Ending oil subsidies key to curb a runaway current account deficit.

For the July-September quarter of the current fiscal year, the current account deficit — the difference between receipts and payments on account of trade in goods and services, including income accruing to capital and labour — was 5.4% of GDP. This is way out of line with what inspires confidence in the country's macroeconomic stability.

But there is a silver lining. Export growth in the first half of 2011-12 had been in the vicinity of 40%, which means that export growth in the first half of this fiscal would seem pretty dismal. But in the second half of last fiscal, export growth plummeted.

Which means that export growth this second half would appear not so bad. The reality is that with the developed world struggling to avoid a recession, exports cannot really grow all that fast, even if Indian exporters' efforts focus more closely on the fast-growing emerging economies like China and Indonesia. What can be controlled, however, is import of oil and gold.

Oil imports in the first half have crossed $80 billion, 6% higher than the oil import bill in the corresponding six months of 2011-12. By subsidising assorted petroleum fuels — kerosene, cooking gas and diesel — India is encouraging greater growth of this biggest item of our import bill. These subsidies need to go.

Oil subsidies lead to a higher fiscal deficit, feeding excess demand in the system and inflation. This singlelargest source of macroeconomic instability is eminently actionable. It needs to be eliminated, the faster the better.

Gold demand cannot be curbed through exhortation or higher import duties. People need financial instruments that offer a hedge against inflation the way gold does. We need more action on this front.

Then, there are these needless additions to the deficit created by the apex court and a supremely inefficient Coal India. By banning iron ore mining in Karnataka and Goa, the court has depressed export earnings and forced imports of ordinary grades of steel.

Coal IndiaBSE 0.31 % has forced the economy to widen the external deficit through coal imports even as we have huge domestic reserves of the stuff. Political courage alone can tackle these and other forces widening India's external deficit.


Source : economictimes.indiatimes.com