downward pressure on growth and upward pressure on inflation, creating a stagflationary scenario. The increase in fiscal deficit leads to higher government borrowings that crowds out the private sector, and hence investments in the economy, weakening growth and further fuelling deficit, and the vicious cycle continues.
Self-delusion is the first step towards disaster–we need to shift the medium- to long-term focus away from funding the CAD to reducing the CAD on a permanent basis, else we will continue to have large currency depreciation at regular intervals that can deteriorate the overall well-being of every citizen in the economy.
A stable currency regime required for a stable growth economy cannot be achieved unless the structural issues are addressed to improve productivity and keep a stable inflation environment, resulting in a more stable fiscal deficit and external sector which puts India on a sustainable growth path with stable FD, CAD, inflation and growth.
The author is executive vice-president, ICICI Securities