Government should act

Dr Ashwani Mahajan
Dr. Raghu Rajan has taken the command of Reserve Bank of India as 23rd Governor, at a time when nation is faced with severe economic crisis. Rupee after dipping to the historic low at rupees 68.80 per US$, though recovered slightly to rupees 67 per US$ by September 4, 2013, there is no reprieve from the woes for the economy. Trade deficit had reached the historic height of 191 billion dollars in 2012-13 and current account deficit (CAD) at 90.7 billion dollars. External debt is also at all time high of nearly 400 billion dollars.
Rating agency Standard and Poor’s has downgraded India to BB(-), which is only a step below ‘Junk’. Official circles are talking about selling gold from exchequer. Notable that nation experienced the trauma of mortgaging nation’s gold with Bank of England due to payment crisis in 1991.
Nation once again is amidst deep payment crisis, which is causing steep decline in the value of rupee. It is notable that in 1991, our current account deficit was less than 10 billion US$, which has now climbed to 90.7 billion US$ in 2013, that is, more than 9 times that of 1991. Even if we look at as percent of GDP, CAD was 3.3 percent of GDP in 1991, which is 4.8 percent now (as per admission of the Finance Minister). But it may be noted that with depreciated rupee at 67 per US$, CAD in rupee terms is 6.1 lakh crores, which is actually 6.1 percent of GDP (of 100.2 lakh crore in 2012-13).
Response to this crisis from the government has been very timid and disillusioned. Although official circles maintain that situation is not like 1991, Prime Minister has himself conceded that economy is under serious crisis. Prime Minister claims that steps taken by too Government would help bring down CAD to 70 billion dollar in 2013-14. He has called for curbing petroleum products and gold imports, to keep CAD under control. But PM’s kitty does not have any innovative ideas to bring nation out of crisis. Government seems to be running out of measures and the public is running out of patience. Haplessness of the government has been underlined by the opposition too.
It is no big deal to understand the genesis of the crisis. In 2008-09, balance of trade deficit was only 118 billion dollars, which reached 191 billion in 2012-13. Huge remittances from NRIs, amounting 63.5 billion dollars and software earnings of 57 billion also proved insufficient to finance this gigantic trade deficit and the nation faced CAD at all time high at 90.7 billion dollars in 2012-13. It is notable that is 2008-09, CAD was only 28 billion.
Huge import bill of 491.5 in 2012-13; notably comprising of gold and silver (57 billion dollars), Chinese (including Hong Kong) imports (63.5 billion dollars). Indispensability of oil import cannot be denied, however imports of gold and silver and Chinese imports could have been avoided with ease. It is notable that Chinese imports also include power plants, engineering goods and consumer products which could have been produced domestically.
Coal scam, which has hit coal production in the country, is yet another cause of soaring import bill. Increase in the number of coal, oil and gas based power plants is also fueling import bill.
Foreign Investor are also Contributing to these Woes
Foreign investors are also no way less responsible for woes of the economy. Against general perception that foreign investors help in bridging CAD, they have rather worked towards widening of CAD. Payment out-goes on income by way of dividends, royalties, salaries, interest etc in 2012-13, amounted to 31.2 billion dollars. It is notable that country received only 22 billion US dollar by way of FDI in 2012-13. This means that there was a net outflow of 9.2 billion dollars by foreign investors.
Rajan Effect
It was obvious that after taking over the responsibility of RBI governor, Raghu Rajan would announce some measures in view of the given situation. He has announced various measures including swap arrangements by banking institutions and working toward currency swaps in bilateral trade agreements, reduction in Statutory Liquidity Ratio (SLR), increasing borrowing limits of banks from abroad from 50 percent of the unimpaired capital to 100 percent now, issuance of new inflation indexed bonds based on consumer price index and bank licenses to corporate entities. Share markets welcomed these incomes and & BSE’s, sensitive index has gained more than 1000 points since September 4.
But we must understand that economies do not run on the moods of share markets. Today our economy is in very bad shape with Current Account Deficit (CAD) reaching 90.7 billion dollars, mainly on account of rising international prices of crude oil, soaring imports of gold, coal, power plants, telecom equipment, electronic and other consumer goods, mainly from China. Prime Minister’s, statement that we should reduce our oil consumption; and for that closure of petrol pumps after midnight is no solution for restricting consumption of oil. It may lead us to the era of rationing and queuing. In fact rising import of gold is the result of our perverted automobile policy and near neglect of railway development; under which development of railways was put at back-burner and doors were made wide open to welcome global automobile majors to increase the production of cars. A large number of oil and gas based power plants were established. Desired efforts were not made to encourage solar, wind and other renewable sources of energy. We will have to adopt all possible measures to reduce our imports (less rationing).
China Factor
China, which has continuously been creating troubles on our borders and also internally, trespassing into our territory time and again posing serious problems for our security, surprisingly has become the largest trading partner of India. More worrying is the fact that trade with china is highly imbalanced and trade deficit with china has reached 40 billion dollars, much more than the imbalance with any one trading partner. Rising imports from China thus cannot be legitimised from any angle or with any argument. If we look at the composition of imports from China; they comprise of consumer goods, electronics, telecom equipments, power plants and other project goods. These are the imports which could be easily substituted by domestically produced goods.
Inflation is yet another problem faced by the country. RBI, under past Governor and present Governor both is feeling helpless in controlling inflation, using all measures at its disposal. Yet another jump in inflation is stopping Raghu Rajan to bring ease in monetary policy by bringing the interest rates down. Inflation is directly linked to the quantum of fiscal deficit and growth in GDP. And it is unfortunate that government is failing in both.
It is time that the Government instead of blaming international factors or the political parties, sets its own house in order, adopts a judicious investment policy, both domestic and foreign, especially to limit outflow of foreign exchange, restricts Chinese imports, especially electronic, telecom equipments, power plants and project goods, restrict gold and coal imports; all with a view to bring down CAD. Imposition of a lock-in period for FIIs may also help. To keep inflation under check, wasteful Government expenditure and corruption must be curbed to bring the economy back to the growth trajectory.

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