Is India’s CAD vulnerability caused by consumption patterns of richest 100 million?

Rathin Roy, director of economic think-tank National Institute of Public Finance and Policy and a part-time member of Prime Minister’s Economic Advisory Council, in an interview to Indian Express has highlighted the structural nature of India’s current account deficit (CAD).

According to Roy  there are “structural weaknesses in the Indian macro economy which cause colds every time the world sneezes.”

The focus on CAD has intensified over the last few months on the heels of a firm trend in the price of oil and a depreciation in the value of the rupee against the US dollar. In the April-June quarter, CAD as a percentage of gross domestic product was 2.4%.

“CAD, it is deeply structural. So really what you are seeing happening now is a symptom of a structural issue that we need to remedy,” said Roy.

Till this point, Roy’s description made sense. His explanation for the underlying cause, however, is baffling.

Roy pointed out the domestic orientation of economic activity in India and also its relatively high import intensity. He linked this aspect to the structural problem in the following manner.

“The root of the problem lies in the nature of growth process. Over the last 30 years, the process has been based on feeding the consumption of the top, to be charitable, 100 million Indians. That is a huge market by global standards. But what the top 100 million demands in the first phase are things like two-wheelers, automobiles, FMCGs, etc.”

In absence of evidence, it is difficult to understand how Roy managed to separate the import intensity of consumption by the richest 100 million from the rest. For instance, semiconductors which power communications devices are in demand for products used across all income groups. India needs to import them.

The case with FMCG products is no different. They are found across India, including villages where government services exist only on paper. Again, in the absence of some way to segregate FMCG consumption according to income and, subsequently, import content it’s not possible to reach Roy’s conclusion.

The example of two-wheelers is also odd. According to data published by Society of Indian Automobile Manufacturers, 122.9 million two-wheelers were sold between 2012-13 and 2017-18. Barring a handful of two-wheelers sold which may have been bought by recreational users, the rest bought vehicles for commuting. In India, 80% of vehicles sold are two-wheelers which suggests that a lot of the demand for petrol comes from people who buy the least expensive mode of personal transport. This doesn’t appear to fit well with the notion that two-wheeler buyers are largely among the relatively rich 100 million.

Roy’s argument that India’s CAD vulnerability is on account of a structural problem is plausible. But what it unconvincing is the explanation for it. The odd examples are perhaps symptoms of a weak argument.