The Endeavors of the Finance Minister to Bridge the Widening Current Account Deficit (CAD)

As per the theory of economics, there are two principal factors of the ‘balance of payments’; namely, the current account and the capital account. Mathematically, the current account can be represented as, (net exchequer on exports minus the investitures in imports) PLUS (Foreign investment earnings minus the investitures made to the foreign investors); i.e., ‘balance of trade’ plus ‘factor income’ plus ‘cash transfers’. The current account balance (CAD) is one of the major yardsticks for measuring the ‘foreign trade’ economy of the country. A surplus in the current account increases the foreign exchange reserves of the country, while a current account deficit depreciates the foreign exchange reserves of the country by an identical amount. The ‘balance of trade’ can also be mathematically represented as the total export of the country minus the total import of the country.

A ‘balance of trade’ deficit for a country occurs when the net import of the country is more than the net export. Since current account balance is the sum of the ‘balance of trade’, ‘factor income’ and ‘cash transfers’, with the ‘balance of  trade’ being the highest factor in this equation, the higher the ‘trade balance’, the more is the current account surplus. The Current Account Deficit (CAD) is associated with a situation where import exceeds export for a country, which causes a depreciation in the ‘trade balance’ as per the above equation, resulting in a deficit. The CAD can also be represented as ‘Absorption’ minus ‘Production’ (where Absorption = Domestic Consumption + Investments + Government Expenditures) and ‘Absorption’ > ‘Production’.                                                   

Finance Minister P. Chidambaram’s measures to bridge the CAD of the country:

As of July 17, 2013, Finance Minister P. Chidambaram had announced further implementation of financial reforms to be undertaken by the government, to bridge the CAD. Such reforms will be introduced keeping the foreign exchange reserves of the country untouched. As per his statements on this issue, to the assemblage of the capitalists and private investors, “Some more decisions are on the anvil. Reform is a work in progress”. The intimidating inflation of around 9% had been curtailed to a less threatening 5%, and was creeping towards a 4.9% by June, 2013. The Finance Minister had added that the inflation could be kept under control if the price of crude oil proves to be stable. Referring to last year’s CAD, he had further added that, “At the end of the year (2012–13), not only did we finance the CAD, but also added USD 3.8 billion to our reserves. This year the CAD looms large. We are doing our sums and we are confident that with some stern measures that we have taken and will take, we can contain the CAD to a level below the last year’s CAD. We will finance it fully and safely without running down reserves”.

As of August 12, 2013, the Finance Minister had unraveled a series of policies to contain the imports of the country and ensure consistent foreign investment. These measures were announced as a part of the government’s plans to delimit the CAD to 3.7% of the GDP (USD 70 billion) in 2013-14. As of 2012-13, the CAD had increased to a threatening 4.8% of the GDP, one of the primary reasons behind the 10% slump of the rupee. While in July, the RBI had appointed a new Governor, the Finance Minister had underlined that the responsibilities vested in RBI not only cover inflation and price containment, but also imposition of strictures that will enhance the overall growth and development of the country, including a higher employment rate.

Reiterating the Government’s pledge to bridge the fiscal and current account deficits, even if it involves implementation of arduous policies, the Finance Minister, while addressing a session of the IMF committee in Washington, on October 15, 2013, had delivered the following speech: “The Government is committed to the path of fiscal consolidation and had drawn red lines for the two deficits (Fiscal and Current Account). We shall not allow the red lines to be breached under any circumstances, and we shall remain within the red lines. We are prepared to take difficult decisions, should the need arise”. The fiscal deficit is a yardstick of the Government debts, and the Finance Ministry had promised to reduce it to 4.8% of the GDP for 2013-14 against the 4.9% mark of the fiscal year 2012-13. The Finance Minister had conceded to the fact that flaws in the Government’s economic policies have resulted in such a grim financial condition and confirmed that stern methods were already in place to close the widening fiscal and current account deficits.

The Finance Minister had also expressed his aspirations of bringing down the fiscal deficit to 3% by 2016-17: “Projects amounting to more than USD 64 billion have been cleared in the last few months. Once these projects come on-stream, they will have an all round salutary effect”. It is to be mentioned here that the growth rate of our country had slumped to a meager 5%, the lowest in the last decade, in the fiscal 2012-13. The economy curve, however, registered a discreet growth of 4.4%, and according to the Government projections, the economic growth will touch 5 to 5.5% in the current fiscal.

Encouraged by a CAD figure, pertaining to the first quarter of the current fiscal, that was beyond expectations, the Finance Minister is confident of concluding the current fiscal with a more acceptable financial statistics than initially apprehended. While the Finance Minister reaffirmed the increase in the economic growth for the current fiscal, he also gave confirmations that the foreign exchange market is still rife with speculations. The Government is sticking to its original plan of reducing the CAD to 3.7% of the GDP (i.e. USD 70 billion) and the Finance Minister is also confident of the figure. The Finance Minister had further declared that the amplification of the CAD in the first quarter was mainly due to a quantum leap in the gold imports in April and May, amounting to a whopping 345 tons. The Finance Minister also included his observations that for the second quarter (till September 25), there had been a sharp depreciation in the gold imports of the country, calibrated at 63 to 64 tons. He further mentioned that this dip in the gold imports will have a positive effect on the CAD.

Conclusion: The final take of the Finance Minister on the CAD

As of November 1, 2013, the Finance Minister alluded to a dispersal of the cloud of economic uncertainty looming over the country, and the time may indeed be just right for the silver lining. The declaration of the Finance Minister, that the CAD will be contained within USD 60 billion, backed by a hike in exports and a subsequent depreciation in the gold imports, came almost in congruence with the end of an adequate monsoon, promising rich harvest. Assuring to restore fiscal discipline, the Finance Minister added that the policies implemented by the RBI and the Finance Ministry will definitely help to subdue inflation and secure a consistent investment process. He guaranteed full cooperation of the Government in the forthcoming investment plans and assuaged the corporate and asked them to start investment procedures.

As an added financial measure, the Government is also pushing the issue of the much awaited ‘insurance amendment bill’, aimed at hiking FDI from the current 26% to almost a double of 49%, due to be tabled before the Parliament in the winter session. As for the Direct Taxes Code (DTC), the Finance Minister had confirmed that the final blueprints will soon be submitted to the Union Cabinet, seeking ratification. The citizens of India were waiting with bated breath for the economy to turn. It seems that the amendments of RBI and the Finance Ministry were indeed able to turn the tables, as evident from the 8% growth rate of the major industries in our country, as recorded in September, 2013. This, naturally, comes as a reprieve, after eleven months of grim economical situation.