Ballooning Current Account Deficit: What Options?

India’s large and growing current account deficit is a matter of serious concern. Of equal concern is the government’s policy response, which apparently consists of measures meant to attract a growing inflow of foreign capital to finance the growing current account deficit. Underlying this response are two premises, both of which are faulty.

The first premise is that the government cannot really do much to bring down the deficit in merchandise trade, the growth of which is the sole reason for the growth of the current account deficit. Why? The reasons, it appears, are as follows. The continuing global economic crisis virtually rules out the possibility of increasing exports. Curbing domestic demand for imports requires increasing prices of imported goods, which seems unwise at a time when inflation is running high. Curbing imports directly by increasing import duties or by imposing quantitative controls would also increase prices and might, additionally, give rise to black markets. How solid are these reasons? One can perhaps accept that increasing exports in the short run is difficult, though one cannot fail to note that overvaluation of the rupee (that resulted from a combination of appreciating nominal exchange rate, and high and rising inflation) had hurt India’s exports. But the proposition that curbing imports is also difficult is hard to accept. Limiting imports cannot, of course, be entirely painless and problem-free. But this does not mean that it cannot be done. We only have to recall that between 1990-91 and 1991-92, when merchandise exports had registered a small decline, the government had managed to cut merchandise imports by about 25%.