Practice Article 2

This is a slightly difficult article but I expect a similar article in the P.O. exams, especially in SBI PO. Read it twice and time your second attempt.

Anything around 4 min is good for this article.

I have taken this article from WSJ India Real Time and you can access the original article from the link given here or at the end of the article. The link is this

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Data show there is a very real threat that India’s economic growth could slip below 5% this fiscal year.

Industrial production shrank in December for the second month in a row; grain production estimates point to a decline in output because of drought, and food inflation is already high; the trade deficit expanded in January, raising fears that India’s current account deficit could hit record highs.

Last year through March, India’s current account deficit as a percentage of gross domestic product reached 4.2%. The situation has worsened this year, with the ratio at 4.7% in the first half and as high as 5.4% for the second quarter through September.

The central bank said India’s trade deficit to GDP ratio rose to 11.7% in the nine months through December from 10.1% a year earlier. The trend continued in January, when exports grew a modest 0.8% in dollar terms and imports accelerated. In January India’s trade deficit touched 20 billion dollars, the second highest of the year.

With weakening economic growth, India’s non-oil imports have fallen. But the depreciating rupee and rising oil prices have resulted in a surge in oil imports, leading to a spurt in the trade deficit. India’s current account deficit to GDP ratio for the year may well be in the vicinity of 5% or even above as India’s economic growth slows.

Such a high current account deficit poses a big challenge for the economy and could lead to a downgrade in India’s sovereign rating. Many have blamed high gold imports for the worsening current account deficit, but data show gold imports for the first nine months were lower than the previous year.

The trade deficit and slower growth in services exports were the real culprits. Weak external demand combined with high imports of oil and oil products have resulted in a deterioration of the trade balance.

The likely fall in the savings rate is another concern. The current account deficit goes up if an economy invests more than it saves domestically, and that is what is happening in India.

The savings rate last year fell to 30.8% of GDP from 34% the previous year and a peak of 36.8% in 2007-08. This year, the savings rate might well drop below 30%.

The current account deficit needs to be financed by foreign capital flows. But foreign direct investment has slowed to a trickle as investors appeared unnerved by a sense of policy paralysis in India and concerns over governance. However, foreign investment inflows, which are more volatile in nature, have risen and helped finance the deficit. But an excessive dependence on FII inflows would lead to increased volatility of the rupee, which is already showing signs of weakness.

India needs to aggressively pursue policies that will help manage the deficit. These include diligently sticking to the fiscal consolidation roadmap, which includes cutting down subsidies; improving the business environment so that foreign investors feel more comfortable; and taking measures to arrest and then reverse the decline in savings.

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Ouch, India’s Economic Woes, By Kunal Kumar Kundu , The Wall Street Journal - India Real Time, February 22, 2013, 9:30 AM

                                                    http://goo.gl/Zqe4a