Last week, India reported its goods trade data for Oct 2012. The data showed rising imports and falling exports. India has been experiencing falling exports for last few months due to loss of competitiveness of Indian exporters stemming from raging domestic CPI inflation of around 10% pa for last few years. Although initially India’s falling exports were blamed on slow global economy, in recent months, there is a clear divergence between Chinese exports surge and Indian exports slowdown – indicating that the root cause of Indian export malaise lies elsewhere.
In addition, inadequate policy responses to control inflation have created two additional related effects. First, inflation expectations in the minds of consumers – especially housewives – is anchored deep and people expect inflation to be around 12% pa for next twelve months. Second, with domestic bank deposit rates at less than 8% not adequately compensating savers for expected inflation, Indians are buying large quantities of imported gold, putting upward pressure on overall imports.
The table below shows the estimates of the Indian current account deficit for seven months period April-Oct 2012.
Table 1: Indian Current Account Deficit
Source:Decimal Point Analytics Estimates
Clearly, current account deficit at 5% of GDP, combined with general government deficit of 10.2% (IMF estimates for 2012) is not sustainable even in short-run. India needs to tackle the issue of high inflation on an urgent basis, and needs to show to its savers that its banks are willing to pay more than inflation on their deposits. Unless urgent actions are taken, India is headed for severe macro economic challenges.