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There is no foreign hand in this

The UPA’s failure to devise and implement sustainable economic policies has led to the current account deficit crisis. Ramakrishnan TS writes.

india Updated: Aug 22, 2013 23:48 IST

The current account deficit (CAD) crossed $20 billion in June and is expected to reach 5% of GDP by the end of the financial year. This is in contrast with the current account surplus of $10.56 billion we had in 2003-04. The slide in the current account (CA) has happened after India witnessed a growth rate of 7.9% between 2004-05 and 2012-13, the highest-ever in the economic history of India. The CA was fluctuating between deficit and surplus from 2003 till 2009 and started declining thereafter with no signs of recovery.

To avoid emergency situations, governments maintain a CA within permissible levels without sacrificing growth. Even a reasonable CAD is not altogether bad as long as it facilitates sustainable growth. There are a large number of interlinked goods and services in the imports and exports basket that contribute to the CA. Choosing the right basket of imports and exports that facilitates sustained growth without creating a huge deficit in the CA should be the strategy for an emerging economy like India.

A look at the transport and agricultural sectors will show how the current CAD crisis is our own making.

Crude oil, the top-most import commodity, forms about 32% of our total imports and most of the demand for crude oil and its products originates from the transport sector. The policy of not facilitating the energy-efficient rail sector to increase its share in passenger and freight transport continues even though India has made impressive economic growth between 2004-05 and 2010-11.

Today 87% of our passenger transport and 65% freight transport is by roads, resulting in an increase in crude oil consumption and the resultant CAD. India imported 90.4 million tonnes ($18.2 billion) of crude oil in 2003-04 and 172.1 million tonnes in 2011-12 (($214.7 billion). The quantum of crude oil import went up by about two times and the remittances for the same went up by 12 times. The failure to augment a less oil dependent mode like rail for passenger and freight transport has made India more vulnerable to international crude prices and fluctuating exchange rates. Moreover, had rail infrastructure capacity been augmented and operations been improved, it would have made the total cost of exports lower than what it is today and made Indian exports more competitive in the international arena and thereby improved the CA.

The two major imports in the agriculture sector are edible oils and pulses. Edible oils and pulses form about 2% and 0.35% of India’s total imports respectively. With economic buoyancy in the first decade of 21st century, the per capita income of Indians had gone up. A new middle class emerged and the basket of consumption changed more towards pulses, oil seeds, vegetables and fruits. The agricultural policy-makers should have taken cognisance of this food consumption pattern and implemented the reforms to bridge the gap between demand and supply. Although India employed 60% of its population on agriculture and allied activities, it is the lack of a proper policy perspective that caused a deterioration in the supply-demand gap in oil seeds and pulses, and hence the import of these commodities. The import of pulses has gone from 1.7 million tonnes in 2003-04 to 4.02 million tonnes in 2012-13 and the edible oil from 5 million tonnes (worth $ 3.2 billion) in 2003-04 to 10 million tonnes (worth $ 11.31 billion) in 2012-13. On the one hand, wheat and rice are rotting in godowns, we are importing oil seeds and pulses, although the CA started declining from 2010.

The failure on the part of the various ministries to devise and implement sustainable economic policies has led to the CAD crisis. Although the CAD means that the imports are higher than exports, the present crisis has not been imported from abroad. We are responsible for it.

Ramakrishnan TS is a doctoral student of Public Systems Group, Indian Institute of Management, Ahmedabad
The views expressed by the author are personal