How does a balance of payment problem affect demand in the economy? Neelkanth Mishra of Credit Suisse puts it in an elegant way in an interview with Ira Dugal.
To paraphrase, if you think of it like a household budget: suppose a family has a consumption expenditure of Rs. 120 and an income of Rs. 100. The difference of Rs. 20, which would need to be borrowed from someone, would be the equivalent of the current account deficit. If, say oil prices go up, the consumption basket then becomes Rs. 140 and you would have to borrow more. Quite often it is the case that no one will be willing to lend the family more and therefore their consumption has to be brought back down to Rs. 120. This is the demand adjustment that the economy will have to face.
Neelkanth commented that the demand adjustment may be nearly 2 per cent of GDP and this could be the reason for the current panic in the currency. The balance of payments adjustment also puts a question mark on medium term growth rates. He estimated that even seven per cent growth rate is not sustainable. This is because our energy import bill is at an all-time high even though oil prices are at half the levels seen in the prior peak.
The entire interview is worth a watch:
Other discussion points from the conversation:
Rishad is the founder of Kairos Capital. He started his career with Standard Chartered Wealth Management and has extensive experience in markets, particularly in terms of mutual funds and stocks.
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