India’s current deficit

I am posting this on Sunday morning. In a few hours, results of the Assembly elections will be known. If exit polls are reliable, BJP should win comfortably in three key states. Then, the Parliamentary election will become theirs to lose.

They need to be alert for signs of hubris or arrogance lest they create a sympathy wave for the Congress unintentionally. That is where Nelson Mandela will be a useful role model for them. I am so pleased with myself for having written this article in April 2008, after my first visit to South Africa. During that trip, I finished reading, ‘The long march to freedom’. The MINT piece was inspired by that book. Sadly, the piece remains relevant five + years after it was written.

Arguably, he was the greatest human being-leader in the 20th century. Yes, I have taken into consideration that Gandhi-ji also lived in the 20th century.

I have forgotten that this post is supposed to be about India’s current account deficit. India’s current account deficit data for fiscal second quarter was released ahead of time. It was a good number from the Indian point of view. The current account deficit was 1.2% of GDP. The drop in imports was entirely due to the decline in gold import. In fact, there was very little decline in overall dollar value of India’s imports in the first ten months of 2013 from imports for the same period in 2012. Gold imports had gone underground. This Reuters news-story makes that very clear. What the true current account deficit is? – no one knows.

Of course, fiscal third quarter will be even better because of the money that the RBI raised through NRI deposits. I think the funding issue might be still around in 2014-15 if global risk appetite wanes. India’s external loan repayments and trade financing were sharply down in the fiscal second quarter. They might pose challenge next year too.

At some level, it is possible to argue that the rupee is not cheap. Based on inflation differentials, it should be around 70 to a dollar. Of course, India’s relatively higher growth rate in the last decade should have meant a higher rupee (Belassa-Samuelson effect)  as my friend argues. That it is not means that it is undervalued relative to fundamentals, according to him. But, India’s capital and labour productivity are both lower these days (they have probably dropped materially in the last decade) and hence,I am not sure how much stronger India’s rupee should be, based on the B-S effect.

All told, no room for complacency and anything other than temporary relief.


2 thoughts on “India’s current deficit

  1. I believe Balassa Samuelson is a better way to assess real effective FX rates, rather than NEER. And even then much of this analysis is ex-post unless there is a reliable running source of labour productivity (or TFPG) data. Asides from Conference Board’s TED, I am not aware of any other place to get “sources of growth” data on anything more than an annual basis. So that takes us back to relative differences in inflation in key trading partners, etc.


    1. Happy New Year! I am not sure I understand your comment. I re-read my post. I had not mentioned NEER as the way to assess real effective FX rates. In fact, I had mentioned the B-S factor too.


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