The government has to take hard decisions. Crude prices have gone up and the government must pass on the increased burden to consumers immediately. There is a double whammy: crude prices are going up and the dollar is appreciating against the rupee. Both are serious issues and to ensure that public finances are in shape, the government must increase the price of diesel quickly. The current 50-paisa hike every month will not help at all.
To contain the Current Account Deficit, the government has taken some steps to restrict imports, which will have some impact in the coming months. The weak rupee should also help in bringing down CAD by discouraging imports and supporting exports. Immediately, there is no way to bring down the CAD significantly and the rising price of oil is putting an additional burden. But we expect that CAD will be 3.9 per cent of the GDP this year, down from 4.8 per cent last year.
To ensure adequate funding of CAD, the government is required to take bold measures to attract foreign capital. The global risk and India’s weak macros have sent investors back and to get them the government needs to create a strong pull factor. It needs to push reforms as it did in 1991.
Then the market will look very attractive. The reforms agenda needs to be pushed at any cost and the most binding constraints for the economy need to be relieved. First and foremost is the mining issue. Having sufficient coal and iron ore reserves, the country can’t afford increased import dependence on these as they not only add to the CAD but also create headwinds for domestic growth. The pending projects need to be cleared at a faster pace.
At the moment the RBI can’t do much. It is strategically intervening but the situation is bad. It is caught between a rock and a hard place. Though growth is going down, the RBI can’t bring down interest rates due to high inflation and weak currency. Structural reforms are the only lasting solution to the current woes.
(As told to Lalatendu Mishra)