Sunday, 16 June 2013

Current account deficit and Gandhiji


Gandhiji organised boycot of foreign clothes during the struggle against the Britishers.  India was one of the hubs of trade in the East till the British had arrived.  They gradually destroyed the local crafts (even chopping off the hands of artisans and craftsmen so that they cant work anymore) and shipped the raw materials back to England.  These raw materials after processing into finished goods used to be dumped in India.

In effect, they looted India of the raw materials and thereafter sold the finished products back to the Indians at low prices.  This way they could keep their industries back home running optimally and earn a lot of money.  To top it all, part of the money earned was used to buy bigger guns and larger armed forces that were used to oppress us Indians only.

Being an astute politician and freedom fighter, Gandhiji may have realised this and asked for total boycott of foreign goods.  A poster on the same is reproduced below:-

How is this relevant to current account deficit (CAD)?

This is what we need to look at.  Gandhiji advised boycott of all foreign goods which were largely clothes at that time so that domestic produced items can sustain despite being at higher price.  In the present day, if we examine any electronic or house hold appliances/decor, we can find that there is a deluge of products from South East Asia particularly China. If we take the same analogy of Britishers, this deluge is leading to the following:-

(a)  Wiping out the complete domestic electronics market
(b) Wiping out the complete domestic furniture market.  Hardly anybody goes to a carpenter these days.
(c)  Create a huge trade deficit with China/SEA countries
(d) Ensure sustenance of  foreign companies abroad by virtue of huge sales in our country, thereby furthering their prosperity
(e)  Place a severe demand for dollars to pay for exports

One might say that the same is true of Gold which is also correct.  Unfortunately we are now focussing only on Gold, probably because the other items have some utility unlike Gold which has pure ornamental value.  Still, Gold is a lesser evil in the long run. Consider this example:-

in 2013, Mr. A purchases 10 gms of gold for Rs 30,000/- and Mr. B purchases an LED tv for Rs 30,000/-.

The 30,000 for Gold, say is paid to Switzerland and the 30,000/- for the TV, say is paid to Korea. In the year 2013, both have the same impact on the current account deficit.

After five years in 2018, the LED TV would have depreciated to about 5,000 but the Gold would have appreciated to about 50,000/-. Effectively, the wealth of the individual had actually grown in purchase of gold as against the LED TV.  This is very useful when we calculate the per capita debt of the country i.e total debt of the country/population.  

It is evident from the above that despite having the same effect on CAD in 2013, their effect on the individual's and the nation's wealth is completely different five years on.

We can therefore deduce that it is equally (if not more) important to curb the imports of electronics, home appliances and decor as much as the restraints on Gold.   

In addition, that cheap mobile/appliance/decor is cheap only at the point of sale.  Once it adds to the CAD, the government has to pay for it somehow and the only way the government can pay for anything is by extracting it from the general public by way of taxes, cess etc.  So, you really aren't getting anything cheap but just filling up the pockets of MNC's.

I hope this issue generates positive and healthy discussions.