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Embarrassing forex inflows

India’s external sector has got significantly strengthened thanks to heady foreign exchange inflows in recent years. The additions to foreign exchange assets were $46.82 billion in 2006-07, by itself a record. In the current financial year also, up to January 4, the growth under this head was unprecedented at $81.09 billion, taking the total to $274 billion.

A good proportion of the assets can be ascribed to non-debt inflows though it is difficult to say how much of the $68 billion of portfolio investments made so far will be retained within the country. Foreign institutional investors have been stepping up their portfolio investments at a fast rate. Foreign direct investments too had doubled in 2006-07. Actually, out of the net additions to foreign exchange assets in 2006-07, non-debt inflows accounted for 58.8 per cent even with larger debt inflows.

With such a comfortable position, over $20 billion of the reserves can be profitably deployed in infrastructure projects. No decision in this regard has been taken so far by the Planning Commission or the UPA Government. It was of course mooted some time back that $5 billion could be utilised with the Central Government borrowing its requirements from the Reserve Bank of India and meeting forex expenditure on projects on the fast track in the infrastructure and core sectors.

In fact the RBI is having problems in profitably deploying available forex resources when debt servicing obligations are increasing and earnings from foreign investments are more than the outgo by way of interest, dividends and other payments. Since foreign exchange assets may cross the $300 billion mark by end of March, judging by recent accelerated inflows, an early decision on using reserves for investment purposes becomes imperative.

FDIs may be rising even more impressively in the near term as entrepreneurs in the Special Economic Zones will be getting busy while the Planning Commission is keen on a manifold increase in outlays on power, oil and transport projects. At the recent Pravasi Bharatiya Divas, Prime Minister Manmohan Singh stressed the urgency of new power projects and maximising the output of petroleum and natural gas from India’s onshore and offshore regions.

It is comforting to note that many coal and gas based power projects have been finalised as the output of natural gas from the Krishna-Godavari and other offshore basins will be increasing steadily. Gas output may even more than double in a short period. It will thus be possible to avoid a sharp rise in crude and gas imports.

It is also planned to reduce dependence on imports by augmenting power generation from renewable energy sources. With a determined bid to use ethanol as admixture with gasoline or other light distillates it may be possible even to fully eliminate the deficit on current account. Growing trade gaps since 2004-05 are mainly the result of heavy oil and non-oil imports, notwithstanding a commendable export effort. Yet the gap increased only marginally to $9.61 billion in 2006-07 from $9.17 billion earlier. Even the rise in trade gap by $13.06 billion was nearly offset by the increase of $12.64 billion in net invisible receipts.

The current financial year too may see a similar experience. The deficit for April-September is only slightly higher than a year ago. The deficit in the second half may be larger as oil prices have been soaring and non-oil imports also have been rising as never before. Exports increased by 22.08 per cent in April-November to $98.38 billion while imports rose by 29.26 per cent to $151.19 billion. The trade gap has thus widened in eight months to $52.28 billion from $38.48 billion. The increase for the whole of 2006-07 was $13.06 billion. The absence of any big rise in the current account deficit is on account of the steady growth in net invisible receipts. Developments in 2008-09 in any case will be on entirely different lines. With a new bid to utilise the experience and resources of NRIs and continuing inflow of forex resources as well, the objective of achieving growth of 9-10 per cent in GDP can be realised.

The monetary authorities and Finance Ministry officials are of course worried about an assertion of inflationary pressures in the coming months. World prices for crude, coal and even primary products are much above domestic levels.

The contemplated hikes in gasoline and diesel prices may push up the inflation rate temporarily but it has to be decided how internal prices for essential commodities can be prevented from rising awkwardly.

There has been no impact so far on issue prices for foodgrains through fair price shops despite a stiff hike in procurement prices for wheat and rice and higher support prices for various other commodities. The worries on this score should not in any event deter the monetary authorities from softening interest rates on bank deposits and advances with a cut in repo and reverse repo rates.

The conundrums arising out of the dearer rupee in particular directions have to be satisfactorily solved by the Commerce and Industries Ministry.

Some industries are acutely dependent on rupee earnings from their exports. Large export earnings are also necessary to offset contraction in profit margins on domestic sales arising out of falling prices and cost escalation.

It is necessary at the same time to stimulate demand for various products and increase also capacity where there is unsatisfied demand. There has been a noticeable deceleration in industrial production to 9.2 per cent in April-November against 10.09 per cent comparably.

Even so, with heavy outlays in power, transport and other infrastructure, the year 2008-09 may prove to be another turning point for the Indian economy as greater emphasis is being laid on improving productivity of agriculture and eliminating domestic deficits in wheat, pulses and edible oils.

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