A sharp reduction in the current account deficit (CAD) from $21.8 billion in the last quarter of 2011-12 (January-March 2012) to $16.8 billion in the first quarter of the current year (April-June 2012) appears to have brought some joy to macroeconomic planners. It has been possible to bridge the lower CAD with almost the same level of capital flows that obtained during the previous quarter. India’s balance of payments is back in surplus. Important as this development has been in the management of the external economy, it is unwise to exaggerate its significance. The level of deficit is still way above what is considered prudent and manageable. Besides, the fall in the CAD is due to all the wrong reasons — falling imports that corroborate the slowdown, and decelerating exports. The outlook for software export earnings is not bright amidst the global slowdown. Expressed as a percentage of GDP, the CAD has fallen from 4.5 per cent to 3.9 per cent. Most experts have projected the CAD for 2012-13 at 3.5 per cent or lower, on the basis of certain key assumptions: that the economy will grow at a reasonably fast clip of around 6.5 per cent; oil prices will not go very much higher than current levels of around $100 a barrel; and most important of all, the actions of the European Central Bank and the Federal Reserve will help in bringing economic growth in Europe and the U.S. back on track. The last point will have an all-round bearing on India’s external economy. It could help India’s faltering exports regain traction. Second, there would be far less uncertainty on the movement of capital flows to India.
There is of course a flip side to all of this. India’s growth has already slipped by most accounts to below five per cent. The cheap money policy of the Federal Reserve will boost inflation worldwide. Although it is customary to view the CAD on a par with the fiscal deficit — the menace of twin deficits as they are usually referred to — it is the latter that has received greater attention. Besides, the government seems determined to adopt questionable means to finance the deficit rather than be proactive in reining it in. For instance, recent announcements to ease external commercial borrowings and encourage capital market flows from abroad might have had the intended effect of boosting stock prices. But these are not sound policies from the point of view of the macroeconomy. Encouraging foreign currency borrowing to take advantage of the surfeit of funds circulating abroad is hardly the right strategy for an economy whose level of short-term debt has been rising and exchange reserves falling.
Ever mounting pressure due to surge in CAD and fiscal deficit is staring us in the face.Recent announcements of permitting FDI in a plethora of sectors to pump up the falling stock prices and encourage commercial borrowings was the only way left out with the Indian government to avert imminent issues of these twin deficits.Eurozone crisis hit hard at the Indian economy thus more strict austerity measures need to be adopted in order to revive the nation and put it back on track.Recent slew of reforms can provide relief but not to a much greater extent.
Germany is going to ignore the deficit reduction targets clamped on
Greece in exchange for more bailout loans, even prior to the Debt
Inspector’s Report..IMF is considering granting two more years to
Greece to achieve the agreed targets. As far as Spain is concerned, it
is imposing new austerity measures so as to enable it to pre-qualify
it for eurozone aid. Tough budget cuts are expected in Italy,
Portugal, Ireland which are very much in the grip of currency crisis
and unemployment.
Now the Chinese economy is getting loosened and many U.S MNCs have
become dependent for their future prospects. Though Chinese middle
class’s buying power is not fully unleashed, U.S shipments to China
have grown fivefold. In the long run U.S will have to face the
challenge, while the fastest growing Chinese economy slows down.
Deficit reduction must be compatible with each country’s
circumstances. This was the advice of Managing Director of IMF-
Christine Lagarde to countries like Greece and Spain cut their
deficits with austerity measures immediately after her return from the
IMF’s annual meeting in Tokyo last week.
In fact many European nations, especially Germany, had insisted that
countries with excessive public debts have to focus on debt reduction
measures, even if it adversely affects the economy. The pace of
austerity measures in countries like Spain and Greece is now proving
counterproductive by worsening their recessions, which deprive
governments of valuable tax revenue needed to cut debt. The issue will
certainly be the topic of debate in the ensuing meeting of European
Union in this week on Thursday and Friday to address the financial
crisis. Knowing the practical difficulties in deficit cuts German
Chancellor Angela Merkel was kind enough to soften her stand on
austerity.
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