India’s current account deficit has replaced the fiscal deficit in media headlines. Of course, one wonders why it took so long. The CAD has been a permanent feature of our national account statistics.
It’s probably the love of percentages. There’s something sinful about less than 8 per cent growth and an over 5 per cent fiscal deficit and CAD. Keep below these magic numbers and we are alright, say those who ought to know.
We were smug on the CAD front. After all, forex reserves are $300 billion. Will anyone dare touch the rupee? The bravado is gone, replaced with a begging bowl, going by the dignified name of ‘road shows’.
Paradoxical situation
In fact, absurd as it sounds today, some time back, ideas of creating a sovereign wealth fund were rife. Without any wealth, that is. For our reserves are the product not of hard-earned dollars from exports but, in the guise of financial liberalisation, massive capital inflows taking advantage of interest arbitrage and booming stock and real estate markets. Thus, the paradoxical situation of an appreciating rupee amidst a rising CAD.
No time was lost in proclaiming that this reflected global confidence in India. It was actually hot money from the vast pools of international finance in search of a quick buck. The elementary point that we are, in effect, giving usurious returns for short-term money entering and exiting our markets still eludes us.
In the minds of those wielding power on economic and financial matters, the rupee became fungible with foreign currencies — our fiat currency was equated with scarce dollars.
The 2008 market crash exposed India’s soft underbelly. Once foreign money downed shutters, the rupee found its natural level — continuous depreciation. Note, nothing happened to China’s yuan; it kept its head above water in the worst of times. Markets know who lives on borrowed money and time.
‘Shadow funding’
Indian corporates have always found the lure of low interest rates on foreign currencies irresistible. Unsurprisingly, they have generally got the timing wrong and paid the price of sharp rupee depreciation, especially against the lowest interest rate currencies such as the yen and Swiss franc. And the havoc wrought by bets on exotic forex derivatives is too recent to relate. Have the Government and the RBI woken up to the risks of ‘shadow funding’ of rupee requirements with foreign currency and domestic bank guarantees?
Unsurprisingly, few lessons have been learnt. ‘Borrow big and borrow long’ from global markets screams a headline in the editorial page of a business newspaper.
The rationale is that the loose monetary policies of the central banks of the US, Europe and Japan will eventually lead to higher inflation, so we will repay in cheaper foreign currencies. But how is their inflation relevant and how will we get foreign currency in the first place to meet our debts?
Such is the quality of much of economic commentary and debate.
Meanwhile, our appetite for energy imports is increasing. Any charity and donations to fund it would be most welcome.
(The author is a Chennai-based financial consultant.)