If you pick up any financial daily or switch on a business news channel today you will find the reason for India’s falling economic standards -- the current account deficit or the CAD. But is CAD really the culprit or are our 'sentiments' at play here?
 
According to the Reserve Bank of India (RBI) report, India’s CAD for the year 2011-12 was $78.2 billion. This swelled up by 9.6 per cent, to $87.8 billion in the year 2012-13. Barclays in a report dated August 23, 2013 says that India might surprise with a lower CAD for 2013-14. “We believe India’s current account deficit has the potential to surprise favourably and have cut our FY 13-14 deficit forecast to $68 billion (from $80 billion). This is well below the consensus estimate of $76 billion and the average of $83 billion in the past two fiscal years. We also think our forecast could be conservative,” Siddharth Sanyal and Rahul Bajoria of Barclays in the report say.
 
If the CAD was really the issue then the current year’s projection should soothe investor nerves and bring back the investments. After all, the CAD has spiralled from $8 billion in 2007 to the current levels and from here any news of stabilising or lowering of CAD should be good news, right?
 
But then the second problem of tapering of the GDP hit India which raised the questions on funding the deficit yet again. The RBI expects India’s GDP to expand by 5.5 per cent in the current fiscal. The market believes that the number might actually be lower, at 5 per cent. This means that financing the CAD will be difficult. Even the RBI in its biannual report on the financial stability admitted that the “non-disruptive” financing of the CAD is a major challenge. It is this ‘sentiment’ that is causing the investors to abandon the ship.
 
Now, if we compare the rupee fall in the given two years, in 2011-12, the rupee depreciated by roughly 10 percent and by nearly the same figure on 2012-13. It is only in the last four months that the rupee fell from Rs 54 to a dollar to the current Rs 64 levels. So what changed so drastically in the last quarter?
 
What has changed than the fact that the US Fed might taper the printing of dollars, as explained by Vivek Kaul in this FirstPost story, which is making the foreign investors blink and take their money back home. But is this the entire truth?
 
According to this report of the Hindu Business Line, the foreign investors have pulled out over $10 billion from India in June-July alone. But has this money gone to the safer haven -- the US? The story explains how this money has found its way to Japan, apart from the US.
 
This Bloomberg story details how currencies of all emerging markets have taken a beating.
 
After CAD, the most abused word in the financial world today is ‘sentiment’. Investors are already wary of the high CAD but over the last few months the ‘sentiments’ have changed. Investors are beginning to believe that the government might not be able to finance this CAD. And this is making them pull out their monies from India and deploy it elsewhere.
 
Even though the warnings of this rupee depreciation have been around since 2010 that the CAD will land up the rupee in a bottomless pit, such cries are usually ignored till the crisis comes knocking at the door.
 
The question arises, is the captain of the ship doing enough to plug the hole and stop the sinking? If he is then the ‘sentiment’ will revive and the foreign investors will be back with their precious dollars. And if he fails, then the rupee will sink further to the gallows which some in the investor community have already started whispering about.
 
This Mint article explains how emerging markets like Russia, Indonesia, South Africa and Brazil are in the same boat as India. Russia is the only market from the countries assessed in the story that has a surplus current account and yet its currency fell. Why?
 
Which should lead us to believe that CAD is not the only issue that is causing the currencies in the emerging markets to fall. They chose the path of growth over everything else. No one would have raised an eyebrow in the event of rising national incomes but since the tide has turned, the emerging markets, including India, are paying the price.
 
There are no two ways about how the government can boost the ‘sentiment’. By tackling the third most abused in the Indian financial space -- the policy paralysis.
 
Although the government has woken up to the issue and is trying ways to fix the rupee fall, some feel that this is pushing India back to 1991 as explained by this story in the Economic Times.
 
Even in 1991, the government reacted when it was pushed to the wall. History repeats itself. Only after the rupee depreciation became a vertical fall in the last few months, did the government wake up to the monstrosity of the debacle. And as the situation is not as bad as 1991, the government’s response to stem the rupee fall has been tepid.
 
Election year is always seen as the one where the incumbent government doles out social welfare schemes to woo the voter. This government is following the same pattern. But if only it convinces the investors that the doling out of such schemes will mean more disposable income with the masses with a hope to revive the consumer confidence, the revival of our fortunes might be not that far away.
 
Long term investors are concerned about the the foundation of the economies and the faith in India’s growth story is still not shaken. However, to boost the economy, the Indian exporters need to take advantage of this otherwise dismal environment and make hay while the sun shines.
 
The way to bridge the CAD is to earn more dollars than the spend. Apart from the knee-jerk reforms that the government is undertaking to halt the rupee slide, if only it focuses on ways to help the Indian exporter, the solution to our problems might be closer than most have anticipated.
 
Sanyal and Bajoria go ahead to say, “We expect the INR at 61/USD in 6-12 months, which partly reflects a current account improvement. However, given the present fragile market sentiment, the underlying improvements in India’s current account may go unnoticed.”
 
The rupee wouldn't have fallen to these levels had the foreign investors continued to pump in money. With them taking out money, the question marks show up around India's ability to fund the CAD. The only way forward is by boosting the sentiments and reviving confidence in investors.
Shubhashish is a journalist who is now pursuing Masters in International Studies and Diplomacy in London. Email:shubhashish@msn.com