On the face of it, the sharp fall in India’s current account deficit (CAD) to $32.4 billion in 2013-14 from a record $88.16 billion in previous fiscal is great news. Together with the rupee stabilising well below 60 to a dollar, this may seem as if it provides the leeway for the new government to focus on other immediate concerns — reviving investments and tackling inflation. But the truth is that the reduction in CAD is both artificial and temporary. This is because almost two-thirds of it has come from a fall in imports — especially of gold (from $54 billion to $29 billion), capital goods and a host of non-oil commodities.

It is obvious much of this fall is a result of artificial restrictions on import of gold and the overall demand slowdown in the economy. The curbs on gold imports cannot continue for long with growing evidence that smuggling has made a big return. Similarly, a slowdown-induced reduction in non-oil, non-gold imports is neither permanent nor desirable. Control over CAD in the long run is possible only through higher exports. And the story on the export front is far from inspiring. Merchandise exports grew by just 3.9 per cent in dollar terms in 2013-14. Even gross ‘invisibles’ receipts — mainly from software exports, remittance transfers and tourism — registered a measly 4.1 per cent growth. A weak rupee has, in other words, not helped as much as one might have expected.

While there can be no sustainable CAD solution without exports picking up — which also means investing more in power, roads, ports and other infrastructure that contribute to real cost competitiveness and ease of doing business — no less important is the issue of financing it through capital flows. The rupee’s crash last year happened mainly because of capital flows, which nearly halved to $48.8 billion from $89.3 billion in 2012-13. The July-September quarter even saw net capital outflows to the tune of $4.75 billion. The country can afford to run a CAD of up to 2.5 per cent of GDP — or just below $50 billion — if it attracts sufficient capital flows through foreign investments and external commercial borrowings. But this can happen only with growth returning to the economy, as it did during the times when every global investor wanted to put money into India. The run-up to the elections and formation of a stable, pro-reform government under Narendra Modi have enthused foreign institutional investors, who have poured in $15 billion into Indian markets in 2014 and $5.5 billion in May alone. The challenge lies in sustaining this interest and giving a real thrust to exports, which will take care of both the CAD and the capital flows necessary to finance it.