Bridging the Deficit

In December, India's Current Account Deficit (CAD) reached historically high levels, accounting for 6.7% of the GDP. The Government keeps on blaming this yawning deficit solely on the public demand for gold and fuel, both of them being natural resources that we don't have enough of.

There is no  doubt that our country is a gold-crazed nation whose demand for the precious metal equals to almost a quarter of the world's demand. We import roughly 1,000 tonnes of the yellow metal a year. But the cost of gold imports only totals up to about 12 % of the import bill.

Since we are yet a growing nation, our country continues to consume vast amount of fuel, which we don't have sufficient deposits of. Demand for oil in the country rises 10% per annum but increase in domestic production is yet a meager 2%. Thus, we continue to import a whopping 75% of our fuel needs. This adds another 30% to the import bill.

So gold and petroleum consist of 42% of the import bill. This is worryingly high but unfortunately, no way exists to prevent increase in our consumption of gold and oil. Even though we have increased our import duty on gold, the demand continues to reach sky-high levels.

What we need to look at currently is what forms the remaining 58% of our import bill. The problem which ails the Indian economy is that we don't manufacture. It is not that we don't have enough natural resources, we are blessed with some of the world's largest deposits but we don't make use of them.

We have some of the world's largest iron deposits. Yet, don't make effective use of them. After mining, a majority of the iron is exported to the outside world, especially China. In China, this iron is used for manufacturing steel and other products. Ultimately, we are the ones who are importing these steel products from China all over again.

Trade deficit with China accounts for half of our yawning Current Account Deficit. If we manage to use the iron we mine in manufacturing goods ourselves, a vast portion of the Current Account Deficit will be accounted for. In fact, it might even be possible that we actually have a Current Account Surplus, if we export these very manufactured goods.

The Finance Ministry's path ahead is clear. Trying to trim gold imports is not the solution. Nor can we even think of limiting oil imports. We need to stop exporting raw materials and then importing them back as manufactured goods. We need to provide incentives to the manufacturing industry. If we do this, well the Current Account Deficit will be back on track.

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