India the only country in Asian region with current account deficit
For nearly three years, every policy-maker has been claiming credit for India
escaping the misery caused by the 2008 credit crisis due to the deft handling of
the situation by administrators. Now, a crisis is brewing that is making many
recall the year 1991 when India pledged gold to save its skin.
The current crisis, however, is not due to any global shock, but is mostly the doing of policy-makers. Alarm bells are not ringing yet in the corridors of Raisina Hill, but there are murmurs on Mint Street after the Reserve Bank of India released the quarterly balance of payments report on March 30. For the first time since Lehman Brothers collapsed, the balance of payments fell into the deficit zone. The current account deficit (CAD) - the net position of cross-border trade and services - crossed 4% of the gross domestic products (GDP), when 3% is considered to be the 'lakshman rekha'.
These times are eerily similar to the worst the nation faced in more than two decades - at least economically. But the cacophony over the slowing economic growth rate, taxes and corporate profitability is drowning what should have been the hot topic of debate - worsening external balances.
This is not 1991. Indian economy is many times bigger. Trade is up multiple times. Actors are many and instruments are numerous. However, the impact of the worsening situation will probably be more severe than it was in the gloomiest days since the state occupied the commanding heights of the economy.
"In 1991, the global situation was relatively more reassuring," said Samiran Chakraborty, head of India Research, Standard Chartered Bank.
"But, now, India's openness has increased substantially. So, in that sense, any shock in the global economy will have a large impact on the domestic sector. Hence, we are kind of worried about the balance of pay ments despite numbers being relatively better than 1991." Two decades ago, the current account deficit was close to 4% of GDP due to a sharp rise in the import bill driven by surging oil imports, among others. Crude prices surged because of the Middle-East crisis.
With demand being price-inelastic, curtailing imports was difficult and, at the same time, exports, too, were slow to rise. The government depreciated the rupee by 24% in a matter of three days to regain the export competitiveness. It borrowed $2.2 billion from the International Monetary Fund and pledged 67 tonnes of gold with Bank of England and the Union Bank of Switzerland and raised another $600 million, since there were no foreign investments flowing in.
Twenty-one years later, the discussions among economists, currency traders and experts are almost similar. Are we into the next big crisis?
Two factors are converging to whipsaw investors and the economy - there is extraordinary demand for goods from an overheated economy, and exports growth is slowing as Europe and the US are still crawling back to growth. "If it does not adjust, then we are in for another round of depreciation," said Abheek Barua, chief economist at HDFC Bank. The Indian rupee, which was the best performer in the first two months of the year, has surrendered half the gains and will probably end a loser if overseas fund flows do not improve. There are already calls for some special schemes like the once famous Resurgent India Bonds, or the India Millennium Bonds - which, by itself, is an indication that the economy is almost where it was in the early 1990s.
source: The Economic Times
The current crisis, however, is not due to any global shock, but is mostly the doing of policy-makers. Alarm bells are not ringing yet in the corridors of Raisina Hill, but there are murmurs on Mint Street after the Reserve Bank of India released the quarterly balance of payments report on March 30. For the first time since Lehman Brothers collapsed, the balance of payments fell into the deficit zone. The current account deficit (CAD) - the net position of cross-border trade and services - crossed 4% of the gross domestic products (GDP), when 3% is considered to be the 'lakshman rekha'.
These times are eerily similar to the worst the nation faced in more than two decades - at least economically. But the cacophony over the slowing economic growth rate, taxes and corporate profitability is drowning what should have been the hot topic of debate - worsening external balances.
This is not 1991. Indian economy is many times bigger. Trade is up multiple times. Actors are many and instruments are numerous. However, the impact of the worsening situation will probably be more severe than it was in the gloomiest days since the state occupied the commanding heights of the economy.
"In 1991, the global situation was relatively more reassuring," said Samiran Chakraborty, head of India Research, Standard Chartered Bank.
"But, now, India's openness has increased substantially. So, in that sense, any shock in the global economy will have a large impact on the domestic sector. Hence, we are kind of worried about the balance of pay ments despite numbers being relatively better than 1991." Two decades ago, the current account deficit was close to 4% of GDP due to a sharp rise in the import bill driven by surging oil imports, among others. Crude prices surged because of the Middle-East crisis.
With demand being price-inelastic, curtailing imports was difficult and, at the same time, exports, too, were slow to rise. The government depreciated the rupee by 24% in a matter of three days to regain the export competitiveness. It borrowed $2.2 billion from the International Monetary Fund and pledged 67 tonnes of gold with Bank of England and the Union Bank of Switzerland and raised another $600 million, since there were no foreign investments flowing in.
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Twenty-one years later, the discussions among economists, currency traders and experts are almost similar. Are we into the next big crisis?
Two factors are converging to whipsaw investors and the economy - there is extraordinary demand for goods from an overheated economy, and exports growth is slowing as Europe and the US are still crawling back to growth. "If it does not adjust, then we are in for another round of depreciation," said Abheek Barua, chief economist at HDFC Bank. The Indian rupee, which was the best performer in the first two months of the year, has surrendered half the gains and will probably end a loser if overseas fund flows do not improve. There are already calls for some special schemes like the once famous Resurgent India Bonds, or the India Millennium Bonds - which, by itself, is an indication that the economy is almost where it was in the early 1990s.
source: The Economic Times
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