Dr. Susmit Kumar, Ph.D.

Before even thinking to become a super-power, a country needs to have trade surplus, which the US had for more than 30 years after World War II, China since early 2000s, and both Germany and Japan for last several decades. The last two countries are economic super-powers but are too small to be military super-powers.

As per a recent news report, there was increase in Current Account Deficit (CAD) in the third quarter of 2016-17 (read: "Current account deficit rises to $7.9 billion in Q3"). CAD is defined as the sum of the balance of trade (goods and services exports less imports), net income from abroad, and net current transfers. According to the report, "Despite a slightly lower trade deficit on a year-on-year basis, the CAD widened primarily on account of a decline in net invisible receipts." A main reason for the decrease is the drop in remittances from Gulf countries. Due to lower oil prices, NRI remittances went down as nearly half of NRI remittances come from Gulf countries. IITians and Indian IT professionals in US are sending less remittance to India than nurses and labourers from Kerala and other Southern states working in Gulf countries.

Even after three years of PM Modi’s “Make in India” policy, the situation has not changed in India as shown in the graph below. The lowest points in graph are for during 2011-13 when India’s trade deficit were in the range of $180 bn to $200 bn, due to sky-high crude oil price, which India was not able to pay using its NRI remittances (about $70 bn) and FDI (about $50 bn) (Foreign Direct Investment), causing the rupee to collapse from 44:1 (rupee : dollar) to 62:1. Since 2013, India is just barely being able to pay for trade deficit by NRI remittances and FDI.

Right now, even after increasing CAD, the rupee is not going down because banks have tons of money in their vaults after demonetization. Had there been no demonetization drive, which increased bank deposits by nearly 15 lac crore, the rupee would have been significant depreciated.

We do not see any fundamental change in Indian economy due to “Make in India” policy. If we discard the 2011-13 data, we do not see any effect of “Made in India” policy on India’s foreign trade. India is becoming a consumer country like the US without becoming a producer country like China. It is worth noting that taking advantage of its currency being the global currency, the US just prints its currency, dollar, to fund its trade deficit (and also its budget deficit) whereas a country like India cannot do the same. If any of factors like, crude oil price, NRI remittances and FDI goes south, we would see a collapse of Indian rupee and it would also cause the entire Indian economy to go south for the next couple of decades.

Indian economy is still vulnerable to external factors of which the country does not have any control. Until the early 2000s, Indian economy was not a significant economic player in the world. Until the 1997 East Asian Economic Crisis, East Asian Miracles (like Thailand, Malaysia and Indonesia) were considered as major players as they had significant trade surpluses years after years. Then the 1997 East Asian Crisis occurred, mainly due to the 34% currency devaluation by China in 1994 causing the said countries to have trade deficits, eroding their FOREX severely. After the 1997 crisis, these countries are no longer major players in global economy.

The term BRIC (Brazil, Russia, India and China) was coined only in 2001 after economists determined that these countries were all deemed to be at an early stage of fresh economic development. The first BRIC summit was held in 2009 where a formal BRIC institution was established. Later on South Africa joined the group, leading to its renaming to BRICS.

After the sharp devaluation of the Indian rupee during 2011-13, some economists even started to write the obituary of the Indian economy (read: "None of the experts saw India's debt bubble coming. Sound familiar?", The Guardian, UK, August 26, 2013). At the time, one research analyst at Morgan Stanley even came up with a new group, called “Fragile Five,” for Turkey, Brazil, India, South Africa and Indonesia as these five countries were facing serious economic setback (read: "'Fragile Five’ Is the Latest Club of Emerging Nations in Turmoil", New York Times, January 28, 2014). One point worth noting is that Russia and China were not included in the new club of “Fragile Five”. Both Russia and China have been running trade surpluses since early 2000s. Russia’s trade surplus is due to the significant income from its crude oil export. After the onset of Ukraine crisis, the US used its dollar as a weapon to destroy the Russian economy, but Russia was able to withstand it mainly because it was running both trade surplus and budget surplus.

In just little more than a decade of becoming a major player in global economy, India faced severe economic crisis for more than two years which is 20% of fame time. If a child gets life-threatening disease for two years in his ten years’ life span, people would certainly say that the child is prone to getting life-threatening disease and needs drastic change in his life-style.

Countries after countries have faced severe economic downturn due to their prolonged trade deficits. Tables 1 and 2 below show the budget surplus/deficit and balance on current account of two groups of EU countries and the United States. The balance on current account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (interest and dividends) and net transfer payments (such as foreign aid). Euro-GroupA countries (Germany, Holland, Belgium, Austria, and Finland) are not affected much by the 2009 economic downturn. On the other hand, Euro-GroupB countries suffered badly. The latter group of countries was now known as PIIGS (Portugal, Ireland, Italy, Greece, and Spain) and at that time, economists were predicting that in the very near future, France would also join this group, needing to be bailed out.

Table 1 and Table 2 are from the book "Casino Capitalism," Susmit Kumar, iUniverse, pp 10-11, 2012.


Until the start of the global economic downturn in 2008, the government fiscal balances, which denote the budget surplus/deficit, of both groups, except Greece, were nearly the same. But there was a stark difference between these two groups in their balance on current account. Euro-GroupB countries had recurring negative balances on current account during the 2000s, whereas Euro-GroupA countries had positive balances on current account during the same period. Within the Euro zone, France’s share of exports fell to 13.4 percent in 2009, from 17 percent in 2000; Italy’s share fell to 10.1 percent from 11.9 percent. The German share increased during the period (read: "The Euro’s Uneven Benefit in Europe", New York Times, December 17, 2010). Since the 2009 economic downturn started, the budget deficits of Euro-GroupB countries worsened.

One remarkable point we get from the above tables is that the US economy resembles the economies of Euro-GroupB but is still surviving. The (open) secret is that it can print its currency to fund its deficits, whereas the Euro-GroupB countries cannot do such a thing, as the Euro is managed by the European Central Bank (ECB).

With a debt-to-revenue ratio of 312 percent, Greece is in dire straits till now. However, the debt-to-revenue ratio of the United States is 358 percent, according to Morgan Stanley. The Congressional Budget Office estimates that interest payments on the federal debt will rise from 9 percent of federal tax revenues to 20 percent in 2020, 36 percent in 2030, and 58 percent in 2040. Only America’s “exorbitant privilege” of being able to print the world's premier reserve currency gives it breathing space. But this very privilege is under mounting attack from the Chinese government (read: "In China’s Orbit", Niall Ferguson, December 1, 2010).

Economists claim that China has been under-cutting other countries by selling products below their production costs. But Chinese rulers are not fools who would sustain prolonged losses in selling “Made in China” products at below production costs. As discussed in my article, “The Hidden Cost of Imported Items and The Need to Redefine Modi Administration’s “Make in India” Policy” (read: The Hidden Cost of Imported Items and The Need to Redefine Modi Administration’s “Make in India” Policy", Susmit Kumar, January 7, 2017),  a sticker price of 100 rupee “Made in China” may in fact  cost 200 rupee to Indians. If a person in India purchases a "Made in China" commodity instead of "Made-in-India" commodity, then India loses not only a factory job but also indirectly associated jobs such as in schools, hospitals, and auto sector. Instead his purchase of the imported commodity creates such lost jobs in China.

Therefore, there is an urgent need for the Modi government to re-define its “Make in India” policy so that India can beat China in its own game and get rid of perennial trade deficits, on the way to becoming an economic super-power. I believe in the principle that a country should never import a mass consumption items otherwise it would be at the mercy of external factors which are beyond its control. 

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