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. Value of a Currency
Every Currency has two values:
A] Internal Value
B] External Value

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. THANK YOU