Recent headline of newspaper was about the India’s current account deficit reached to 1991 levels.
One would recall that during 1991 the liberalization process was started by the government to get the much required Forex reserves. But just before this Govt had to sell the reserve Gold to sustain the balance of payment for few more weeks.
Why did India reach this situation. It was due to the various policies and regulations that didn’t allow free trade. The terms often explained by the phrase “License Raj” or Red Tape.
So the then FM Mr. Manmohan singh dramatically reformed the whole structure to improve exports and let industry be competitive in Global playground. He did succeed to great extent.
Cut to 2007. Economy strives and Indian industries doing well through the 1991 to 2007 years. Steady and good progress. Government feels that since now the policies are working, there is no need to review it and it should work eternally.
Small attempt was made to introduce GST system by 2007 by abolishing (or merging) all the taxes into one tax. This would have streamlined the tax system and made Indian Industry more competitive.
However this was the decade where lot of Forex was already coming in and the Govt was under no hurry to implement the GST. Infact it made merry with lots of borrowed money, introduced various welfare schemes (to make our people lazy eg. NREGA), Invested in world class infrastructure projects (only on paper, the projects that were implemented were not at all world class, so we know where the money went)
Meanwhile our neighbour China was aggressively working to help its industry to be more competitive, whereas in India we ruthlessly neglected export promotion. We were very bullish on the Indian growth story and we felt that we can survive even if our exports don’t grow. Hence no major reforms or export development schemes were introduced or implemented. SEZs were introduced. But they soon got caught in the Red Tape such that the whole scheme failed. Unlike in China were SEZs fueled its export success story.
2007 to 2013: Trouble starts to begin in the western economies. Still the effects are not visible on Indian soil as the Indian domestic economy was solid and growing. We did not feel the pinch yet. However the first signs were visible with declining exports and lower inflows of Forex.
PC Chidambaran was in no mood to accept the trouble. Was it our ego fueled by the last decade of cash rush or was it over-confidence? we will never know.
Today we sit in a situation where doing business in India is very difficult. Govt has failed to provide a smooth ground for the industry. Too much and complicated Local level, State level and National level taxes increase the cost, as well as makes it difficult to do business.
The strength of India, the small scale industries, is the worst affected due to bureaucracy.
It lost various markets to China as they offered better deals and faster deliveries.
The Govt is still fooling the people that the cause for CAD is increased Gold and Oil imports. Lets compare with China. China has already surpassed India in Gold imports. We are not the number one Gold importer now. China also imports lot of Oil. Much more than we do.
However while being the biggest consuming economy in the world, China also concentrated in increasing its income, that is exports. It is here where India failed badly.
It is common sense that as your family will grow and your standard of living increase, you will consume more. If you try to sustain this consumption on borrowed money, while not doing anything to increase your income, then one day you will surely be in trouble.
This is what Indian govt did.
It has nothing to do with Gold import and Oil imports, it has to do with decreased exports.
Way forward: Short term and long term.
Short term: give immediate Export sops to give a shot to exports.
Long term: Implement GST alongwith abolishing all (ALL) local taxes. (just read a few days ago that Maharashtra will keep LBT even if GST was introduced. What is this nonsense).