Today's economic woes and BoP crisis of 1990s not comparable: Saumitra Chaudhuri

Interview with Member, Planning Commission

As India's current account deficit (CAD) touched a record 4.8 per cent of gross domestic product (GDP) in 2012-13 and the rupee came under pressure, some analysts started comparing the situation with the Balance of Payments (BoP) crisis of the 1990s. Saumitra Chaudhuri, member of Planning Commission and Prime Minister's Economic Advisory Council, tells Sanjeeb Mukherjee the situation is not as bad as the BoP crisis. One of the contenders for the post of the next Reserve Bank of India governor, Chaudhuri says the key to fixing CAD lies in better management of gold and fuel imports. Edited excerpts:

Critics have compared high CAD and slowing down of capital flows to the BoP crisis of the 1990s. Are we really on the verge of a BoP crisis?
There is pressure on the BoP and that is primarily because of CAD, which is much higher than it ought to be. Economic growth is also subdued. But, I strongly refute the comparison (with the BoP crisis of 1990s). It is similar neither in description nor in analysis.

Why do you say so?
We have today a liberalised economy fairly well integrated with the rest of the world. A banking and financial system and corporate balance sheets, that may bear a few scars perhaps, but is robust. Worsening of the CAD has come about on account of the slowing of exports due mainly to external factors and an expansion of imports driven by burgeoning gold and to a lesser extent oil and coal imports. Gold imports deny savings for use in productive activities at home and increase the import bill. Gold imports increased from less than $30 billion in 2009-10 to $62 billion in 2011-12 and $56 billion in 2012-13. Take away the increase of $25-30 billion and the bulk of our CAD problem would vanish.

Do you see CAD narrowing?
Clearly, something can be done about it and is indeed being done. Import of gold in June 2013 has dropped significantly and we have to maintain the trend in the months to come. In the absence of price reform in many petroleum products, domestic demand grew faster than it might have had otherwise. To that extent, measures already taken and others that can be considered have the potential to trim the oil import bill to some extent. The difficulties we face with mining our own coal reserves, which are among the largest in the world, have increased our need to import to levels that are larger than it may otherwise have been. We are attending to these issues. I am confident the magnitude of the CAD could be brought to a level that will be readily financeable from the global investment community, restoring stability to the balance of payments and to the rupee.

Capital flows have also dwindled and these are also part of BoP?
Should we forget that over the past three years, the average capital inflow into India has been in excess of $70 billion and that in 2012-13, net capital inflows was $89 billion? The stabilisation of the CAD - achieved by curtailing gold imports and more efficient outcomes in fuel imports - will help us overcome the present difficulties. We must also get back some momentum into our export growth. However, at present, the key to fixing our CAD lies in better management of our gold and fuel imports.

How do you see the recently released June trade numbers?
Finally, the trade deficit number for June 2013 has come down to $12.2 billion from $20 billion in May, pointing to the feasibility of getting our trade balance into more manageable dimension. If we run around crying that a crisis is upon us, nothing will ever get solved. We have to understand the situation and figure a way out, which is what the government is doing.

The rupee has come under pressure and there are no visible signs of a revival in the economy. Are things going from bad to worse?
A lot of measures have been taken in the past year, but the expected positive impact of these has yet to materialise in a significant manner. Wholesale inflation has come down. These are achievements. However, the growth response is taking longer because of the accumulation of adverse developments, not just on confidence and sentiment but in a more deep-rooted sense. The profitability and balance sheets of corporates and to an extent of banks has been weakened. Low economic growth has meant lower livelihood, job and enterprise growth, which ultimately lower growth of real disposable incomes in the hands of the citizen. And that has slowed down demand. But the decline seems to have been halted about a year back. The problem is the uptick is taking longer than expected. It is my assessment that the situation is stabilising, even if it is taking longer. Part of the problem is that new difficulties keep popping up.

How confident are you about the economy turning around, given that the industrial production contracted 1.6 per cent in May?
I'm fairly confident that by the second half of the year, things will start looking up. But that revival, too, is more likely to a bit subdued in comparison to the quick recovery after the 2008 crisis.

The revival will also be drawn out, as the economic agents in the scheme of things such as companies, especially infrastructure companies, have taken a hit and they will take some time to recover. I feel what is required is a regular dose of small improvements in the macroeconomic numbers and that this will happen in the second half.

Recently, the government announced a slew of infrastructure measures, including building 50 small airports in the next one year or so. Do you think these have come a bit too late as the signal has already gone out that the India growth story is waning?
The purpose of the exercise was not to send a signal per se, but to start up pending projects, which will happen within the respective timelines given. Yes, the completion of the projects will take time. But that is natural as infrastructure projects cannot be completed within a financial year.

The operative fact is that once a start is made and orders are placed, execution gets afoot and economic activity gathers pace. The gain is real in a continuous sense - both during the project construction and then after that on account of the services and benefits that such infrastructure projects provide the economy with. The point is to get the projects off the ground and then stick to the timelines.