Dogmas and the deficit
Conventional economic wisdom suggests that for an economy like India, it is time to start worrying when the current account deficit (CAD) crosses 3 per cent of the GDP. When it crosses 5 per cent, as it did in the second quarter of 2012-13, worrying alone doesn't help. It is time to take immediate corrective action. The question is, what kind of policy action will do the trick? For one thing, a piecemeal approach to bridging the CAD is unlikely to pay off. We need to base the corrective strategy on a comprehensive assessment of our trade policy, our industrial structure and the various imbalances that have fed a rising imbalance in our external account. We also, perhaps, need to jettison some dogmas and look for solutions that possibly lie out of the box of conventional wisdom.
The first thing to recognise is that though the focus has been on rising gold imports as the cause for the rise in the CAD, it is only part of the problem. In 2011-12, the CAD printed at 4.2 per cent of GDP. Even if we were to take gold imports (net of re-exports) out of this, we would be left with a CAD of 1.8 per cent. In 2012-13, when the CAD is likely to be over 5 per cent of GDP, the non-gold deficit would amount to about 3 per cent of GDP. A breakdown of the import bill reinforces this point. Even with the rise in gold imports over the last three years, they constitute about 12 per cent of the total import bill. Thirty-three or 34 per cent of imports is oil, and the balance of around 55 per cent comes from non-oil imports. Thus, reducing gold imports will help pare the deficit to a degree, but it cannot be the sole solution. We need to pay as much attention to other components of the CAD and the merchandise trade deficit that underpins it.