After watching the relentless fall of the Indian rupee for 18 months with saintly restraint, Finance Minister P Chidambaram declared on August 12 that he would cut the Current Account Deficit (CAD) — the excess outgo over receipts of foreign exchange — and stabilise the rupee. In January 2012, Indians could buy one US dollar by paying Rs 45. But, by August 12, they needed to pay more, Rs 61 for a dollar, the dollar rising by over 35 percent since January 2012, mirroring an equal fall in the rupee value.
This is the direct outcome of the burgeoning CAD since 2004-2005. On August 12, Chidambaram announced “measures” to reduce the CAD and arrest the rupee slide. But, within 36 hours, on August 14, the rupee fell further, to Rs 61.50 per dollar.
This forced the Reserve Bank to restrict investments and remittances abroad to reduce the dollar’s flow out of India. Even that did not work. It is Rs 62 to a dollar now. Even as the rupee was crashing, in January, The Economist magazine [2.1.2013] reported that the real value of the rupee, namely its purchasing power, equated a dollar to just Rs 19.75 - a third of the market value of the dollar today.
The Economist said the rupee is the most undervalued currency in the world market. Why does the already-undervalued, high real-value rupee keep losing value? Who is responsible for it? Chidambaram himself had acknowledged that the NDA had left behind a healthy economy.
In his budget speech (July 2004) Chidambaram said: “The economic fundamentals appear strong” and “the balance of payments robust”. From “robust” balance of payments, the nation is today in a balance of payments crisis reminding the country of the dark days of 1991.
How did the UPA manage to mess up the prosperous economy it had inherited in 2004?
A quick look at some simple facts will bring out the drastic change for the worse after the UPA came to power in 2004, which turned disastrous for the country after the UPA was voted back in 2009. Take the recent history of the CAD. The country incurred a CAD of $35 billion in 10 years from 1991 to 2001. But, under the NDA regime, it posted a substantial current account surplus - yes, surplus - of $22 billion for the first time since 1978. After the current account surplus of the NDA days, nine of years of the UPA regime saw unprecedented CADs of $339 billion, when Chidambaram [5 1/2 years] and Pranab Mukherjee [3 1/2 years] stewarded the national economy. See the transition from surplus into deficits under their economic leadership. While the NDA handed to the UPA a current account surplus of $13.5 billion in 2003-2004, the UPA quickly turned it into a CAD of $2.7 billion (2004-5) and trebled it to $10 billion each in the second and third years and thereafter multiplied it to $16 billion (4th year) $28 billion [5th] $38 billion (6th) $48 billion (7th), $78 billion (8th) and $89 billion (9th). The government repeatedly said oil prices and high gold imports are the culprits for the relentless CAD. Is the story of oil and gold as culprits true? Or the complete truth?
Reckless imports destroy production
A closer look at the import data reveals a shockingly different picture. Unnoticed (or suppressed?) in popular discourse, capital goods import skyrocketed under the UPA rule. The capital goods import during the NDA period averaged about $10 billion a year. But in 2004-2005, the very first year of the UPA, it leaped to $25.5 billion and then relentlessly rose year after thus: to $38 billion in the second year, $47 billion (3rd), $70 billion (4 th), $72 billion (5th), $66 billion (6th), $79 billion (7th), $99 billion (8th) and $91.5 billion (9th), aggregating to $587 billion in nine years.
Import of capital goods is a sign of vibrant economy. And in theory it generates higher national production. But, see what happens. The Index of Industrial Production (IIP) annually averaged 11.5 percent during the first four years of UPA rule. But in the next five years the annual average IIP came down to less than 5 percent — finally to a peanut of 2.9 percent for 2012-2013. Far from rising with the import of capital goods, the IIP growth has fallen from 11.5 percent in the first four years to 5 percent in the latter five years, a fall of over 56 percent. In contrast, it was in the latter five-year period the capital goods import was $407 billion (79 percent) out of the $587 billion for the UPA’s entire nine years, the average in the first four years being $45 billion and the later five years was $80 billion.
A rise of 78 per cent
Is it not shocking that when the capital goods import rises by 79 percent, the national production falls by 56 percent. The 2008 meltdown cannot be cited as an alibi for the decline in the IIP. Because the GDP has risen from 6.7 percent in 2008-2009 to 8.6 percent in 2009-2010 and to 9.3 percent in 2010-2011. Also, an economic slowdown affects investment first and production later.
Production falls after investment contracts. But here investment (read capital goods import) has risen by two thirds but production has fallen by half. Why this conundrum? The reason for the fall in national production in the latter five years itself is the rise in imports. The domestic capital goods industry slowed down and later declined because of the import of capital goods. Even as the GDP rose to 8.6 percent in 2009-2010, the IIP rise of 5.3 percent did not keep pace with it. Later the index of domestic capital goods production fell — yes actually fell — by 4 percent in 2011-2012 and 5.7 percent in 2012-2013. More, in the last three years to 2012-2013, the production of intermediate goods hardly grew. If capital goods import under the UPA hit the capital goods industry like a tsunami, foreign-manufactured goods flooded the Indian market.
The average annual import of manufactured goods during 2001-2004 (the NDA period) was just $600 million. But from 2004-2005 to 2012-2013, the average soared to $5.5 billion, by 8 times. The nominal national GDP grew by 3.2 times in this period, by just a third of the growth of manufactured goods imports. The 9-year UPA regime saw manufactured goods imports of $50 billion against just $2.3 billion during the NDA regime. Obviously, the capital goods import did not add to, but actually destroyed, national production, ably aided by import of manufactured goods.
CAD kills GDP growth
It is basic economics that trade surplus adds to national wealth (GDP) and trade deficit cuts into it. So, the CAD, which is the trade deficit, brings down the nominal GDP by a like amount. Calculations show that the CADs have brought down the real GDP by 0.8 percent in 2007-2008, by 1.5 percent (2008-2009) by 2.1 percent (2009-2010) by 1.4 percent(2010-2011) by 2.6 percent (2011-12) and by 3.9 percent (2012-13). If the CADs were removed, theoretically, the real GDP of India would have been 10.8 percent (not 9.3 percent) in 2007-2008, 8.2 percent (not 6.7 percent) in 2008-2009, 10.7 percent (not 8.6 percent) in 2001-2011, 8.8 percent (not 6.2 percent) in 2011-2012, and 8.9 percent (not 5 percent) in 2012-2013. True, oil and gold too have eaten into the forex holdings. But there is a fundamental difference between them and capital goods. Indians buy a quarter to a third of the global supply of gold, which is not produced in India. Domestic oil production is just a quarter of national needs, necessitating the import of the balance three-fourths. But most imported capital goods, which are actually produced in India, has displaced domestic production of capital goods and brought down the GDP.
Oil and Gold as alibis
And see how the oil and gold story is not true or is true only partly. The gross value of gold, silver and precious stones import of $402 billion during the UPA’s nine years looks huge. But if the export of jewellery and precious stones of $251 billion is set off, the net deficit is $161 billion in nine years. Likewise, the petroleum imports of $804 billion in nine years look gargantuan. But, if the export of petroleum products ($279 billion) is set off, the net import is down to $515 billion. It is less than the capital goods import of $587 billion. In the last five years, the net petroleum import is worth $360 billion, but the capital goods import is worth $407 billion. Does it need a seer to say that the real culprit is the reckless capital goods import and that it has killed the rupee through the CAD and hit domestic production and GDP? Just see one fallout of rupee depreciation. A calculation shows that for every additional rupee paid to buy dollars for oil imports, the additional oil bill for India is Rs 9,500 crore. In today’s rupee value, the extra annual petrol bill will be Rs 1,60,000 crore. But the CAD is only part one of the story of destruction. Await further testimony on the decade-long destruction.
S Gurumurthy is a well-known commentator on political and economic issues. Email: