CRISIS IN THE EXTERNAL SECTOR-RISING CURRENT ACCOUNT DEFICIT AND SLIDING RUPEE N.S.VISWANATH*

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1 CRISIS IN THE EXTERNAL SECTOR-RISING CURRENT ACCOUNT DEFICIT AND SLIDING RUPEE N.S.VISWANATH* BACKGROUND The year 1991 was a year of problem of Balance in Payments (BOP). The shrinking of Foreign Exchange Reserve lead to a critical situation. The Reserve Bank of India pledged the Gold reserves to strengthen payment capability of the Country. This step was quickly supplemented by several steps in Economic Reforms. The last two decades of Economic Reforms have lead to higher growth rates during & at 5.57% & 7.59% respectively. The composition of GDP shifted from Agriculture & Manufacturing sector to Service sector. This sector is contributing 56% of GDP now. The Foreign Exchange Reserves were never a problem during last two decades in spite of flexible exchange rate mechanism of currencies. India is the 10 th & 3 rd largest Country in terms of nominal GDP & PPP terms in It is the 19 th largest Exporter & 10 th largest Importer in the same year In spite of this, the growth rate has dwindled from 9.3% to 5% in The Country has lost 6 lakhs Jobs in The Current Account deficit (CAD) is 88 Billion Dollars in 2013 (4.5% of the GDP) & is expected to be pegged to 3.7% in In real terms, the Rupee has weakened from Rs.55 per dollar in 2011 to Rs.68 per dollar in The exchange rate for International transactions has improved for Exporters & worsened for Importers, in terms of pay to be received & paid respectively. *PRINCIPAL, M.P.BIRLA INSTITUTE OF MANAGEMNT: ASSOCIATE,BHARATIYA VIDYA BHAVAN, BANGALORE

2 Issues There are two main issues connected with International transactions in India: 1. How to reduce CAD? 2. How to arrest the slide or the fall of the Rupee? These two issues are discussed at length. Current Account Deficit (CAD) The Current Account Deficit can be reduced by initiating corrections in the Domestic Economy. The first correction is to reduce the Import of Oil. This correction may help the Government to Import less of Oil & hence the reduction of burden. There are some arguments against this measure. The consumers of Oil may feel the pinch of buying the Petrol / Diesel. They may move in pooling the transport facility. Many of them may shift to Metro Rail use to balance their budget. In certain cases, public may not respond to the measure & yet continue to bear the burden. A mass movement of consumers in staggering the buying of Petrol may have to be initiated. This measure in essence will hit the masses of consumers. Another measure which is critical is, banning import of Gold. The Gold prices have increased from Rs.22,000/- in 2011 to as high as Rs.31,000/- in This action may lead to reduction in the payment of Foreign Exchange. The general Indian public may not like banning of import of Gold. The consumers in India still consider Gold as a yellow metal of safety, security & wealth. The asset is perceived to be on the higher side over periods of time. The measure of banning Gold is not populist. The third measure could be issues of Gold Bonds for Public & NRIs. It is essential to store domestic Gold to face CAD issue positively. The issue 2

3 of Gold Bonds may tide over crises of CAD. This may also help in reducing inflation. All the three measures, if implemented simultaneously will ensure buoyancy in the CAD. This can be a short term measure to put back the economy on its growth path. How to arrest the sliding Rupee? The Rupee which is the currency of India is on the downward slide since last one year. The decline of the Rupee is to the extent of 23.64% over its base of Rs.55 in The rate at which the Rupee is declining is an indication of danger for Rupee in the coming years. The first step the Government should initiate is to allow Foreign Direct Investment (FDI). The profitable areas for FDI would be Retail & Public Infrastructure sectors. Infrastructure building would lead to asset accumulation. This in turn would increase the value of Rupee significantly. The second step is to allow for more Exports of services & technology transfer. This will lead to higher cash inflow from outside, influencing further re-investment. Another step the Government should take is to tap Tourism. The General Tourism & Medical Tourism would help the services sector to further expand its contribution. The technology transfer from India to other Countries must be allowed to happen. This will enhance the value of products produced. This will further lead to increase in cash reserves thereby strengthening the domestic economy. The Private sector must be allowed to activate in the development process. Let the trade grow at its pace. 3

4 A Wild Idea! Another wild idea comes to the fore. This is practicable. This idea to put into action requires courage on the part of the leadership. The idea is to bring back the Foreign Account Deposit (FAD) of Political Leaders. All the Political Leaders may voluntarily resolve to withdraw the money stock in FAD & deposit in the Government treasury. The personal wealth of leaders gets translated into public wealth. This transformation of personal wealth into public wealth will preserve the Economic health of the Nation. Another measure the Government may initiate is to allow the markets to perform by selective intervention. This action will lead to steady inflation which can be monitored by Governance mechanism. Public Behaviour Economics can work by good governance. Lal Bahadur Shastri in had demonstrated by a call for a one day fast in a week. This helped to monitor drought in India. Governance is the key to fine tune market conditions. Banks & Markets can help restore the value of public assets. The RBI & the Banks can help in regulating & mobilizing funds for reduction of CAD & in reversing Rupee slide trends. What should RBI do?-is the next question! 4

5 CRISIS IN THE EXTERNAL SECTOR- RISING CURRENT ACCOUNT DEFICIT AND SLIDING RUPEE N S Viswanath Principal / Director M P Birla Institute of Management Associate Bharatiya Vidya Bhavan Bangalore

6 2. India had faced a problem of Balance of Payment (BOP) in The problem reflected through shrinking of Foreign Exchange Reserves (FER)

7 3. The problem was averted by pledging gold for a loan to strengthen payment capability.

8 4. The Government in 1991 initiated steps for economic reforms.

9 5. Since last two decades the reform measures imparted in terms of higher growth rates of GDP. The GDPs of India was at 5.57% & 7.59% respectively.

10 6. The composition of GDP moved away from Agriculture & Industrial sectors to Services. The contribution of services sector is 56% of the GDP.

11 7. The FERs were never a problem in spite of flexible exchange rate mechanism.

12 8. India is 10 th & 3 rd largest country in terms of Nominal GDP & PPP terms respectively in 2012.

13 9. It is 19 th largest exporter & 10 th largest importer in 2012.

14 10. The growth rate has dwindled from 9.3% to 5.0% The country has lost 6 lakh jobs in

15 11. The Current Account Deficit (CAD) has $ 88 billion in (4.5% of GDP) & is expected to be pegged to $70 billion 3.7% in

16 12. In real terms the rupee has weakened from Rs.55/- to Rs.68/- in The exchange Rate for international transactions has improved for exporters and worsened for importers in terms of payment to be received and to be paid respectively.

17 13. Two main issues are: a. How to reduce CAD? And b. How to arrest the slide or fall of the rupee?

18 14. CAD can be reduced by some corrections in the domestic economy. First, reduction in imports of oil. Secondly, ban import of gold. Thirdly, issue gold bonds for Publics and NRIs.

19 15. Reduction in import of oil is only a temporary measure. This should be followed by public consumers on efficient use of movement of goods. Make efforts to search for a stable price inflow of oil from Oil producing and Exporting Countries (OPEC).

20 16. Prices of gold in the domestic market are volatile since last one year.it has moved from Rs.25000/= to Rs.31000/- per ten gram. It can be mitigated by gold bonds for publics, domestic and NRIs. OR alternatively ban import of gold.

21 17. These short term measures will ensure buoyancy in the CAD.

22 18. How to arrest sliding of the rupee? Allow Foreign Direct Investment (FDI) in the private sector.

23 19. The conditions on FDI should be relaxed to make it profitable. The FDIs can be channeled to Retail & Public infrastructure.

24 20. Let infrastructure building lead to assets accumulation. The value of rupee increases significantly.

25 21. Allow for more exports of services and technology transfer. Cash inflow would increase for further reinvestment in growth potential areas.

26 22. Tap tourism general & medical. Cash inflow would increase domestically. Develop centers for improving health.

27 23. Allow technology transfer to happen in first and second world countries. Cash reserves would strengthen domestic economy.

28 24. Strengthen private sector by developing public infrastructure. Allow trade to happen at its pace.

29 25. A wild idea! This is practicable. The Foreign Account Deposit (FAD) of political leaders may be voluntarily withdrawn and credited to the Government.

30 26. This possible by demonstrating to people that personal wealth is public wealth.

31 27. Allow markets to perform by selective intervention. This will be reflected in study of inflation which can be monitored by governance mechanism.

32 28. Public Behaviour Economics can work by good governance. Lal Bahadur Shastri in had demonstrated by a call for a one fast a weekmonetary to help monitor draught in India. Governance is the key to fine tune market conditions.

33 29. RBI has a key role in mobilizing and regulating funds for reduction of CAD, and reversing rupee slide trends. W hat should R B I do?-is another question.

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