With the rupee depreciation and rising crude oil prices, India’s current account deficit (CAD) is under pressure and has become one of the biggest issues that government has at hand. However, while there could quick fix to the rupee fall, Prime Minister Economic Advisory Council (PMEAC) member Rathin Roy points to the structural problem in India’s CAD, as do some other economists.
In an interview with The Indian Express, Rathin Roy said that India’s CAD problem is partly because of a small population of, say, 100 million (10 crore) due to their spendings on goods and services like four-wheelers, higher education, civil aviation, and recreation travel.
He said that the recent rupee depreciation reflects that “there are structural weaknesses in the Indian macroeconomy which cause colds every time the world sneezes” and needs to be addressed. The noted economist said that the consumption demand for rich Indians is of a different kind, one that is not produced in India, like higher education, aviation, and recreation travel.
“Our current growth pattern is such that we need many things in India, but we import the things we need to make them, for example, electronics, or aircraft… Certain sectors where the consumption demand was very low in the past, like, mobile phones, have become very important sources of demand, but we are unable to supply them in India.” he told the newspaper.
“In the very extreme, the problem is compounded by the fact that even things that used to be non-tradeables like education and recreation travel have become tradeables. The import bill on this is skyrocketing. ” he added. Rathin Roy said that either India needs to increase import substitution or increase exports.
Last week, the government swung into action and announced “immediate” steps to deal with the current account deficit, which in the first quarter of FY19 widened to 2.4%. From reducing non-essential imports to removing curbs on Indian banks issuing Masala bonds, the government announced five steps to rein in the CAD.