ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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India's Current Account Woes

An Attempt to Clarify

Sustained capital flows into India caused a real appreciation accompanied by a very high trade deficit and a rising current account deficit. The Indian contribution to this entirely predictable story was that somewhere along the way it picked up high inflation that has now become entrenched in expectations.

This piece was written before the United States Federal Reserve decided to continue with its purchase of long-term securities. I am not tempted to revise what I had written because I believe the euphoria will wane in the coming weeks.

The Indian economy is facing a macroeconomic crisis. The external imbalance (whether measured by the trade balance or the current account) is well beyond what can be called normal. The nominal value of the rupee has fallen more than the currencies of other emerging market economies this year. The looming macroeconomic crisis should make us pause a little and reflect on recent history, so that if and when we come out of this mess, we do not repeat the mistakes that have brought us to this sorry pass.

Indian economists, with a few exceptions, do not understand macroeconomics. Most of the macroeconomic analysis is a hand-me-down from American macro textbooks. This presumes a closed economy, one that is “opened up” at the end of the textbook.1 Hence the clamour by some, loudly in an American accent, that all we need is a resumption of growth, capital flows will follow.

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