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JPMorgan (India) has come out with an excellent report on the causes of India’s current account deficit (CAD). It is a timely rejoinder to the excited talk about improvement in India’s CAD because of the recent drop in the prices of commodities and gold.

Making assumptions about India’s gold demand reverting to pre-Lehman collapse levels, the authors calculate that savings in the gold import bill could be sizeable. However, as they state, the assumption is that Indians feel that the crisis in the world economy and in the Indian economy has come to an end and there is no need to seek the insurance of gold for their wealth. That is not a realistic assumption.

The report is careful to add that even if one were to assume an optimistic (declining) path for India’s gold and oil imports, India’s CAD could remain sizeable because of several other factors. One, India’s export of iron ore has plunged because courts have accommodated environmental considerations. India is now importing steel scrap. In fact, if the mining of iron ore remains caught in legal and environmental webs, India may have to import iron ore. Second, problems in the allocation of coal mines have led to a steep rise in the import of coal. Third, India’s fertilizer imports, too, have picked up because of demand and because of problems in the production of natural gas. Some underlying factors that led to these developments are unlikely to change in the near future.

Environmental and ecological balance is a necessity for India. However, lower growth, weaker currency, higher inflation and reduced employment opportunities have human costs, too. At the minimum, these costs must be taken into account and a fairer and reliable cost-benefit analysis of environmental concerns must be undertaken.

However, there is also a sinister dimension to environmental activism in India. Some of them are simply orchestrated by corporations to undermine the business expansion of their rivals. A significant number of Indian promoters do not have a national perspective or conscience.

Therefore, the judiciary must resist the temptation to play to the gallery. They should not be taking sides in this false battle of David vs. Goliath. Economic stagnation, supply shortages and higher cost of living affect many Davids right now more than any environmental degradation. This will hurt their progeny in the decades ahead.

Therefore, to project a decline in India’s CAD and inflation rate because of lower prices for commodities and then to predict (nay, demand) that the Reserve Bank of India cut rates in May is to get too far ahead. India has to wait some more time for a return of a healthy combination of economic growth, inflation rate and current account balance.

On the question of the funding of CAD, even if it were to decline in the quarters ahead, one must acknowledge that persistent weakness in commodity prices is a manifestation of weak global growth. Stock investors have ignored the link between macro fundamentals, corporate earnings and stock prices since August last year. However, even stock markets eventually return to sanity and risk appetite gives way to caution and risk aversion. Reduced risk appetite will deter flow of funds into India. If foreign investor interest in Indian stocks waned, the government will be tempted to further liberalize norms for the raising of external debt (i.e., debt in foreign currencies) by Indian corporations, including by those who have no foreign exchange earnings. India’s short-term external debt has risen rapidly in the last seven to eight years. According to a ministry of finance document on India’s external debt published in March, total short-term debt was around $19 billion in 2005-06. The quick estimate for December 2012 is that it had gone up to almost $92 billion. That is nearly a fivefold increase in little more than six years. The ratio of short-term debt to foreign exchange reserves was 12.9% in 2005-06 and by December 2012, this ratio had shot up to 31.1%.

Servicing this debt, in an environment of weak export growth is onerous for Indian corporations. Further, their debt to operating cash flows was 6.2 times at the end of March 2012. Any reading above six is a sign that corporations are heavily geared and need to reduce their debt. As they slash capital spending to reduce debt, their profit ratios will fall and their share price will decline. It is little consolation to investors that gearing levels are higher in Korea and in China.

For every silver lining in the Indian story, there is a dark cloud and that is largely due to gross economic mismanagement in the last nine years. It is “impressive" that the clock could be set back by two decades in nine years.

Consequently, current developments are grossly inadequate to restore a healthy balance between India’s growth, current account balance and inflation rate.

V. Anantha Nageswaran is the co-founder of Aavishkaar Venture Fund and Takshashila Institution. Comments are welcome at

To read V. Anantha Nageswaran’s previous columns, go to

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