Dr. Susmit Kumar, Ph.D.

Few days ago, our Economic Affairs Secretary Shaktikanta Das said in Japan, “In particular, it points to S&P Global Ratings keeping China at “AA-“ despite rising debt and slowing growth, while India has been kept at one step above junk….China’s reported debt surged to 264 per cent of its GDP at the end of 2016, from 193 per cent in 2009. In contrast, India’s debt fell to 66 per cent of its GDP from 72 per cent” (Rating agencies far detached from India’s ground realities: Das, The Hindu, May 6, 2017). In reality, the factors, described by Mr. Das, have nothing to do with our “BBB-“ rating. Credit rating depends on factors like the probability that loan would be repaid. There is no significant change in Indian economy after the India’s Capital Account Deficit (CAD) crisis during 2011-13. Indian economy is still vulnerable to external factors like crude oil price, NRI remittance and Foreign Direct Investment (FDI). Also India is nowhere as compared to China because India has trade deficit year after year in last two decades whereas China has trade surplus during the same period.

The above statement shows the influence of US economists/MBAs on Indian bureaucrats and economists. You should think twice before accepting any statement from an US economist or MBA. These are the people who created and sold the US to its Frankenstein, China, in the name of lower taxes and unrestricted free-market. As explained in my previous articles, since early 1970s the US has trade deficit year after year; it just prints its currency, which happens to be the global currency, to pay for its trade deficit (and also for its budget deficit). Hence the US economists would NEVER accept that the trade deficit, the primary reason for the FOREX (FOReign Exchange) problem, has potential to destroy a country’s economy for decades to come. Therefore they would preach about reining in the fiscal deficit and getting FDI (Foreign Direct Investment) as well as using tools like interest rate to keep the economy in check; the latter factors do not have as much influence as the trade deficit/FOREX problem on a country’s propensity to go the emergency ward of the IMF (International Monetary Fund). FOREX crisis is generally caused by a prolonged or sudden increase of trade deficits. Time and again history has shown us that even with fiscal deficit (when a government's expenditures exceed its revenue) and debt under control, a FOREX crisis in a country can lead to complete collapse of its economy.

In 2009, I attended a conference on Indian economy at a Business School in a Midwest university which is in top five business schools in the US. During the first session, I raised the question that yes Indian economy was booming, but its trade deficit had been increasing like the US trade deficit and US could pay it by printing its currency but India would face a crisis down the line. They did not give any direct answer. After my question, they changed the format of question from audience (after the first session) - in the first session, you just needed to raise your finger to ask question. But now they asked to submit questions on a piece of paper to the moderator and it would be up to the moderator to choose from the submitted questions.

In fact, I would suggest the Indian government not to send its top bureaucrats for training at premier US universities, which it does right now, because they are being brainwashed with bogus economic theories as discussed here. The US economists/MBAs are very good in increasing the share prices, but are not good for a nation’s economy.

As explained in my article The US Dollar – A Ponzi Scheme, during World War II, US enticed all other countries by claiming that it would keep its dollar pegged to gold at the rate of $35 for one ounce of gold. (Please read my article “Chinese yuan replacing US dollar as global currency: A not so distant prospect” for how the US Dollar became the Global Currency due to the 1944 Bretton Woods Accord). The US asked other countries to use the US dollar as reserve currency and also for conducting transactions between countries. This resulted in the 1944 Bretton Woods Accord, signed by 44 countries. As per the agreement, you could have asked the US govt to give you one ounce of gold for $35. As shown in Charts 1 and 2, the US had trade surplus from the end of World War II till early 1970s, but since it has had trade deficit year after year. The reason for it is that Nixon de-linked the dollar from gold in 1971, after which the US has just continued to print dollars to fund its trade and budget deficits. This has been going on since the Reagan administration.

Chart 1. US Monthly Balance of Trade (1950-75)

Chart 2. US Monthly Balance of Trade (1975-2016)

Nearly all the major financial crises in the developing countries started due to a FOREX crisis in the respective country:

1. 1991 Soviet Union Collapse (even the CIA had not predicted the Soviet Union’s collapse) (read: my article Communism Collapsed Due to Collapse in Oil Price in Late 1980’s and German Banks – Not Due to Reagan). Because of lack of hard currency Russia's shelves were empty of bread before its collapse in 1991. In 1984-85, the USSR imported 55.5 million tonnes of both wheat and coarse grain, a record for a single country to take in one year. Beginning with the 1972-73 crop season, the Soviet Union imported more wheat than any nation had ever done. It is an irony that today Russia is the number one exporter of wheat in the world.

2. 1994 Mexico Peso Crisis,

3. 1997 East Asian Economic Crisis - After China devalued its currency by 35% in 1994, only Japan devalued its currency to maintain its export level. Other Asian countries delayed devaluation until 1997. This caused a sharp fall in the exports of East Asian countries like, Thailand, South Korea, Malaysia, and Indonesia while China’s 1997 exports increased by 20 percent. Japan also had a trade surplus of $91 billion that year. This resulted in sharp drop in FOREX reserves of the former countries, making them venerable to the currency manipulators. For an example, South Korea’s foreign exchange reserves at the end of 1997 were only $8.87 billion, compared to $29.4 billion at the end of 1996. Prior to the 1997 East Asian Economic Crisis, the affected countries had modest budget surpluses, and inflation was low. After the 1997 crash of the economies of Thailand, Malaysia and Indonesia, these countries have lost their place in global economy, i.e. nobody talks about them right now.

4. 1998 Russian Financial Crisis,

5. 2001 Argentina Economic Crisis - Argentina went through an economic crisis in 2001. Instead of bowing to IMF dictates, it defaulted on $132 billion, mostly of foreign debts, and the investors had to take haircuts on their investments. At the height of the crisis in 2001, four Argentinian presidents took oaths and resigned in just ten days. Before the onset of the 2001 crisis, Argentina’s fiscal deficit and debt were only 3.2 percent and 54 percent, respectively, of its GDP. Due to 2001 default, Argentina is still having trouble in getting foreign loans.

6. 2009 Euro Crisis - Unlike the Eurozone countries (Euro GroupA) that were not affected by the 2009 crisis, all the PIIGS countries (Euro GroupB) – Portugal, Italy, Ireland, Greece and Spain – had been running trade deficits for a decade or so as shown in Tables below. In the early mid-2000s, the economy of Greece (worst affected by the 2009 crisis) was one of the fastest growing in the Eurozone. At the onset of the 2009 Euro Crisis, PIIGS countries, who suffered the most, had been running nearly the same fiscal deficit as non-affected Euro zone countries during the preceding decade, except the fact that all the PIIGS countries had trade deficit during that decade whereas the other countries did not. At that time, economists were predicting that both Britain and France, who had similar trade deficit issues, also might join PIIGS. After the onset of the 2009 crisis, the fiscal deficits of the PIIGS countries ballooned as shown below (please see the discussion about it in my article Is "Make In India" Theme Helping Indian Economy? - Part I). Here it should be noted that India has been running trade deficits for the last two decades and more.

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

    

   

   

During 2011-13, India saw what higher trade deficit could do to its economy. After the sharp devaluation of the Indian rupee and double digit inflation during 2011-13 due to the high crude oil price, resulting in higher trade deficit, 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; ‘Fragile Five’ Is the Latest Club of Emerging Nations in Turmoil, New York Times, January 28, 2014). Due to the record trade deficit during 2011-13, the exchange rate of India’s rupee (vis-à-vis the US dollar) tumbled from 44.17 in April 2011 to 62.92 in September 2013. 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 the early 2000s. Had high crude oil price persisted for a couple of more years, it was certain that India would have had to go to the IMF to take loan, which would have destroyed the Indian economy for next decade or longer, due to the IMF’s bitter medicine of getting rid of subsidies to balance the budget, significant increase in the interest rate, and selling the crown public sectors to Wall Street bankers at throwaway prices.

The bottom line is that if India wants to be a superpower, it has to get rid of its perennial trade deficit and become self-sufficient in essential mass consumption items.