Unprecedented upsurge in forex reserves
THE PREVALENCE of low interest rates in the developed countries, a continuing decline in the external parity of the U.S. dollar vis-à-vis the major currencies and improvement in India's creditworthiness in world markets have been responsible for an unprecedented upsurge in forex reserves. It would not have been expected in 1991, when forex reserves were only $5.83 billion, with foreign exchange assets accounting for $2.24 billion, that there would be an upsurge in these reserves from the middle of the Nineties.
In a little over nine and half months in 2002-03, forex assets have risen by $18.70 billion to $69.75 billion during the week ended January 24, 2003 as compared to only $11.50 billion in the whole of 2001-02.
The revaluation of foreign exchange assets held in euro and other currencies, after taking into account the depreciation in the greenback in recent months, has had an exaggerating effect to the extent of 17 per cent. Even allowing for this adjustment, net additions to foreign exchange assets have been embarrassing to the Reserve Bank. This is because difficulties will be experienced in redeployment of these reserves, if the debt content proves to be sizable.
However, with a smart rise in invisible receipts and a current account surplus of $2.5 billion up to November on current account and other non-debt inflows on capital account, the monetary authorities have indicated that the handling of forex reserves has not presented any serious difficulty.
It is now being discussed in forex market circles to what extent the uptrend in forex reserves will be sustained and whether the $100-billion-mark will be reached even by March 2004 from around $76 billion at the end of March this year after allowing for revaluation including gold reserves.
Higher value of gold holdings
As there has also been a spurt in gold prices in World markets, the reserves held by the Reserve Bank in the Issue Department are being revalued at the end of every month and the value of these reserves has risen to $3.44 billion during the week ended January 17, 2003 from $3.05 billion at the end of March 2002. It is likely that the value of these holdings will rise in a pronounced manner, as World price for the yellow metal has risen by 30 per cent in recent weeks. However, it is necessary to remember in this context that the same quantum held by the Reserve Bank get appreciated in value with monthly adjustments.
With the highly comfortable Balance of Payments (BoP) position and the prospect of a current account surplus emerging again in 2002-03, notwithstanding a heavier oil import bill, the restrictions on the use of foreign exchange by individuals and institutions have been relaxed. NRIs also have been provided incentives for increasing their investments in India. This process of liberalisation towards capital account convertibility of the rupee may not, of course, get reflected in any noticeable utilisation of foreign currencies for various purposes.
External debt reduction
The Union Finance Ministry has, therefore, decided to effect repayment of foreign loan of $1.54 billion due to the International Bank for Reconstruction and Development (IBRD), the developmental financing wing of the World Bank, and another loan of $1.25 billion to the Asian Development Bank (ADB) prematurely. These repayments will be helpful in minimising the interest payments in respect of outstanding foreign debt and there may also be a net decline in the external debt.
The real decline in the outstanding external debt may not get revealed, as foreign bonds are being lodged with the Reserve Bank.
What is heartening to note is the continuing rise in software exports and larger inflows due to remittances from expatriates, a higher level of foreign tourist traffic and other favourable developments. It will be necessary, therefore, for the Reserve Bank to devise measures for effective use of the portion of free reserves for augmenting investment in vital sectors of the Indian economy.
The oil import bill had not, of course, got reflected in an enlargement of the trade gap in April-December 2002, as the increase in the oil import bill by $2.10 billion and non-oil imports by $3.47 billion could be financed more than fully with export earnings of $6.45 billion. As a consequence, the trade deficit for the nine-month period has even declined by $875.80 million.
Even taking into account the impact of higher prices for crude and petro products, due to special factors, the trade deficit may not get enlarged by more than $1.5 billion in a whole year. The Organisation of Petroleum Exporting Countries (OPEC) members are also inclined to raise output for offsetting the reduction in supplies with a drop in output of Venezuela.
The surging forex reserves have resulted in an appreciation of the rupee against the U.S. dollar and less pronounced depreciation against other major currencies. The Indian currency has, thus, improved by 2.55 per cent against the U.S. dollar and also against other ASEAN currencies in varying degrees since June 4, 2002. But it is still at a discount in other major currencies and it is believed that the export effort will not be adversely affected by the rising rupee, as the inflation rate also has remained low at around 3.5 per cent.
Sizable accretion to bank deposits
The accretions to the deposits of the Scheduled Commercial Banks (SCBs) have enabled bank executives to lend liberally for worthwhile purposes and invest at the same time large amounts in new loans issued by the Central and State governments. The Central Exchequer has not, thus, had any difficulty in increasing the net borrowing through new loans on a cheaper basis. Though aggregate borrowing will be higher than the Budget estimate, the fiscal deficit may not get unduly enlarged even with a sharp rise in non-plan revenue expenditure due to liberal assistance extended to the States for overcoming the impact of the drought.
Fiscal deficit may constitute an all time record
The fiscal deficit has, of course, declined to Rs.86,269 crores in April-December 2002 from Rs.89,014 crores even with an increase in total revenue expenditure to Rs.2,18,506 crores from Rs.1,99,249 crores. The revenue deficit has got enlarged modestly to Rs.68,018 crores from Rs.66,559 crores. In spite of the serious bid made by the Union Finance Ministry to prune an undue enlargement of the fiscal deficit, it will constitute an all time record at over Rs.1,45,000 crores. This situation is in strong contrast with the comfortable BoP.
Will fiscal deficit be reduced in stages?
It remains to be seen how the Finance Minister Jaswant Singh will adopt measures for contracting the fiscal deficit gradually with a pruning of subsidies, downsizing Government employees and the like. There should also be a streamlining of the structure of indirect and direct taxes for boosting revenues even while providing the necessary fillip to saving and investment and creating conditions, which would be helpful to the Planning Commission to achieve the postulated average gross domestic product (GDP) growth of 8 per cent in the Tenth Plan Period.
P. A. Seshan
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