The Answer is Exports

Jun 22, 2013

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
In the last few weeks, sentiment surrounding the Indian economy has worsened dramatically. The rupee has hit record lows, the stock market is falling, and economic growth remains stagnant. Among all the factors causing this is a large current account deficit. The current account deficit is equal to imports minus exports.

Currently, we import much more than we export, and we have to fund the difference through the capital account. In general this means we need enough foreign inflows in order to make up the current account deficit. The current weak rupee can be attributed to a fall in foreign inflows.

One solution floated by the Chief Economic Advisor Raghuram Rajan is to further liberalize the capital market and encourage more foreign inflows. One such example suggested was to issue NRI bonds in order to raise foreign exchange. These solutions may be fine to deal with the short-term issue of the falling rupee. But they do a poor job of addressing the long-term problem of a high current account deficit.

In fact, if we issue NRI bonds all we are really doing is borrowing more in order to fund the current account deficit. What we need instead is a good long-term solution to addressing the current account deficit. From the title of this article, you can guess that the answer is exports.

If we increase our exports, this has numerous benefits. First, it will reduce the current account deficit. Second, it will create jobs at home. Third, it will result in higher economic growth. And finally, it will help the rupee's slide.

Some might claim that increasing exports is a difficult task. This is true, but that does not mean it can't be done. In fact, increasing exports is the only solution that is sustainable in the long term. Right now, we are not even talking about how to improve our exports. The first step is to recognize that exports are critical, and then policy makers can come up with the next steps to implement this.

The global economy has improved over the last one year, and continues to show promise of further growth in the near term. This means that global demand for exports will go up, and we need to make sure we cash in on this opportunity. Plenty of other countries want to increase their exports too, so it is critical that we take action immediately.

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is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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12 Responses to "The Answer is Exports"

C K Vaidya

Jun 23, 2013

I am sorry to say that "The answer is exports' is an over-simplistic solution to a complex problem of exchange rates, costs, relative strengths, competitiveness, beauracratic hurdles etc.

Export more of what is a question that goes abegging. Recently when Chinese leaders were in India, our Govt raised the issue of substantial less exports to China compared to our imports. What can we export to China? Can we export power generation equipment when Chinese equipment is available in India at a landed cost which is substantially lower than BHEL? Can we export foodgrains?
We need to focus on our competitiveness and relative advantage and support this through effective infrastructure. All of this takes time. Thats why the focus on short term, whether by discouraging import of gold or by raising debt.
And we must still remember that to grow rapidly, we need funding which could come from funding agencies. CAD is also one way of funding.


G Subramaniam

Jun 23, 2013

There is a short term issue that Raghuram's approach is designed to address i.e. liberalize the bond market to attract foreign funds to it. However, the sustainable solution is to develop as good a manufacturing sector as we have a services sector. Only a solid manufacturing sector that is supported by infrastructure that is world class can we hope to achieve a balance in our CAD. While this is the solution it requires a bi-partisan approach to - a) rectifying labor regulations b) investing in education c) improving out commercial tax structure (GST) d) investing in modern infrastructure. All this will have to happen almost immediately for it to bear fruit in time (10 - 15 years). If we do not do the needful we are sitting on a Malthusian time bomb adding as we do over 10 million to the working population every year over the next 15 years !!!

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