More than fiscal deficit, FM Sitharaman has to worry on current account deficit challenges and work on composite plan
As per the current trend, the current account deficit (CAD) of India might exceed 3 per cent of GDP in FY-2022-23. The CAD is more damaging compared to the fiscal deficit. Typically, CAD is financed by the external debt (private and sovereign) and equity investments by global investors. Hence, India’s forex reserves are accrued from the external capital receipts which are “international liabilities”.
But the fiscal deficit is majorly financed by the domestic debt liability. Out of the total sovereign debt, the external debt is barely $131 billion and the balance is domestic debt in rupee. This provides comfort to India over many other nations. In the next 12 months, out of total external debt (private & sovereign) of about $620 billion, about $267 billion is due for payment. This may have implications for the forex reserves.
More so, in the current global turmoil, the global investors are shifting their investments to safe destinations such as the US and such other countries into debt portfolios. Falling Rupee against US Dollar is a big deterrent for retaining such investment in India. So far, forex reserves of about $590 billion provide comfort to India.
But considering the rising trend of CAD, depleting forex reserves and falling rupee, India must not be complacent. International liability of India is much higher compared to its forex reserves.
Recently, the RBI has taken a few good steps to arrest volatility of rupee and outflow of forex.
In such a global turmoil, India must draw a composite plan for mitigating any probable external risk instead of taking piecemeal steps. In the past, India had faced several crises. There is no dearth of experts within the Government. However, well-known experts may also be outsourced and included in a team for response work. Wider consultation is always preferred instead of leaving the matter to the RBI alone.
The composite plan should essentially include “structural reforms” to improve “global competitiveness” for boosting exports and replacing imports. In a short/medium term, fiscal incentives with a sunset clause may be opted. More so, higher taxes on minerals, coal, diesel and gas must be reduced. That will push exports and GDP growth, besides cooling inflation.
The loss of revenue shall be compensated in future years. Resolving CAD stress must get priority over the fiscal deficit. India must gradually develop self-dependency on the front of energy, fertilizer, food, medicine, electronic chips and rare minerals. Import of thermal coal must be reduced by boosting domestic production. New exploration of petroleum and gas must be done in an aggressive manner. Railways must increase the share of goods traffic to reduce diesel consumption and logistic cost.
Public transport must be given a boost to reduce petrol consumption in private vehicles. Power cuts must be reduced to save diesel consumption in generators and pumps. Likewise, a series of reforms are needed which have common bearing on the GDP growth and stability of the external sector. Both are interlinked to a large extent.
Gold imports must be brought to almost nil in the next three to four years by using an innovative modified gold scheme, as I recommended in my book, Turn around India-2020.
That alone shall augment forex reserves about $450 billion in next five years, as estimated therein. This will be without increasing international liability and, therefore, rupee shall stabilize. It could be a game changer.
Capital market also needs more reforms, particularly for raising new capital, may be equity, corporate bonds or debt instruments. So far, the share of global investment in Indian debt & equity is too low compared to the size of its economy. Vibrant capital market shall certainly attract global investors and facilitate producers for new investments. Facilitation must co-exist with regulations for healthy growth.
Likewise, the easing of business and taxation laws shall attract private and global investment. Financial sector reforms, including easement of NPA norms, shall restore the share of productive credits from consumer loan portfolio and push GDP. MSME reforms are overdue and that will boost exports and create new jobs.
Vast potential in the export of services, processed food, textiles and handmade goods need a separate policy paper. Preservation of inward remittances of $80-85 billion needs immediate priority. Failing which, CAD will further expand.
As per composite plan, all such actions should have a pre-decided timeline from 3-36 months. This may be disclosed in public for infusing confidence among the global investors, capital market, producers and exporters of goods and services, etc.
Such a composite plan shall not only mitigate the probability of external risk but this will convert the global turmoil into an opportunity for radical reforms. India must act swiftly and emerge as a strong economy with a stable Rupee and comfortable forex reserves.
(The author has written Turn Around India-2020.)
