Dr Subir Gokarn
Jan 16 2015
Excerpts from the presentations at the Roundtable on National Security Key Challenges Ahead organised by The Tribune National Security Forum in collaboration with the Indian Council of World Affairs See also, www.tribuneindia.com
In the last three years, we have seen repeated jolts and shocks to the rupee. It has moved very sharply in the course of a few weeks and this has been extremely disruptive to business, to sentiment, to overall economic activity. People cannot deal with such volatility in the rupee, particularly foreign investors whose returns were completely neutralised by the rupee depreciation. Why did that happen and what are the national security implications?
Obviously, it makes the economy extremely vulnerable. There is a loss of credibility, a sense of firefighting and the inability to focus on long-term policy-making. All of these are vulnerabilities that we need to recognise, but the key issue is why we, or how we, let our current account deficit increase from a very, very stable 2 per cent of the GDP, or less, for 20 years — in fact, we had surpluses — to a sudden explosion of 4.2 per cent in a year and 4.8 per cent in the second year? That is the context in which rupee vulnerability became very, very acute.
So, a very significant element of economic vulnerability is to have a mechanism in place to not allow the currency to move so dramatically. We were not the only ones affected by this. Other countries also saw a lot of turbulence. But the impact on our economy was acute in the financial and retail sectors and foreign investment. There is a lesson there in terms of trying to create conditions which prevent this kind of shock from manifesting. Why did our current account deficit grow so large? There were four factors.
Firstly, gold imports grew from 1.2-1.3 per cent of the GDP in 2007 to about 3.1-3.2 per cent in 2012. It was a massive increase, but it created a big hole. The second factor was oil and the increase in its prices from about $80-85 per barrel in 2010 to $105-110, which persisted until a few months ago. Two other factors came into play in 2010 and 2011. Our coal imports grew from virtually nothing in 2007. We import lots of coaking coal, but not non-coking coal. Now, we import about $10 billion worth of non-coking coal because we have to feed all the power generation capacity we created without the corresponding increase in coal capacity. And we know the story behind that. But this kind of rapid increase and dependence on other countries for critical items is something that is of great significance when it comes to managing microeconomic vulnerability. We need to focus on it as we move forward.