Current account deficit and indian economy b.v.raghunandan


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Current account deficit and indian economy b.v.raghunandan

  1. 1. Current Account Deficit and Indian Economy - B.V.Raghunandan, SVS College, Bantwal Post Graduate Department of Commerce, Government I Grade College, Barkur August 12, 2013
  2. 2. Value of a Currency Every Currency has two values: A] Internal Value B] External Value
  3. 3. Internal Value of a Currency -Internal Value is the value at which, it is accepted in settlement of transactions. -Internal value again may mean two different things: •Face Value is the value printed on the currency and there is a legal obligation on the part of every citizen to accept it at this value •Real value or purchasing power of a currency is the value of currency vis-à-vis the value of goods and services •More Currency issued reduces its value against the goods so that inflation occurs •To avoid this, countries followed Gold Standard wherein the Central Bank is required to have proportionate amount in Gold
  4. 4. External Value of a Currency • Currency is like a any commodity having its value determined by its demand and supply • Mismatch in internal value results in inflation and deflation • External Value is the value at which it is exchanged for foreign currencies • A country can adopt any one of the three systems: a) Value determined by market i.e., demand and supply for the currency-the USA b) Value determined by the Central Bank as in China c) Value determined by Market Forces with Intervention by the Central Bank
  5. 5. Strategy of a Country Regarding External Value 1. Every country tries to export more and import less 2. The attempts are to export manufactured goods rather than raw materials 3. Through International Agreements, achieving trade supremacy 4. Levying Excise Duty on Imported Goods 5. Providing Encouragements to Exporters through tax concessions, subsidies, SEZs, encouraging R&D 6. Government Sponsored Spying System 7. Encouraging Trade Fairs and Exhibitions 8. Ministerial Visits
  6. 6. Effects of Trade Deficit Deficit takes place on account of : Capital Account and Current Account Trade Deficit leads to Current Account Deficit (CAD) created by more imports, more payments made to foreign countries, more Indians travelling abroad, higher defence purchases from other countries, export of low valued goods and import of high value goods
  7. 7. India in 2013 • Increasing Current Account Deficit • More Imports mainly on account of crude oil and gold • More Indians travelling abroad • Drying up FDI Investment stopping the inflow of funds • FII Investment leaving the country • US Economy looking up •Slow-down in the Industry • Scandals in India after 2009 and Disturbing Political Developments Positive Side: Good Monsoon will lead to bumper agricultural crop
  8. 8. Genesis of the Problem • Started during the British Time when they converted India slowly into exporter of raw materials to England and importer of manufactured goods • Colonial rule left the industrial development of the country modeled for serving the British Industry • Growth was suppressed • After Independence, Nehru copied the Soviet Model of Public Sector and a Suppressed private sector • Most of the industries were off limit for the private industry • Benefit was the public getting the benefit of stability in the system, controlled prices, and an economy of social justice
  9. 9. The Impact • Slowly, the Public Sector became sluggish, inefficient, anti- public and serving the interest of the political leaders • Growth rate was affected • 60s and 70s witnessed drought leading black patches in Indian Economic History • Unlike China, people were not ready to be restricted consumerism • Black marketing, smuggling, hoarding of essential goods, corruption, nepotism, casteism etc grew • Still, CAD was not a very serious problem with moderate exports, totally controlled imports
  10. 10. 1973 Oil Shock • OPEC was formed originally in 1960 by four countries Iran, Iraq, Saudi Arabia and Kuwait as a retaliation to the US Quota system of buying crude oil from non-gulf countries • In 1973, eight other countries joined and production of crude oil was cut leading to a steep rise in the price of petroleum products • India’s Balance of Payment position received a shock • Though the imports were the same, larger bill had to be paid on account of spiralling price of crude oil • The country had to struggle to maintain the needed foreign exchange reserves
  11. 11. The Beneficial Impact of the Oil Shock • ONGC was given a lot more importance and internal exploration and production of oil was given a boost • Oil marketing companies were nationalised by taking them over Anglo-American companies • Oil producing companies like Iran, Iraq, Saudi Arabia, UAE etc became rich and started investing heavily in their economies- they needed people and Indian NRIs filled the gap • Remittances made them to their relatives in India helped the country to manage its Current Account • As imports of consumer goods were very much restricted, the current account was manageable
  12. 12. 1984- Liberalisation • Rajiv Gandhi brought in the first dose of liberalisation amidst severe protest from many • Infrastructure and Telecommunication received a sincere support bringing in many foreign companies and noted NRIs to the country • Automobile and power generation etc saw the effect a limited easing of controls • Tax Reforms were contemplated • IT Industry started attracting the attention of the world • Management and Engineering Colleges started creating engineers for the IT Industry
  13. 13. Political Uncertainty of 1990s • Political Uncertainty left RBI with foreign exchange sufficient for one week’s imports • The RBI was forced to pledge its gold to Bank of England in order to get the foreign exchange needs of the country • 1991 saw a bigger dose of liberalisation • TV Broadcasting, Insurance, civil aviation, telecommunication, power-generation, ports and air-ports, disinvestment in PSUs, tax reforms, new regulatory agencies, banking sector reforms, capital market reforms, money market reforms, FDI and FII Investment, foreign exchange management, all saw the effect of liberalisation
  14. 14. Problems that Began Invisibly • IT Industry took the lime-light pushing the manufacturing sector to a neglected space • All the engineering graduates ended up in the IT Industry creating a problem of HR problem for the manufacturing industry • Manufacturing Industry could not match the salaries of IT Industry as the latter enjoyed zero percent tax and a highly profitable model of operation • Government after government neglected manufacturing sector • Service sector started assuming a bigger role • A big distortion in the economy was taking place
  15. 15. Compounding the Problems…… • Consumption went up at an alarming level • The foreign suppliers of every brand and every product converted the life in India to be expensive through promoting western model of life and popularising premium products • A country like India with its largest population could not afford such a high level of consumption unless it matched it by production and export of its own goods • The advertisement by World Gold Council in India in 2002 and subsequent commercials by the jewellery companies took the consumption of gold to a maddening level • National Level companies sprang up to market gold jewellery
  16. 16. Pressure on CAD • Conventionally, CAD was accepted for the developing countries • Rating Agencies take a very stringent stand against CAD •They downgrade the sovereign rating if the CAD becomes a problem • Once it is done, it aggravates the problem through FIIs pulling out their money • The country is forced to export even minerals, which are the insurance of future generation • Industrial raw material like iron ore is also exported and high value finished equipment is imported
  17. 17. What should be done…………. • A separate Group of Ministers is set up to complete the unfinished projects, whether in the private sector and public sector • Stop investment in saturated sectors like automobiles, electronics etc • Revive the manufacturing sector and ignore the IT sector • Ban import of super-premium products into India or jack up the customs duty at a special rate • Pass a legislation to ban the advertisement of gold on TV channels • Stop the sale of gold coins or start the sale as well as buying gold coins by banks, post office etc • Covert the vehicles to LNG enabled
  18. 18. THANK YOU