The biggest concern is, of course, the CAD, which, for the past two years has been above 4 per cent of the gross domestic product (GDP). And, contrary to popular belief it is not gold that caused high CAD. While the level of gold import is high, it actually fell last year. And a weak external sector is only a partial explanation of the malaise. The fact is, the impact of faulty policies of the past and sheer economic mismanagement has finally caught up.
Dieselisation of the economy as a consequence of an ill-conceived oil subsidy and inefficiency of the power sector (causing increased demand for diesel generated captive power as supply falls woefully short of demand) resulted in oil imports going up even when the economy was slowing. Also, despite having about 10 per cent of the world's coal reserves, India's coal production has been woefully inadequate in meeting the requirement of thermal power plants (India's main source of electricity) requiring its large-scale import. Add to that, the virtual comatose state of India's mining sector induced by policy inadequacies which have resulted in a sharp fall in India's iron ore export. High CAD is, therefore, quite natural. Read More