Will India be back in early 90s crisis mode?

Tue, 16 Jul Pre-Open

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Balance of payments (BoP) is a record of all transaction between a country and others during a specific period of time; usually, a year. In the early 90s, India's faced a BoP crisis. The government was close to default, having barely enough reserves to finance three weeks worth of imports. This led it to pledge its gold with the IMF in order to receive a loan.

Current account deficit (CAD) is a situation that arises when a country's total import bill of goods, services and transfers is in excess of such exports. It is one of the causes of BoP. With India's CAD almost touching the 5% mark (of GDP) during FY13, comparisons are being made to the crisis of the early 1990s.

If Mr. Saumitra Chaudhari - a member of the Planning Commission and Prime Minister's Economic Advisory Council - is to be believed, the situation is not as bad. He is of the view that once the current account deficit is under control, the BoP should be under control as well. The CAD has worsened because of sluggish exports - on account of external factors - and the rising imports. The latter mainly primarily include gold as well as oil and coal. The latter two have impacted the imports to a relatively lesser extent. According to Mr. Chaudhari, gold imports have increased from less than US$ 30 bn in FY10 to US $62 bn in FY12 and US$ 56 bn in FY13. As such, if the gold imports were to go back to what there were in FY10, the CAD situation and ergo, the BoP situation, should be well under control.

How easy it will be to bring these under control may be difficult to say. Nevertheless, gold imports dropped significantly in the month of June this year. If the government is able to keep it under control, one could expect deficit situations to improve. Also, as and when the issues related to the domestic coal mining are curbed, the country could rely less on imported coal.

While we agree with Mr. Chaudhari on curbing gold imports bringing down the CAD, we believe the government should do more on the other side i.e. to boost capital inflows. Even though capital inflows have been higher in FY13 than the past three-year average, the government's efforts should be aimed at bringing in more investments from abroad. And one of the ways to make this possible is to improve on India's tainted image and making the country an investment friendly destination. Given the Indians love for gold, their conservative mentality & their preference for tangible assets, the solutions the government is using at present to curb gold imports may be only good for the short term. The long term solution for CAD is to improve the fundamental strength of India. For that the government needs to do work harder.