New Delhi: India must address its persistent current account deficit (CAD) to stabilize the rupee and attract foreign investment, said Janmejaya Sinha, chairman of Boston Consulting Group (BCG) in India.
“The Indian policy establishment got comfortable with a small current account deficit, given it was a commodity importer. If you see, our current account deficit is essentially a function of oil, gas and gold imports, and we have done nothing seriously to fix it,” Sinha told Mint in an interview.
“CAD is a neglected issue. No one talks about it,” he said. When energy prices rise, it puts pressure on the fiscal deficit, which puts pressure on the rupee and foreign investors flee, he added. “Such outflows can complicate monetary and currency management, thereby increasing the need for policymakers to respond to external shocks.”
India must act on both oil and gold to fix this problem. It must reduce its oil demand through electrification, reduce wastage, and cut wasteful subsidies, such as those for , at least shifting them to a subsidy for green ammonia, he said.
Imports of petroleum, crude and products rose 22.4% year-on-year to $95.57 billion in April–August, while fertilizer imports increased 53.2% to $8.21 billion. Meanwhile, gold imports rose 3.4% to $17.47 billion during the same period, per commerce ministry’s data.
India has almost as much gold as its GDP. “If the temple trusts could sell their gold to the government with the option to buy it back when they needed it, it would be a game-changer. A dead asset would allow temples to fix their surrounding areas, attract tourists and give the government a real kicker in terms of foreign exchange,” he said.
The World Gold Council estimates that Indian households hold about 31,000 tonnes of gold, valued at about $3.4 trillion.
Because India grew on the back of its domestic consumer market, the dependence on domestic markets was allowed to persist despite its fairly stellar growth record, Sinha said.
“It developed a certain export pessimism. As a result, Indian industry, even after liberalisation, has been supported by among the highest tariffs. Historically, high import tariffs protected domestic manufacturers from foreign competition,” he said.
This approach allowed Indian companies to generate profits by selling to domestic consumers without necessarily developing globally competitive products, brands or spending anything meaningful on building research and development (R&D) capabilities, he said.
This is unlike all the countries that have grown rapidly since World War II, initially Japan and Germany, then the four tigers – South Korea, Taiwan, Singapore and Hong Kong – after that, for a time, Malaysia and Indonesia, then China and now Vietnam. They have all had export-led growth.
In a recent interview with Mint, Franziska Ohnsorge, the World Bank’s chief economist for South Asia, had also said that India had yet to fully benefit from the China+1 strategy, with Vietnam and Cambodia seeing clearer gains from shifting global supply chains.
He said protection from overseas competition reduced the pressure on businesses to improve quality, invest in technology and develop products for international markets. “Indian consumers gradually gained access to better-quality products, but often at prices higher than those in overseas markets. Companies also tended to expand capacity only when domestic demand showed signs of expanding. As exports were modest and manufacturing’s share of GDP was falling, industry did not build scale or invest to serve global markets,” he said.
That approach is now under pressure as India pursues free trade agreements (FTAs) and opens its domestic market to greater competition.
“We have entered into nine covering 38 countries. Remember, they can also sell to us,” Sinha said. “The opening up of markets presents an opportunity for Indian businesses, but it also means domestic companies can no longer depend on a captive consumer base. They will need to have top quality, best services or China-like cost to compete with international manufacturers,” he said.
“The new era requires a major pivot. The old model will not work. India will have to deregulate; it will have to make itself more competitive. For this, government policy must encourage R&D spending, improve contract enforcement and rationalise the subsidy regime. It must also provide impetus to go into certain sectors. But one of the accompanying things it must fix is its current account deficit,” he said.
Sinha also called for India to bring more talent back from overseas and create conditions that encourage high-value research and product development at home. He contrasted global capability centres (), which typically perform work for multinational companies, with product businesses that own intellectual property and can command higher margins. While GCCs have become an important part of India’s services economy, Sinha argued that the country should focus more on building companies that develop and own products, rather than primarily providing services for multinational corporations.
Infrastructure push
He said the government’s infrastructure push since 2014 has improved conditions for private investment. Road construction, airport expansion, higher port capacity, railway improvements and additional power generation have helped address bottlenecks that constrained industry in earlier years.
The next phase of growth, however, will require both the government and the private sector to undertake reforms, he said. The government should reduce the cost of doing business, simplify regulations, lower tariffs on raw materials and intermediate goods, and improve contract enforcement. High tariffs on inputs can make Indian exports more expensive and undermine their competitiveness in international markets, he said.
Companies have had limited incentives to invest heavily in research when they could generate profits by selling to a relatively protected domestic market, Sinha said, while arguing that this approach will become increasingly difficult as foreign competition grows. “Businesses will have to invest in R&D, attract top talent and improve product quality to remain competitive.”