Hiking import duty to counter widening CAD will not work: Montek

Giving an overview of the macro and micro economic situation, he said though the CAD, at its current level (four-quarter high at 2.4 per cent of GDP in April-June from 1.9 per cent in January-March quarter), is not alarming, it was at a “comfort to worrying level.” By the end of the current year, if it breached the 3 per cent mark, then it is “really an alarming” situation. The health of an economy is perceived as normal if the CAD remains at 2 per cent. If it got close to discomfort levels, then efforts should be to find out mechanisms to bring it back to the comfortable mark.

Ahluwalia pointed to the ambivalence of businesses pertaining to the weakening rupee, where the exporters who were the biggest beneficiaries as believed, had never lobbied in such situations. Though the “unexpected gain” made buyers negotiate, it was not applicable for new orders, he said. 

He applauded the RBI by stating that not only had the apex bank handled the rupee depreciation well, the commentators and experts too had done well on this account. However, Ahluwalia called out the use of “volatility” to be a euphemism for depreciation. That the rupee is strong, is only a sign of a strong economy, he added.

The former bureaucrat said it is the impact of the US federal rate increase that might impact the flow of global capital flows into the country. Ahluwalia was quick to add that inflows were not always calibrated to the strength of an economy. But, India belonged to a class of emerging markets in Asia, where the chance of investors flowing out of the country too had to be factored in. Since the current CAD is at a higher level, international capital flows need not feel happy to fund large capital flows. Therefore, the custom duty hike is a wrong move, he reiterated.

“Our government is doing what other governments (globally) are doing,” he said, adding CAD being too high meant there is an excess of expenditure which needs to be curtailed. In this context, the relevance of fiscal deficit and monetary policy (interest rates) cannot be ignored. While the Finance Minister choosing to “stick with the deficit figure” is a good signal, it is imperative to evaluate the numbers to see if the assertion will hold, discounting small variations, Ahluwalia said. 

The next budget, an interim one, will not allow the government to be in position to give the signal about the economy, he said, adding the macro policies may continue unless drastic changes were made much ahead of the next budget. The overall economy is currently on a 7.3 to 7.4 per cent growth path, he said, drawing a parallel to global economies such as Brazil, Indonesia, Turkey and China. “We are not overtaking China in terms of size but only in terms of growth,” Ahluwalia said, noting that unless there was any muck up, India would continue to grow faster than China.