MY SOULTIONS TO CURRENT ACCOUNT DEFICIT

 As the Current Account Deficit (popularly known as CAD) is at the highest level, India is on the verge of crisis like situation as it was in 1991. To address CAD crisis in 1991, the reforms called Liberalization, Privatization and Globalization (LPG) were initiated.  Similar crisis erupts today. I believe LPG can not be reverted back as India is one of the biggest beneficiaries of the process. We have to move forward with LPG with the solutions of CAD. Here I suggest how to deal with it.

1. Gold

Table 1: Imports of pearls, precious stones, metals, coins, etc (2011, in USD thousands) of the world Source: Trade Map

Rank	Country	Import value	Imports as a share of total imports (%)	Imports as a share of world imports (%)	Net trade
1	India	95,101,461	20.5	18.04	-45,085,879
2	USA	66,143,501	2.92	12.54	5,684,489
3	Hong Kong	62,234,235	12.18	11.8	-7,024,064
4	UAE	33,844,189	18.23	6.42	-4,243,628
	World	527,312,135	100	2.87	65,879,391

Table 2 Import of pearls, precious stones, metals, coins, etc (2011, in USD thousands) of India Source: Trade Map

Rank	Industry	Import value	Imports as a share of total imports (%)	Imports as a share of world imports (%)	Net trade
1	Mineral fuels, oils etc	157356406	33.92	4.74	-100,799,624
2	Pearls, precious stones, metals, coins, etc	95101461	20.5	18.04	-45,085,879
3	Boilers, machinery etc	35970037	7.75	1.72	-25,216,749
4	Ele.  Equipment etc	31767760	6.85	1.38	-20,028,109
	All industries	463920949	100	2.53	-162,438,382

1.1 Why Gold import is worry for India?

Table 1 shows Imports of pearls, precious stones, metals, coins, etc (2011, in USD thousands) of the world. Major constituent of these commodities is Gold. India is the largest importer of gold and also India constitutes around 20% of total import of gold of the world. Table 2 shows that gold is the second largest commodity which have been imported in India. All know traditional reasons behind it. But the other major reason is to park black money. Since small quantity of gold in value terms can be reached to crores, it is the best way to invest in it. Since in recent times, gold also has seen the highest ever bullish market rose from Rs. 10000 to 32500 restlessly, it attracts huge interest of investors especially in India. Another reason is from 2007 to 2012, equity market faced the worst ever crisis throughout the world and 2012 is knows as reality sector slump year in India. Now the safest, the most lucrative and the tax-free investment is gold only.

It damages heavily our balance of payment. Table 2 also shows the import of gold constitutes around 27% of total current account deficit. It encourages to park black money. It is unproductive. India like developing country cannot resist against non-interruptive gold imports.

1.2 100% import curb on Gold

I suggest 100% Gold import ban for short term only. Cent percent gold import ban is neither against reform process nor against WTO norms. In open trade, periodically problems like balance of payments likely to occur. So WTO itself allows certain measures to curb these problems. WTO article XII to read here with: “Notwithstanding the provisions of paragraph 1 of Article XI, any contracting party, in order to safeguard its external financial position and its balance of payments, may restrict the quantity or value of merchandise permitted to be imported”. This clearly allow import ban of gold. In period of time, we have to learn with currency fluctuation, balance of payment problem and also banning of import and free it at appropriate time. “Time” of banning or opening of commodities must not be politicalised but smartly based on economic permutation and combination. The proposed curb on gold must be for short period for the say, up to three months only.

Will see immediate effect the ban, as the top importer of gold stops buying it, the price will be crashed. As the price crashes, the charm to invest in gold to make profit will be lost.

1.3 Import duty hike to 25%

Recently the government hikes import duty to 8% from 4% on the gold. It is not sufficient it should be increased to 25%. As cent percent import ban may be opposed so-called free trade countries and groups, we can use these weapon silently and smartly. It may have less effect of import ban but certainly positive effect in reduction of gold price in the market and its demand.

1.4 Traceable usage

Gold is the most important means for black money. The digitalization of import and trade of gold is need of the day. Every gold bar will be having unique given six digit number when it is imported. It is broken for trade six digit number will be eight digit and so on. For example, 102030 number is given to a gold bar. If it is broken in two parts, new number will be 10203001 and 10203002. Every transaction must have this unique number and must register with national website for gold trade. So we can trace to every transaction and money involving it.

2. China

Table 3 Import of India Country wise (2011, in USD thousands) Source: Trade Map

Rank	Leading partners	Import value	Imports as a share of total imports (%)	Imports as a share of world imports (%)	Net trade
1	China	55,482,984	11.96	0.3	-38,765,199
2	UAE	35,471,576	7.65	0.19	1,897,782
3	Switzerland	31,367,428	6.76	0.17	-30,349,723
4	Saudi Arabia	28,423,643	6.13	0.15	-23,290,359
5	USA	22,573,864	4.87	0.12	10,345,127
	World	463,920,949	100	2.53	-162,438,382

Table 4 Import of India from china (in USD thousands) Source: Ministry of Commerce

S.No.	Commodity	2010-2011	2011-2012	%Growth	% of Total
1	ELECTRICAL MACHINERY etc	5,396,804.19	6,478,299.07	20.04	23.47
2	NUCLEAR REACTORS, BOILERS, MACHINERY AND MECHANICAL APPLIANCES etc	3,510,085.23	4,959,596.58	41.3	17.97
3	PROJECT GOODS etc	1,446,263.99	2,372,945.77	64.07	8.60
4	ORGANIC CHEMICALS	1,755,452.63	2,008,253.57	14.4	7.28
5	FERTILISERS	695,297.05	1,237,008.64	77.91	4.48
	Total	19,807,907.58	27,599,864.35

Table 3 shows China is the largest exporter to India. International trade theory propounded by Ricardo mentioned that international trade only prospers when two countries have comparative advantage. Here, trade favors China and China only, gave the proof of absolute advantage to China as Adam Smith propounded international theory. Chinese product overthrows Indian product. Many of manufacturers turn into trader. Anyhow we have to curb it. Another challenge from China is security. Moreover, it is not official but the biggest challenge of Indian security is China. By any analysis, Indian forces cant catch up with China on strength terms. Recently China entered in to Indian boarder and tried to aquire thousand of acres land into Indian boundary. Ultimately lose everything to China from money to security.

2.1 Security Tax

There is innovative solution of Chinese problem. Chinese are ahead of infrastructure, investment, reform and all most every aspect of economy. India cant compete with it in short run as Indian product. We should propose security tax on import from China. This tax cant be challenge in WTO. As we read WTO Article XXI: “Nothing in this Agreement shall be construed ..…
 (b)      to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests.” This tax can use in name to finance our defense budget and paramilitary forces budget. We can tax only to Chinese product as we have threat from China only. As far as Pakistan is concerned, we have no much trade with it, neither we need tax on it.

Above steps are not against reform as reform is inevitable solution of Indian problem. Rather they will strengthen reform process itself by using different measures in WTO to protect interest of the country and make trade competitive. The long term solutions lie in the improvement of infrastructure and investment, and most importantly to inculcate liberal and entrepreneur ethos in mindset of the people that I will discuss in next articles.

(Views are personal)