The Answer is Exports
22 JUNE 2013
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- By Asad Dossani, Author, The Lucrative Derivative Report
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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