Concrete proposals to reduce India’s Current Account Deficit

A country’s current account is said to be in deficit when the sum total of its imports, payments to foreigners on investments they hold in the country and cash outflows to other countries is greater than the sum total of its exports, factor income and inflows of cash from abroad. Thus, the current account deficit (CAD) also reflects the difference between outflow and inflow of foreign currency.

India’s current account deficit became something to worry about when it touched an all-time high of 4.8% of the GDP (Gross Domestic Product) and the country’s economic growth rate hit a low of 4.5% in 2012-13. This was primarily due to the hefty crude oil imports coupled with high gold imports and a simultaneous fall in exports because of the global slowdown.

Fortunately, due to the dramatic improvement in the external economic situation, India’s CAD declined to manageable levels in 2013-14 and the year ended with a CAD of 1.7% of GDP as against 4.8% recorded in 2012-13. Since then, this improvement in CAD has augured well for the macroeconomic stabilization in our country. And as per the latest figures, India’s CAD in Q1 of 2014-15 narrowed sharply to 1.7% of GDP (US$7.8 billion) from 4.8% of GDP (US$21.8 billion) in the corresponding quarter of 2013.14. The lower CAD is primarily on account of a rise in exports and a simultaneous decline in imports.

According to a Citigroup research report, India’s CAD for 2014-15 would be contained at 1.9% of the GDP or US$39.3 billion, majorly helped by continued restrictions on gold imports as well as strong exports growth amid a recovery in the world economy. Though the current year’s projected CAD at 1.9% of GDP is lower than 4.2% recorded in 2011-12, it is still marginally higher than the 1.7% CAD posted in 2013-14.

To eliminate Indian economy’s vulnerability to oil price, capital account shocks and other such factors, former RBI governor Y.V. Reddy recently suggested that our country should aim at a zero CAD in the medium term. Though the idea of targeting a zero CAD may find little support, all efforts should be made to bring down India’s CAD as much as possible – ideally to the zero level over the next 3-5 years.

While striving to lower CAD, it should be remembered that a research conducted at the Indira Gandhi Institute of Development Research indicated that India’s current account deficit is countercyclical – that is, CAD rises when output declines and not when demand rises. For instance, during 2007-08, which was a period of high consumption as well as soaring investment and output growth, the CAD was contained at 1.3% of the GDP. Thus, this counter-cyclical tendency needs to be paid heed to, wherein, unlike the pro-cyclical tendency (that is linked with overconsumption), CAD is linked with output.

Boost Exports

To bring down CAD, undoubtedly the major focus of our government has to be on boosting the country’s exports. It is in this context, our Prime Minister Narendra Modi in his maiden Independence Day speech on August 15, appealed to companies around the world to ‘Come, make in India’. This call has the potential to turn India into a global manufacturing hub. By openly inviting the world to come and manufacture in India, Mr Modi was trying to fix the problem of sluggish growth of our manufacturing sector, which has so far put India at the mercy of imports.

To support our Prime Minister’s Independence Day clarion call to foreign companies to “come and make in India”, the Union government needs to take a slew of initiatives aimed at boosting exports. First and foremost is to develop our country’s overall export potential by providing cheap export fund to the manufacturing sector in a bid to reduce input cost as well as to promote R&D and innovation aimed at enabling production of qualitative and competitive products. Our government should also provide sufficient export financing to put Indian manufacturers on an even footing with their foreign competitors and provide expanded support for small business exporters in the labour-intensive sectors.

To enhance exports from the Micro, Small and Medium Enterprise (MSME) sector, the Union government should expeditiously implement the short and medium term measures recommended by the six-member inter-ministerial committee headed by then Finance Secretary R S Gujral, which had submitted its report in August 2013.

Furthermore, the Narendra Modi government may also consider setting a goal of doubling India’s exports over the next five years and announce all the requisite steps to enable Indian businesses achieve this goal. The relevant steps could include expanding the role and responsibilities of the Export-Import Bank of India as well as the Export Promotion Councils (EPCs), exploring the scope for opening up more and more markets for Indian goods in different countries, hiring experts who can offer guidance and consultancy services to Indian companies to foray into new markets, while also facilitating exports of their products to various countries around the world.

Reduce Imports

Our import bill is principally driven by crude oil as nearly 85% of the oil we use is imported. As such, when India’s total import bill in 2013-14 stood at US$450 billion, crude oil import at US$95 billion accounted for 21% of the total imports. In a bid to reduce its dependence on imported oil, our country has already initiated the process of exploration of shale gas through the ONGC, which is expected to dig 30 shale gas exploratory wells across the country by the end of the current fiscal. Shale gas is natural gas trapped within layers of shale rock and can be utilized as cooking gas and for other commercial purposes.

ONGC estimates India’s shale gas reserve to be in the range of 500 to 2,000 trillion cubic meters. However, much more endeavors in this direction need to be completed before we can exploit this resource optimally. Though, there is not much scope to reduce the crude oil imports bill in the near future, the solution to this problem lies in creating new energy sources that can replace petroleum cost-effectively as well as in reducing the total subsidies for LPG, kerosene and diesel that currently amount to about US$25 billion a year. Besides, wherever possible the government should strive to bring down our country’s petroleum consumption by relying on public relations campaigns aimed at encouraging alternatives to petrol and diesel, lower fuel usage, tapping solar energy, promoting carpooling and use of public transport, bio-diesel, bio-ethanol, etc.

Secondly, India is currently facing acute coal shortages. State-owned Coal India Ltd (CIL), which accounts for over 80% of the domestic coal production, has been missing annual production targets during the last few years. Furthermore, CIL is awaiting environment and forestry clearances pertaining to its 241 projects. As such the production of coal has been constrained. As against a total consumption of 739.42 million tonnes (MT) of coal during 2013-14, the supply was only 571 MT. To bridge this demand-supply gap, India had to import 168.42 MT of the dry fuel during 2013-14, which has added significantly to the import bill.

Hence, to reduce coal imports, the coal ministry will have to fast-track coal extraction from the mines from the explored and environmentally cleared blocks held by CIL. Moreover, environment and forestry clearances pertaining to its 241 projects should be expedited and coal mining work should be started immediately.

The next major item on our country’s import bill is gold. India had spent US$28.9 billion in 2013-14 on import of gold. As Indians are enamored of gold, there is an innate desire in most of them to accumulate maximum quantity of gold. Even the intellectuals find it impossible to convince their families not to buy gold, as investment in gold is perceived to be a great idea. India government has several times attempted to trim our craze for gold by increasing taxes on its import. However, so far such attempts have only pushed up gold smuggling.

To stem India’s burgeoning current account deficit, cutting down the huge annual imports of gold is one of the best options as this commodity can be termed as the mother of all non-essential imports. For curbing fresh imports of gold on a sustainable basis, banks and NBFCs should be banned from selling gold coins and from providing loans against gold. Our government should also come up with some innovative and radical ideas comprising massive and sustained persuasion beginning from schools to public campaigns.

Many Indians prefer to purchase physical gold as it is perceived to be a very effective hedge against inflation in the long run. Keeping this fact in mind, our government should design attractive gold bonds offering ‘super incentives’, which can act as a substitute to investing in physical gold. And our government may also have to launch some aggressive super campaigns to promote the acceptance of these gold bonds. The ‘super incentives’ can be gradually withdrawn once the concept of paper instruments as substitutes to physical gold gets accepted.

Focus on Import Substitution Industrialization

To reduce its current account deficit, India also needs to focus on Import Substitution Industrialization (ISI) that advocates replacing foreign imports with domestic production. Depending on imported goods that can be produced in India is an unhealthy trend as it drains our foreign exchange reserves and also increases pressure on our country’s current account. ISI as a trade and economic policy has the twin advantages of reducing current account deficit while improving domestic companies’ global competitiveness.

Currently, many Indian traders deal in Diwali products such as fireworks, fancy lights and statues of Indian gods and even household items imported from China. They just import them on a large scale and stack such products in their godowns and display them in their showrooms. Even consumer products like cigarette lighters, batteries, locks, car stereos, toys, fans and energy saving lamps, among others, are flooding the Indian market.

The Narendra Modi government needs to take a note of this trend. Without further delay, it should come up with an effective and viable Import Substitution Policy (ISP) that will provide stimulus to the domestic industry and also fight the evil of joblessness. Industry analysts believe the Indian manufacturing sector has the competence to attain a growth rate of more than 12% provided the door for inviting funds, talent, and innovation is wide open both at the small scale as well as the large scale.

Refining and upgrading existing Export Processing Zones, assisting our small and medium enterprises to interact with global players, widening of incremental exports incentivisation scheme and streamlining the process of clearances from government departments are some other pressing needs. This measure will also prove constructive in terms of large-scale employment.

Lure Foreign Direct Investment

India can also focus on attracting long term overseas capital flows by way of foreign direct investments, to lower its current account deficit. With the industrialized world growing at a relatively slow pace, capital always keeps looking for profitable opportunities abroad to earn a high rate of return. Currently, India provides that opportunity as it recorded a GDP growth of 5.7% in the April-June 2014 quarter and expects to cross the 6% mark for the full financial year 2014-15.

Going forward, the quick and pro-active policies of the NDA government would act as a growth propeller for the Indian economy, which will further strengthen business confidence and provide added stimulus to growth. And our government is expected to continue on its path of implementing the reforms agenda in a bid to restart the investment cycle and revive the overall demand in the economy.

Latest media reports say India can attract billions of dollars in FDI from Japan as Narendra Modi during his first official visit as Prime Minister has promised speedy clearances for fresh investments from Japan. The areas that can attract such investments include railways, smart city projects, biotechnology, clean energy, electronics, defence equipment and technology, and overall infrastructure space.

Since Modi has also promised to improve ease of doing business as well as fast-track the government clearances, provide clarity in policy regime and more business-friendly environment, there is huge potential to significantly increase the FDI flows from many other industrialized countries across the globe.

Develop India as a Preferred Educational Destination

India, which offers good academic standards, globally recognized degrees and diplomas, low cost education as well as safe and violence-free environment, has everything going for it to enable it to emerge as a dream educational destination. For students desiring to pursue higher education in the engineering field we have IITs, NITs and other renowned technical centers of learning. If design is their calling, they can head for National Institute of Design (NID), Centre for Environmental Planning & Technology (CEPT) or School of Planning and Architecture (SPA). If management is their thing, they can choose from IIMs, Indian School of Business (ISB), SP Jain Narsee Monjee and many other B-schools. Film-making? Well, there’s a choice there as well: Asian Academy of Film and Television (AAFT), Film and Television Institute of India (FTII) or the National School of Drama (NSD).

Despite this, every year over 6 lakh Indian students head for foreign shores for higher education after completing their graduation in the country. If the latest developments are any indication, Indian students have started eyeing foreign universities even for pursuing a wide range of undergraduate courses in computer science, product designing, journalism and mass communication, fashion designing, fashion photography, bespoke tailoring, business management, visual merchandizing and branding, petroleum engineering, drilling technology, beauty and spa management, among others.

The major reason for this migration of students is because they do not get admission in quality institutions within the country. For instance, Delhi University announced a 100% cut-off last year. With such high cut-off marks, majority of students are unable to secure a seat in good Indian colleges and universities. Thus, India currently faces a huge capacity constraint in the field of quality higher education. In view of this, our government in collaboration with the private sector should aggressively scale up the number of high standard quality institutes, colleges and universities that offer world-class education. For India, it is a viable proposition since we already have the technical know-how, expertise and experience to go ahead and implement it under the public-private partnership (PPP) model. What is required is political will and slightly tweaking our priorities.

One of the major advantages that will accrue to India from the above proposition is it will avert foreign exchange outflow of over Rs 95,000 crore in the field of higher education, which can contribute in a big way to ease the pressure on our country’s current account.

Encourage Tourist Inflow

Our government should aggressively seek out ways to encourage tourist inflow, particularly from the West by easing the visa regime and encouraging foreigners to choose India for holidaying. Though India has everything, including beaches, backwaters, snow, desert and different weathers, to attract foreign tourists in large numbers, our strict tourist visa regime acts as a major impediment. This in turn, results in lesser foreign exchange earnings.

India’s visa regime has reportedly been deflecting foreign tourists from the US, Canada and Europe to Sri Lanka, Bhutan and Nepal. The NDA government should, therefore, consider restoring India’s foreign missions’ flexibility for granting tourist visas as it would definitely help in attracting more visitors. Currently, India has agreement with different countries, including Japan, Finland, Luxembourg, New Zealand, Cambodia, Vietnam, Philippines, Laos and Myanmar, under the visa on arrival system. To give a boost to the tourism sector, it would be advisable if the tourist visa on arrival regime is implemented with other countries also.

Motivate Outbound Indian Travelers to Opt for Domestic Tourism

Lately, our country has emerged as the fastest-growing outbound tourist market in the world and in absolute numbers India is second only to China. The number of Indians travelling overseas is set to rise from 15 million currently to around 50 million by 2020. This will mean a significant surge in spending overseas. In 2011, Indians travelling to Asia-Pacific spent US$13.3 billion, which is set to rise to US$91 billion by 2030.

This makes Indians the second-biggest spenders in the world on overseas travel, after China. So, while encouraging foreign tourist inflow to India, our government should also strive to motivate Indians, who normally vacation abroad, to choose domestic tourism destinations over overseas destinations for their future holidaying.

India’s rich history, cultural heritage, beauty, diversity of religion and medicine fascinate the diverse segment of budget and luxury tourists as well as leisure and business travelers alike. In fact, India is probably the only country that offers various categories of tourism with its geographical diversity and rich cultural heritage. However, due to various constraints, India’s domestic tourism potential has not been tapped fully, till date.

The World Travel & Tourism Council (WTTC) has ranked our country among the leaders for long-term (10-year) growth prospects. Moreover, Conde Nast Traveler magazine has ranked India among the top 10 tourist destinations of the world. To encourage more and more Indian tourists to opt for holidays within the country rather than going abroad, our Tourism Ministry should aggressively tap the unexploited tourism possibilities in the rural belts of the North-East, Jammu & Kashmir, the Andamans, Kerala, Karnataka, Goa, Rajasthan and the temple circuit of Tamil Nadu by setting up proper facilities there and by providing air, water and surface-transport linkages and connectivity.

If the airports nearest to these tourist destinations are connected with direct flights to Mumbai, Delhi, Bangalore, Ahmedabad, Hyderabad, Chennai and other metro cities, then many of the outbound Indian tourists can be easily lured to spend their extended weekends in these rural belts.

To promote domestic tourism among outbound Indian travelers, our government should also offer tempting incentives to tour operators, travel agencies & portals, hotel chains, service providers and other stake holders for promoting the diverse range of tourism packages comprising adventure tourism, heritage tourism, medical tourism, honeymoon tourism, eco-tourism, rural tourism, pilgrimage tourism, wellness tourism, wildlife tourism and MICE (Meetings, Incentives, Conferences & Exhibition) tourism at several tourist destinations and circuits spread across the length and breadth of the country.

Given the distance between various destinations and tourist circuits, the government should also ensure that ease of travelling – right from hotel booking, airlines booking and transfers from and to hotels – are all available at the click of a button and all the requisite facilities comprising hotel stay, food, transport, shopping, etc are all within very affordable and budgeted rates.

This point needs to be specially taken care of because there have been complaints from outbound Indian tourists that some of the overseas destinations like Dubai, Thailand, Singapore and Malaysia are currently working out cheaper than domestic tourism destinations like Kerala for Delhiites, tempting the latter and their families to go abroad for holidays.

If all the measures delineated above can be implemented efficiently and effectively, our country can avert significant amount of foreign exchange outflow in the tourism sector, which in turn can be diverted into our domestic tourism industry. This will not only help in containing India’s current account deficit, but it also has the potential to generate large scale employment opportunities and thus give a major boost to India’s GDP growth.

Attract More Overseas Remittances

Since a substantial portion of the NRI remittances get invested in fixed deposits, real estate, stocks and bonds, they can be termed as permanent foreign currency inflows that can help finance India’s current account, unlike the NRI deposits that are repatriable.

There are some countries around the globe where they have shortage of skilled and unskilled manpower. On the other hand, some of our Indian states have acute unemployment problem. With the help of the India’s foreign ministry and overseas missions, our government can try to coordinate with concerned authorities in such countries with a view to tap the prevailing job opportunities there for the benefit of its unemployed citizens. In fact, our government can contemplate setting up a separate ministry to facilitate this process. Once these Indians land up good jobs abroad, the money they send home to their families and relatives would definitely boost the total NRI remittances that our country receives.

It is also observed that many Indians working overseas tend to use illegal and parallel transactions to send money home. RBI should study the reasons for their resorting to illegal means and provide them the required incentives so that they are motivated to use the official channel for such remittances. Furthermore, the Reserve Bank of India (RBI) should try to boost the total remittances received from abroad by resident Indians by scrapping the existing limit of 30 remittances allowed per annum from NRIs. Earlier this limit used to be 12 remittances a year. After scrapping the limit, the change should also be publicized sufficiently so that NRIs desiring to take advantage of this move are able to send remittances more frequently.

Bring Back Indian Black Money Stashed Abroad

A recent Assocham study has pegged the Indian black money stashed abroad at around Rs 120 lakh crore or US$2 trillion. The Narendra Modi-led government has already constituted a Special Investigation Team (SIT) to unearth and bring back this black money to India. Assocham has said it will submit its proposals to this newly constituted SIT.

Our government should come out with some tempting incentives or concrete proposals in the form of either an amnesty scheme or a voluntary disclosure program to facilitate transfer of all the Indian black money lying abroad into our country. If our government succeeds in its efforts at bringing in the said black money stashed abroad, it will instantly enable India to have a significant surplus in its current account.

100 thoughts on “Concrete proposals to reduce India’s Current Account Deficit

  1. Jayant Shroff

    The suggestions are very basic and are known to all most all people concerned connected with the country’s economy. But they fail in implementing them. To implement them you need drastic reforms in the fields of judiciary, police, religious, cultural, ethical, moral, and social reforms. It needs complete transformation of our society at large, starting with each individual contributing to it in a significant way. We need a movement where each individual starts thinking If ” I Transform India Transforms.”

    Reply
  2. Paul kurian

    It is much interesting and informative to read your article.I am Paul kurian , manufacturer exporter of food products and spices and interested in such enlightening articles . Thank you very much for sharing your thoughts.

    Reply
  3. Usha Jha

    Good articals with good suggestion. Really if govt. Follow these suggestions we can overcome from credit account deficit and thers problems. Govermment should take initiative towards this. India has a human capital. If we export our human capital we can reduce the unemployment problems.

    Reply
  4. Ca Ketan Solanki

    Dear Sunil, I am very much impress with your article which gives macro & micro level views on how to reduce India’s CAD. Well done & keep it up. Thanks for sharing your thoughts.

    Brgds
    KETAN

    Reply
    1. ritesh

      Hi

      What u have written is general knowledge to anybody following economics. The devil lies in execution. How the hell do u improve manufacturing : which is the mother of all problems.

      By increasing SSI limit to 10 crores from 5 crores now.
      Improve Labour laws.
      get GST
      get rid of excise for SSI with turnover upto 20 crores.

      There are several more which we can discuss in detail ….keep writing but pls enlighten on action items rather than rhetoric

      Reply
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