Current Account Deficit: Continuance of foul policy since 90s.
Posted by shivamkesari
Day by day value of Indian rupee in global market is declining though much had been done by RBI as well Finance Ministry to control it but all in vain. The current exchange rate of ₹60 for US$ 1 is still declining and there exists least indication for improvement in the scenario when current account deficit is significant. For the period 2008-12, the increase in India’s fiscal deficit (from 2.5% to 5.7%) was accompanied by rising CAD (from 1.3% to 4.2%). High import bill of OPG, ever increasing debt expenditure as soaring interest payment to foreign financial institutions and significant amount of earned profit transaction to abroad investors are further aggravating the situation. Moreover, turmoil of decline in value of rupee has created a sense of insecurity to investors in India and most of them are pooling back their money. Added to this is significant import bill of precious ornamental metals at tune of ₹1.7 lakh crore and subsidies provided by GOI to the tune of ₹ 17000 crore.
I would like to integrate current economic scenario of India with our foreign policy. I acknowledge significant policies adopted by Mr. Nehru during his tenure in order to maintain independency of India as non-aligned country. US tried to establish its imperialism camp in India and make us ally of capitalist bloc. Save for non-aligned principle adopted by Mr. Nehru which not only kept India neutral but also made us to stand as third significant front as non aligned nation. Later India was recognized as strong power in world.
US always wanted to establish its base camp in Kashmir and had always supported Pakistan with arms as well as capital for organizing militant against India to grab Kashmir. We must also know that Osama Bin Laden and his org Al Qaeda as well as Taliban are brain-child of America against USSR and more or less India.
US has always tried to destabilize India in one or other way; of which most significant one is its military support to Pakistan. With India emerging as strong power and nuclear empowered country, US had considered us a threat and had tried all the way to destabilize our sovereignty. Relation of India with disintegrated Soviet Union became unstable after its disintegration. It affected our economic as well as military capacity. Meanwhile US grabbed the opportunity to establish economic relation with India in the turmoil of economic instability. If we gather broad knowledge of other field we will find that it was combined strategic effort of World Bank and IMF to destroy economic system of India with providing easy loan for development sector in India. World Bank and IMF knew about corrupt practices which had engulfed Indian administration by that time. Only fraction of money was used in development sector and we were unable to payback loan. This made India obliged to follow economic policies directed by World bank and IMF. Flawed economic policy directed by them made us deficit in current account balance in later eighties. Rating agencies further spurred the fire by degrading our creditability which resulted in pooling out of money by foreign investors from India. This resulted in Forex reserve existing only for two week import in June 1991. To bring India out of this situation Dr. Manmohan Singh liberalized the economy making way for most of the foreign firms investing in India. I think this was a poor step taken to control temporary situation CAD on permanent basis; effect of which is in front of us. Though our lifestyle and development index had improved but it took cost for our domestic market. And lifestyle development index improved only for less than 20% population, for rest condition had even deteriorated. In LPG, liberlisation and privatization was necessary but not globalization. It would have been better if policy adopted would have been to promote small and micro industry at priority, reducing our dependency on Petroleum products, strengthening public transport and investing on renewable and non-conventional sources of energy, boosting our Agriculture production and export. We failed on this entire front and success is still far the sight till now. Our employment rate had never been greater than 4% but in last decade exploitation has increased while quality of employment soared below. We have enough food for everyone consumption but decreasing purchasing power with rising inflation had rendered our poor people to starve. GOI is now trying to tackle this situation with Food Subsidy bill.
Over the time GOI has failed to recognize main cause of CAD – OPG import bill and interest and profit payment. Instead of taking measures to reduce consumption of OPG it has promoted industry based on OPG as well as subsidized many of them. More than 60% of total OPG import is consumed in transport sector Railway being at top followed by other private motor vehicle owner. Effort to electrification of railway and boosting road public transport has been negligible resulting in soaring consumption of OPG. To meet this gap GOI has taken many times ill steps of opening the economy to global market inviting foreign investors through FDI or FII. This step can meet the need of forex only on current temporary basis and not the solution for long run. Over perpetuity money transferred to abroad is much greater to what investors or creditors invested or lend to India. And this amount has always grown. As on June 2012 India’s Debt to GDP ratio was 68% which is quite comparable to our forex reserve. Indian economy which is already under pressure of weak GDP, poor IIP and elevated inflation rate, is also weighed down by its increasing government debt. High debt to GDP ratio tends to dampen the credit worthiness of the Indian economy.
Further with greater liberty in FDI norms with opinion that foreign investors will own stocks of Indian slow growing firms and share technology with them. This will have pyramidal effect on employment opportunity. Unluckily, nothing had happened as such. Instead Indian corporate had sold their domestic share or sometimes entire firm and invested capital in some slow growing but stable economic. Net forex reserve remained quite unchanged with added liability of interest payment. Adding to it, the 216 most profitable companies of India, each making above Rs 500 crore in profit, and accounting for over half of the corporate income tax collected, paid taxes at an effective rate of 22.5% while over 200,000 small companies with profits below Rs 1 crore paid taxes at the effective rate of 25.7%. The largest companies were in the best position to make use of the tax concessions offered by the government! Top 5 firms controlled more than 60% assets of industry while employing only 2% of total labor force. In the sense we are neglecting our small and micro industry which has more capability to generate employment than large corporate houses and promoting monopoly of big corporate. In real term LPG has failed in benefiting people at lowest of the economic pyramid. But Alas! We still praise it.
If we consider and look into whole scenario it can be observed that capitalist bloc succeeded in what they wanted – to control India. They failed to control politically and diplomatically but economically they succeeded. With India dependent on foreign investments and Dr. Singh further opening market for foreign investors we had lost our economic independence. With one single change in policy by capitalist bloc senator they are capable to direct their investors to withdraw their investment to India. In lieu of smooth economic system of India capitalist bloc can easily blackmail India for our sovereignty, integrity and security.
It was idea of Mr. Nehru to make India independent in all respect which was well relayed forward by Mrs. Gandhi and tried hard by her son Mr. Rajiv Gandhi. But their successors did mistake in handing over our market independency to foreign investors at the cost of our domestic economy. They are still way forward even to allow foreign investment in strategic sectors. I can do nothing than comparing the situation with 1600AD when European entered India as traders but subsequently ruled us. Hope history doesn’t repeat itself.