Notable success

It is almost a miracle that the current account deficit (CAD) of the country has dropped to an eight-year low from a precarious and dangerous situation that would have undermined the economy about a year ago.

The December 2013 figures, which were released last week, showed that CAD had fallen to 0.9 per cent of the GDP from 6.5 per cent in the corresponding period a year ago. For the April-December period, it was 2.3 per cent as against 5.2 per cent earlier. The actual figure which was $ 58.4 billion once fell to $ 33.2 billion in December. For the whole year it is likely to register a maximum of $ 40 billion.  By any standards it is a remarkable turnaround which has led many to doubt the veracity of the figures. But these figures are difficult to manipulate. 

The measures taken both by the Reserve Bank and the government on a war footing helped avert a disaster. The high CAD level had resulted in a run on the rupee which hit its historically lowest levels. The foreign exchange reserves had fallen perilously and there were even doubts of the country going to touch the 1991 position. But the depreciation of the rupee helped exports grow, and drastic import curbs, mainly of gold, led to a fall in foreign exchange outflow. High duties and other restrictions made gold imports unattractive. The FDI and FII inflows have increased in the last few months. Remittances and deposits from non-resident Indians also rose during the period from $ 8.2 billion to $ 10 billion. All these contributed to a reversal of the negative trend and the country reached a safe and secure position in terms of foreign exchange reserves.

The rupee is stable now and is among the few emerging market currencies which are performing. But the situation can still take a turn for the worse when imports start increasing with economic growth. Smuggling of gold, which has increased recently, can harm the economy. The government has refused to lift the import curbs, though the immediate danger has passed. The measures which helped tide over the situation are temporary and there should be a firmer footing for the changes.  Iron ore mining needs to be resumed and coal imports should be reduced.  There is the need for other measures too, which have policy implications. These can be considered only by the new government after the elections.