R Jagannathan
Firstpost.com
The good news on the trade front - with the
trade deficit hitting a 30-month low in September - is nothing to crow about. It does not represent a triumph of good government policy-making nor does it mark the revival of exporting and manufacturing muscle- clearly missing for over two years now.
The most sensible way to look at the narrowing trade deficit -
USD 6.7 billion last month - is that Mr Market has begun his good work. If at all it calls for more policy action, it is this: give Mr Market more time and space to work.
Politicians, of course, will claim credit for someone else's work, and so the sharp drop in gold (down 82 percent) and oil imports (down 6 percent) will be shown to be proof that import curbs work. The government's decisions have been on the ball. Or that the measures to pep up exports have started delivering results.
Nothing of the kind. But on that more later. The UPA has been so short of celebratory events in the last few years that we should not grudge them this brief moment of happiness.
However, if Finance Minister P Chidambaram and Commerce and Industry Minister Anand Sharma know what is good for them, they should acknowledge the role Mr Market played - and why their own disastrous moves helped only in a negative sense. The only lesson they need to learn is that Mr Market helps those who don’t mess with it.
There are two simple reasons why the trade deficit is now looking more manageable: the rupee and the slowdown. The latter, of course, is something the UPA can take clear credit for since it is the demand slowdown that is bringing down imports. Imports fell by nearly a sixth in September, or 18 percent. As for the rupee's fall, here too the UPA can take substantial credit. When you mess up, the rupee will fall.
When Mr Market saw how clueless the UPA was in reversing pessimism about the Indian economy, it took the first opportunity to move money out of India and this is why the rupee fell dramatically after April. It helped that Ben Bernanke had started making small noises about rolling back his bond buying plan, but the rupee would have fallen anyway.
But the rupee is rising now, you may point out. True, but it is again Mr Market at work. When the currency looked set to hit Rs 70 to the dollar in August-September, Mr Market saw a good bargain in the rupee, despite the UPA's best efforts to screw up (making short-term money dearer, stamping down on gold imports, etc). Mr Market never misses a good deal, even if it is a short-term fling. At exchange rates above Rs 60, Indian assets had become too undervalued to not deliver returns.
Now, for a few hometruths.
The current account deficit (CAD) - the gap between what the country earns and what it has to pay for – is not a problem in itself. What matters is how it is financed and at what price, which impacts the real economy. The UPA tried short-term remedies like freeing foreign investment in debt, which is a volatile flow. This is one reason why the currency overshot on the downside when Bernanke whispered his tapering thoughts. Money that came in for yields went back when dollar returns looked better.
CAD always gets financed. The only issue is at what price: through a steep marking down of the rupee or by borrowing at high cost. At the right price, Mr Market always invests in the rupee. You have to offer him a cheap rupee or a higher interest rate. This is why government was talking of issuing sovereign bonds, etc. In the end, a cheaper rupee did the trick. Consider: the rupee has fallen by nearly 70 percent over the last three years. So it was quoting at bargain-basement rates when Mr Market noticed the advantage.
The best way to finance the CAD is to let the rupee go where it will, but governments want short-term nirvana - since a rupee fall makes oil subsidies larger. This is where the government messed up again: by not letting the energy market work, it encouraged Indians to overconsume cheap oil. The point is simple: let diesel be priced at market rates, and both the fiscal deficit and CAD will start heading south. But there is a price to pay in terms of political popularity: people don’t like to be weaned away from cheap stuff, whether it is oil or food. The UPA is thus storing trouble by not letting Mr Market work on the energy, fertiliser and food demand and supply situation.
Another point is this: Mr Market has his moods. It is best to let the moods play out. If he has a hangover after a period of high growth, he should be allowed to rest and sleep. If he is feeling too low for too long, the animal spirits of capitalist opportunity will wake him up anyway. As Ajay Shah argues in an article in
The Economic Times, business downturns are good for overheating economies and help restore good health, both for corporates who may have tanked up on debt and now need to conserve resources, and for banks, who may have been too careless in lending when the going was good.
Here again, the UPA goofed.
When the Indian economy began its natural slowdown after Lehman, a short-term stimulus was warranted. But we went on feeding the false boom and never allowed Mr Market to sleep and recover. This is why the economy is a wilting lily right now. And the slowdown is now biting more than it needed to.
Now that the pessimism has gone too far - at least on the rupee - Mr Market is waking up to new possibilities.
Another example of the downside of messing with the market is that the slowdown will be prolonged in some sectors. Take the curbs on gold imports: this will impact the gold jewellery and related trades, making this sector slow down. There is a price to pay for import compression. Mr Gold Market is not amused.
The moral of the story: let Mr Market do his good work and India will be fine. If only politicians will let him be…
The writer is editor-in-chief, digital and publishing, Network18 Group 
