How will they be able to cover up?

The Current Account Deficit, which is the balance of foreign exchange spent against money earned,  rose to  5.3% in the second quarter of last year. " Last year CAD was 4.2% of GDP, but this year we expect it would be significantly higher than that. It's going to be historically the highest CAD measured as a proportion of GDP," said the Governor of the RBI, Duvvuru Subbarao without saying what the figure is likely to be. ET, 12 February. " We would not worry if the widening CAD is on account of capital goods but here it is on account of import of oil and gold. The other concern is the way we are financing it. We are financing our CAD through increasingly volatile flows. Instead we should be getting as much FDI as possible to finance CAD," he said. The governor is unhappy for 2 reasons. First, the rising deficit is because of import of oil and gold. At least oil is for the transport of goods and people and hence essential for business but gold is a completely unproductive asset. People buy gold as ornaments, especially for marriages, or for hedging against inflation and store them in safety boxes in banks. If this money was spent on capital goods, which are machines used for producing consumer goods, then it would boost productivity, create jobs and increase tax collections. The solution to this problem would be to maintain interest rates at 100-200 basis points above the Consumer Price Index. This will reduce inflation and give real returns to savers, taking away any need to buy gold. Bank savings would jump allowing banks to lend money for business. However, this would cause a collapse in property prices, where politicians and civil servants have hidden all their black money, and so it will not be done.  Secondly, a large part of our foreign exchange reserves are due to Foreign Institutional Investors buying into our share or bond markets. With interest rates at near 0% in the west and Japan FIIs can borrow for nothing abroad and invest in India for handsome gains. FIIs bought $24.4 worth of shares in 2012 and total investment in Participatory Notes, which is an anonymous route for foreign investment in the stock market, reached $28 billion which is equal to Rs 1.51 trillion, down from Rs 1.77 trillion in November. This is hot money and can disappear overnight causing the rupee and the share market to plunge. The governor wants Foreign Direct Investment in which foreign companies build factories to produce goods. This money is stable and increases wealth of the country. Problem is that the government is broke because of corrupt social schemes and needs money to institute more such schemes to win the next general elections. It has made tax demands on Shell, Vodafone and Nokia which these companies dispute. Vodafone has already won in the Supreme Court but the Congress passed a retrograde tax bill called GAAR to gouge money out of it. How long will they be able to cover up the huge mess? We wait in fear.