Says Partha Sen of DSE in his recent EPW piece. Well he talks about India’s Current account crisis and in the process takes a jibe at the econ community in India.
This piece was written before the United States Federal Reserve decided to continue with its purchase of long-term securities. I am not tempted to revise what I had written because I believe the euphoria will wane in the coming weeks.
The Indian economy is facing a macroeconomic crisis. The external imbalance (whether measured by the trade balance or the current account) is well beyond what can be called normal. The nominal value of the rupee has fallen more than the currencies of other emerging market economies this year. The looming macroeconomic crisis should make us pause a little and reflect on recent history, so that if and when we come out of this mess, we do not repeat the mistakes that have brought us to this sorry pass.
Indian economists, with a few exceptions, do not understand macroeconomics. Most of the macroeconomic analysis is a hand-me down from American macro textbooks. This presumes a closed economy, one that is “opened up” at the end of the textbook.1 Hence the clamour by some, loudly in an American accent, that all we need is a resumption of growth, capital flows will follow.
How misleading is this? For a small open economy, like India, the external dimension is very important. Both because it constrains domestic policies in the short run but more importantly, handled correctly it can help in industrialisation (as it did in east and south-east Asia).
he points how people do not know what Current Account is and have advice on the same.
Everyone agrees that India’s current account deficit is “too” high. This includes people like P Chidambaram, who does not know the definition of the current account. He (and many others) defines it as dollar payments less dollar receipts. It is indeed strange (and alarming) that no one (not the former finance minister present in the Rajya Sabha nor the Ministry of Finance bureaucrats) has corrected him. Even if he is not a trained economist, he has presented the union budget so many times that he should know there is a difference between, for instance, current expenditure and capital expenditure. He then proceeded on the basis of his very original definition to say that since we are short of dollars, let us get more foreign direct investment, foreign institutional investment, external commercial borrowings or ECBs (which are capital account items).
We have a situation here where we need to plug the current account deficit but we do not know what the current account is:
Hum ko un se wafa ki hai umeed
Jo nahin jaante wafa kya hai.2
(Loosely translated: “We expect loyalty (fidelity) from one who is oblivious of its existence”.)
The trade balance is the difference between exports and imports of goods and services. Add “net income from abroad” (like transfers) and we have the current account.
Overall, he says you cannot fight fire with fire:
A macroeconomic crisis has to be tackled as a macroeconomic one. Increasing capital inflows may provide temporary relief but will aggravate the lack of competitiveness over time. Taking resort to aggressive mining, apart from the disastrous social and environmental consequences, also does not attack the problem at its source. In this context it is very disheartening to see the politicians from the two major alliances saying that they would take the reform process forward. “Reforms” are not a holy book of a revealed religion. These have to be debated and whatever is found wanting has to be jettisoned. Failure to do so would be very costly. At the very least, it would make the new governor of the RBI look like Don Quixote rather than the knight in shining armour that the financial market makes him out to be.