After rising over four successive quarters, India’s deficit in its transactions with the rest of the world on the current account (CAD) has fallen to 3.9 per cent of GDP in April-June, from its peak of 4.5 per cent during the three months ended March 2012. Even in absolute terms, the CAD of $16.6 billion for April-June is the lowest in five quarters. That is certainly welcome, considering that a CAD averaging 4.25 per cent of GDP in 2011-12 was simply unsustainable in terms of being financed through capital inflows or by drawing down of the official foreign exchange reserves. Viewed from that perspective, the latest numbers suggest a semblance of stability returning to the external macroeconomic environment, though we are still far away from the 2.5 per cent CAD level considered acceptable for a growing economy like India. Even in the crisis year of 1990-91, the CAD stood below 3 per cent of GDP; the only difference this time is that the country’s reserve position is marginally better than what it was then.

That said, the current CAD fall has not been due to any export buoyancy. Exports have actually registered negative growth year-on-year during the current fiscal; it is just that the import decline has been even more. This follows the usual pattern, wherein the depreciation of the local currency resulting from high CADs contributes to a slowdown, leading to lower import demand. Exports, on the other hand, take time to pick up: In this case, the benefits from a weaker currency have been more than offset by the disruptions to global trade from slackening of growth across major economies.

The above adjustments should be allowed to take place as smoothly and naturally as possible. No purpose is served, for instance, by keeping domestic prices of fuel or fertilisers artificially low, thereby sustaining the demand for these products at levels above that dictated by their higher landed prices. Apart from not helping to bring down the CAD adequately, it leads to misallocation of resources. The fact that oil imports have risen by 3 per cent, even while non-oil items have fallen by 11 per cent, clearly points to the distortions creeping in when prices are not allowed to weave themselves into the demand for goods and services. While the brunt of CAD reduction in the short run may have to be borne by imports on private account, the State, too, must contribute to this correction process by reducing its fiscal deficit and cutting down on expenditures. The State’s fiscally responsible behaviour would unleash a virtuous cycle of higher investments and output, repeating themselves to a point of bringing about greater revenue buoyancy, lower fiscal deficit and larger volume of exportable surpluses of goods and services. In the confluence of such beneficial events, there is not just the prospect of a more manageable CAD, but perhaps of its elimination altogether.

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