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Tuesday, April 25, 2006

IIPM : It’s better! It’s cheaper! It’s not Indian!

Current account deficit evidence to inefficient domestic production (IIPM Publication)
The external account of our country requires scrutiny in order to reconcile the difference between reality and popular thought. According to the Indian Economic Survey 2005-06, the current account has gone from a surplus of $14 billion in 2003-04 to a deficit of $5.4 billion in 2004-05. On deeper analysis, the culprit behind such a blatant negative movement seems to be the trading account, which records the flow of tangibles. This account has registered a deficit of around $36.6 billion, while the invisible trade account, which includes services, has recorded a surplus of $31 billion. Popular thought would go with the inflationary oil price argument trumpeted so oft en by the Government; while the truth, on the contrary, lies in high non-oil imports. The weight of oil in the imports basket has actually fallen from 40% in the 1980s to 28% in 2004-05. On a supporting note, though the imports of capital goods have grown to $25 billion in 2003-04 from a mere $5 billion in 1993-94, what is most startling is the fact that the weight of even such imports in the total basket has fallen to 22% in 2004-05 from 25% in 1989-90. But still, it is a fact that the quantum index of imports of items such as manufactured products & transport equipment has grown much faster than the unit value index. In percentage terms, the imports of the former (manufactured products) have grown by 80% & of the latter (transport equipment) by 100%. This implies that people are substituting inefficient domestic consumer products with efficient foreign ones. The government has to hasten the pace of economic reforms in order to make domestic production more competitive; both qualitatively, and in terms of price. The day is not far when Indian firms cry foul of liberalisation; but then, haven’t we already?

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Source :- IIPM Editorial, 2006.

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