June 16, 2013
Abstract: A widening current account deficit combined with an economic slowdown and greater volatility of capital inflows makes the rupee highly vulnerable. Most observers believe that this is structural and will not self-correct. Providing a direct boost to exports will directly address this structural factor. But, which sector(s) this boost should be directed to, needs to be determined. But once the top few potential opportunities are identified, efforts must be made to remove the constraints that might be preventing them from becoming the export engines. In sum, a smaller current account deficit is not an entitlement, but needs to be earned by creating the right facilitating conditions. Addressing structural constraints head-on is a key part of this and is the only way to get the economy to the comfort zone of low current account deficits and steady capital inflows that preceded the 2008 crisis.
Keywords: current account deficit; vulnerability of the rupee; structural responses