the external crisis in india

8/12/2019 The External Crisis in India

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The External Crisis

The entire liberalisation process since 1991was meant to render India

internationally competitive and overcome the balance of payments

difficulties which had plagued it in one form or another since the mid-1950s.It has instead deepened Indias dependence on foreign capital, increased

foreign ownership of Indian assets, and strengthened foreign dictation of

Indian economic policy. The part played by the IMF and World Bank in 1991

has now been taken over by credit rating agencies, whose employees

extensively monitor Indian policy-making and spell out the demands of

foreign capital.

[Note: one lakh = one hundred thousand; one crore = 10 million; one lakhcrore = one trillion]

I. Using the crisis

Since January the Finance Minister has been on a hectic roadshow across

the world Singapore, Hong Kong, Dubai, Frankfurt, London, Tokyo,

Toronto, Ottawa, Boston, and New York. The stated purpose has been to

reassure foreign investors regarding the economic policies and politicalstability of the Indian government, and to attract fresh investments. It may

well be that in the last four months he has spent more time abroad than in

the country.

This relentless cabaret speaks of a certain desperation. In part,

this displayof desperation is deliberate: the Government is using the crisis

of the current account deficit as a means of pushing through various

policies that have been facing resistance. Thus opening the multi-brand

retail sector to foreign direct investment (FDI), raising the entire range of

energy prices (diesel, gas, coal, etc), and granting permission for mining in

ecologically sensitive regions all these have been justified by pointing to

the need to reduce imports and attract foreign capital. Similarly, the

massive cuts in social expenditure in 2012-13 were justified simply by

saying that credit rating agencies would have downgraded India had the

fiscal deficit not been slashed. Recently a well-known economist, a fixture

in Government committees, called this a crisis too good to waste:


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The country is in an economic crisis. The growth rate is coming down. The

current account deficit (CAD) has reached 6.7 per cent [in the third quarter

of 2012-13]. A crisis provides an opportunity to take much-needed

decisions that one could not otherwise take. [1]

In his speech to the nation last September justifying the decision to hike

petroleum product prices and to open the multi-brand retail sector to

foreign firms, Manmohan Singh conjured up the spectre of the 1991 crisis:

If we had not acted... domestic as well as foreign investors would be

reluctant to invest in our economy.... The last time we faced this problem

was in 1991. Nobody was willing to lend us even small amounts of money

then... we must act before people lose confidence in our economy....

Thus there is an element of deliberate exploitation of the crisis.

Nevertheless, it cannot be denied that there also is a crisis. Before going

into the facts, it is useful to go over the meanings of certain terms.

II.Explaining some terms

The balance of payments (BoP) is a set of accounts of a countrys financial

transactions with the outside world. Like any set of accounts, it has anumber of items, against which there are credits and debits. When all the

items are added up, they must total zero i.e., any deficit must be made up

from somewhere, and any surplus must end up somewhere.

(a) Merchandise trade is trade in visible commodities things you can see,

such as agricultural goods, petroleum, textiles, motor cars, and machinery.

India earns less on merchandise exports than it spends on merchandise

imports; thus it incurs a merchandise trade deficit.

(b) Apart from merchandise trade, there are three other types of current

receipts from, and payments to, those abroad.

First, services: for example, receipts from travel here by foreigners and

payments for travel abroad by Indians; or earnings on IT-enabled services

such as software and call centres, and payments for import of software.

Secondly, transfers: in the main, remittances to India by Indian workersabroad and remittances out of India by foreign individuals in India.


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Thirdly, investment income: receipts on Indian investment (including

loans) abroad and payments on foreign investments (including debt) in

India.

Because these three types of receipts/payments are not for visiblecommodities, they are all part of the invisibles account. India receives

much more on the invisibles account than it pays out, thanks to its

relatively cheap labour (that is, its exports of software and software

workers, and the sweated labour of Indian workers in the Gulf). Hence, in

the net, India enjoys an invisibles account surplus .

(c) When you add the merchandise trade (i.e., visible trade) account and

the invisibles account, the sum is the current account (so called becausethe sums paid/received generally relate to the current period). In Indias

case, its merchandise trade deficit is generally larger than its invisibles

surplus; hence India usually runs a current account deficit(CAD).

(d) When a person spends more than he/she earns, he/she has to either

pay out of some money set aside for a rainy day, or borrow in order to

make payments. Similarly, when a country runs a current account deficit, it

must either draw down its foreign exchange reserves, or attract capitalinflows of investment/debt/grants. On the other hand, capital outflows

take place when Indians invest abroad, or when foreign investors sell off

their holdings here and withdraw their capital. Indias capital inflows are

generally larger than its capital outflows, giving us a positive net figure on

the capital account, or a capital account surplus.

(e) The current account plus the capital account gives us the balance of

payments. If there is a surplus in the balance of payments, the countrysforeign exchange reserves must grow; if there is a deficit, the foreign

exchange reserves must be drawn down.

Thus:

(i) Merchandise trade account

(ii) Invisibles account

(iii) Current account [i + ii]

(iv) Capital account


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(v) Balance of payments [iii + iv]

(vi) Change in the foreign exchange reserves [minus

sign signifies increase in the reserves; + sign signifies

decrease]

(vii) v + vi = 0; i.e., any balance of payments surplus

means a corresponding increase in the foreign

exchange reserves; any balance of payments deficit

means a corresponding reduction in the reserves.

Because of its capital account surplus, India has been able to bridge the

current account deficit without drawing down its foreign exchange

reserves. However, such capital inflows whether in the form of portfolio

investment, or foreign direct investment (FDI), or debt come at a price:

Payments on those inflows (whether in the form of profit or interest) flow

out. That outflow, as we saw above, shows up in the current account. So the

very success in attracting capital inflows may result in a higher current

account deficit, requiring more capital inflows to bridge the gap.

Moreover, there are various types of capital inflows. Some are relatively

long-term, and are tied up in assets here which are difficult to liquidate at

short notice. Some others are short-term debt, the official definition of

which is that they are to be repatriated within a year. Yet other forms of

capital inflow can be withdrawn at any time, instantly. The larger the share

of short-term or instantly repatriable inflows in total inflows, the more

volatile will be the capital account, and the more vulnerable the country

will be to the movements of financial capital (foreign or Indian).

III. Runaway growth of imports, trade deficit

Now let us turn to the facts. Let us look at the scale of imports; the

merchandise trade deficit; the current account; and the capital account.

Imports/GDP: As we can see from Chart 1, with the beginning of

liberalisation in the 1980s (India took an IMF loan in 1981), there was a

sharp rise in the imports/GDP ratio. This is partly understandable, as oil

prices rose sharply in 1980. However, oil prices plummeted thereafter:


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Brent crude fell from $36.83/barrel in 1980 to $14.43 in 1986.

Nevertheless the imports/GDP ratio during the 1980s stayed at a much

higher level than in the 1970s. In the decade after the second IMF loan in

1991, imports/GDP rose even more sharply; and in the decade of runaway

growth, the 2000s, the ratio soared.[2]

Table 1 gives the figures from 2000-01 on. We can seefrom this table that

the sharp rise dates to the start of the boom period, i.e., from 2003-04 on.

By 2008-09, the ratio is double that of 2003-04; then there is a brief and

limited dip as a result of the slowdown; but by 2011-12 the ratio has

soared to even higher levels than the earlier peak. Imports are now more

than a quarter of GDP, implying a very high level of external dependence

and vulnerability of the economy. (By way of comparison, the import/GDP

ratio for the United States was 15 per cent in 2011.)


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Current account deficit/GDP: Despite the high merchandise trade deficit

during the 1990s, the current account deficit actually shrankover the

course of that decade. The reason was the rise of invisibles receipts. Themainstay of invisibles receipts in the 1980s had been the export of cheap

labour power to the Gulf; while this was briefly interrupted due to the first

Iraq war and its consequences, it soon revived after the war ended. By the

end of the 1990s, earnings from Gulf labour were joined by two new forms

of export of cheap labour power: the export of software services using new

communications technology, and the export of software workers on short-

term visas to the US. The combined growth rate of two items exports of

Information Technology Enabled Services (ITES) and workers remittances averaged 24 per cent between 2001-02 and 2007-08. As a result,

invisibles receipts rose so sharply that during 2001-02 to 2003-04 India

actually ran a current accountsurplus.[3]

However, in recent years the invisibles account miracle seems to be fading.

The net invisibles surplus peaked at 7.4 per cent of GDP in 2008-09.

Thereafter it fell to 5.8, 4.9, 6.0, and 5.7 per cent respectively in the next

four years. The Prime Ministers Economic Advisory Council (PMEAC)projects that the invisibles surplus will fall to 5.3 per cent in 2013-14. The


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combined growth rate of ITES-related exports and workers remittances

fell to 4 and 8 per cent in 2009-10 and 2010-11 respectively. It recovered

to 20 per cent in 2011-12, but then fell again to an estimated 4 per cent in

2012-13. The future of ITES-related exports, as a mainstay of Indias

invisibles receipts, is uncertain.

Meanwhile, as mentioned earlier, the merchandise trade deficit, which

grew rapidly in the period of rapid growth, continued to rise in the period

of slowdown as well. It has peaked in 2012-13. As a result, the invisibles

surplus covered less and less of the merchandise trade deficit. Thus,

whereas the invisibles surplus covered 92.6 per cent of the merchandise

trade deficit in 2004-05, that figure fell to just 52.9 per cent in 2012-13.

As the invisibles surplus has fallen and the merchandise trade deficit has

kept rising, the current account deficit has risen to historically

unprecedented levels. Before 2011-12, the highest current account

deficit/GDP recorded in all of post-1947 India had been in 1957-58 (3.1

per cent) and 1990-91 (3.0 per cent). In 2011-12, however, it

reached 4.2 per cent; in 2012-13, over 5per cent (the final figure has not

yet been released). It is worth noting that the RBI itself considers a current

account deficit/GDP ratio over 2.5 per cent to be unsustainable.


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Another useful way to present the data is the ratio of total current receipts

to total current payments. This gives us (i) a measure of how much current

receipts (principally exports of goods and services, and worker

remittances) have to expand in order to pay for current payments; and (ii)

whether the gap is closing or growing. As can be seen from Table 3, since

2004-05, the gap has been steadily growing. For receipts to expand fast

enough to close the gap, they would have to grow at near-impossible rates.

For example, let us say the ratio is 85 per cent in 2012-13, and current

payments rise in 2013-14 by 25 per cent.[4]

Current receipts would have to rise 47 per cent in order to close the gap. If,

instead, as is more likely, they rose only 21 per cent, [5] the ratio would

sink to 82 per cent. That is, the mountain to be scaled would become even

higher. This points to a conclusion we will return to later: namely, that the

only way to scale this mountain is not to attempt to clamber up, but to

reduce its size, i.e., reduce imports and invisibles payments.


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IV. Massive build-up of foreign liabilities

How is this giant current account deficit ($94.2 billion in 2012-13) being

financed? At the moment, by an equally large capital account surplus

foreign investment and foreign debt. Policy-makers are unperturbed bythis level of dependence on large capital inflows, which are additions to the

stock of Indias foreign liabilities. In the words of the chairman of the

Prime Ministers Economic Advisory Council, financing the current

account deficit has not been a problem. In 2012-13, India attracted as much

as $94 billion. This shows the trust investors and others placed in

India.[6]

It is revealing that official economists like Rangarajan ring the alarm bellwhen the fiscaldeficit (i.e., Government borrowings, largely domestic)

rises, or even if it does not fall as fast as they want it to; but they see no

problem when the current account deficit has to be financed by ever-larger

capital inflows. Actually, from the angle of national interest, the reverse

should be the case: the growth of Government borrowings from domestic

parties is notnecessarilyalarming, whereas the growth of Indias foreign

liabilities is alarming. The reason is that increased Government spending

(financed by domestic borrowing, a large part of it from public sectorinstitutions), especially when it goes toward investment, can lead to

increased domestic economic activity. Apart from being desirable in itself,

this increased activity also generates additional tax revenue, which

reduces the need for further Government borrowing. Whereas a growing

current account deficit, financed by taking on fresh foreign liabilities, does

not as such generate any additional foreign exchange with which to service

the foreign liabilities. The servicing of the fresh foreign liabilities adds to

the current account deficit, which may necessitate even larger capital

inflows in the next round. Rangarajan says that the capital inflows of $94

billion in 2012-13 show the trust investors and others placed in India; but

that implies that, if their trust is shaken, India would be unable to cover its

current account deficit with capital inflows.

Consider what happened in the second half of the 1980s. As the

Government liberalised imports and industrial licensing, imports grew

faster than exports. Then, too, it seemed for a while that there was no


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problem in financing the current account deficit with external commercial

borrowings, no doubt a sign of the trust reposed in India by foreign

creditors. However, it very quickly became evident that India was entering

a debt trap. A 1988 study noted: If adequate and timely adjustments are

not initiated now,the possibility of more painful adjustments being forced

on us later, similar to the Latin American type, cannot be ruled out. [7]

The external debt doubled, from $40.6 billion in 1985 to $85.7 billion in

1990. While the quantum of external commercial borrowings rose, the

debt-servicing payments on these borrowings too rose so steeply that by

1990-91, after subtracting debt-servicing payments, the net transfer on

commercial borrowings turned negative. That is, there was a net outflow

from India instead of an inflow on account of commercial borrowings. At

that point, Indias merchandise trade deficit was 2.9 per cent of GDP.

Despite the fact that the trade deficit had been considerably higher earlier

in the same decade, India had been able to fund it with foreign borrowings.

In 1990, however, international credit ratings agencies made their

presence felt for the first time in India: when they downgraded India, it

became near-impossible for it to get fresh commercial borrowings. India

was forced to go to the IMF for a loan, forcing a Latin American type

structural adjustment. In other words, the availability of foreign finance

today is no guarantee of its availability tomorrow.

Indias total external debt has risen steeply, from $225.5 billion in March

2009 to $345.5 billion in March 2012 and $376.3 billion in December 2012.

Apart from external debt, foreign investment (i.e., FDI and portfolio

investment in equity) also constitute liabilities which entail payments.

Thus Indias gross foreign liabilities (foreign debt plus foreign investment)

have shot up from $409 billion in March 2009 to $723.9 billion in

December 2012.


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True, India also has foreign assets, but these have risen much more slowly.

Let us look at Indias net external liabilities. That is, Indias international

assets (its loans to others and its investments abroad) minus its

international liabilities (Indias external debt and foreign investment in

India). In the last decade, Indias net external liabilities have growndramatically: from $66.6 billion in March 2009, net external liabilities

have quadrupledto $282 billion by December 2012 (see Chart 4).


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Two developments have taken place on the investment account (i.e.,

foreign investment in and loans to India, and Indias foreign investment

and loans to others). The countries in which India invests its own foreign

exchange reserves have reduced their interest rates to rock-bottom levels,

so Indias returns from its foreign assets have fallen further from their

already abysmal levels. The rate of earnings on Indias seemingly massive

foreign exchange reserves plummeted from 5.1 per cent in 2007-08 to 1.5

per cent in 2011-2012; that is, from RS 51,883 crore in 2007-08 to Rs

19,810 crore in 2011-12.[8]

On the other hand, the returns on Indias foreign liabilities remain

relatively high.

The foreign exchange reserves have been built up from inflows of foreign

debt and investment, on which India pays high returns; whereas the

reserves have to be invested abroad in secure assets such as US

government debt, on which India earns very low returns. One study

calculated that the net annual drain on account of foreign investment and

debt by end-2007, as a percentage of Indias annual national income, was

comparable to the percentage drained annually from India under the

British Raj.[9]

Moreover, Indias foreign liabilities are growing fast. As a result,

the negative net balance of investment income too is growing fast. From -

$5.5 billion in 2009-10, it has shot up to an estimated -$24 billion for 2012-

13 and a projected -$28 billion in 2013-14.[10] In other words, the capital

inflows are themselves one of the causes of the widening of the current

account deficit, because they are leading to major outflows of investment

income.

Further, the drain of foreign exchange as a result of FDI is not limited to

the payment of dividend, royalty, technical fees, and so on; a larger sum is

expended on imports of goods by the foreign firms (which would be

reflected in the merchandise trade account). For example, the net drain of

foreign exchange as a result of the operations of 745 FDI companies

studied by the Reserve Bank rose from $6 billion in 2008-09 to $9.7 billion

in 2010-11.[11] Unfortunately, the study does not provide data whereby


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we can determine how much foreign investment actually came in via these

745 foreign firms.

V. Foreign exchange reserves defence against foreign exchange

crisis?

Despite all these alarming indicators on the external front, we are told not

to worry: We are told that, unlike in 1990, when Indias foreign exchange

reserves fell at one point to $1 billion and the countrys gold reserves too

had to be shipped out secretly, today we have a vast sum in the kitty. As of

March 15, 2013, the foreign exchange reserves stood at $292.3 billion.

Earlier, the adequacy of foreign exchange reserves would be judged interms of how many months imports they could pay for. The traditional

norm was the ability to pay for three to four months imports. At one point

in 1990, Indias reserves could cover scarcely two weeks of imports, and

officials desperately tried to raise a few billion dollars from all sorts of

sources. By contrast, in September 2012, when the reserves were $294.8

billion, they were estimated to cover 7.2 months imports. By another

measure, the reserves could pay for 6.8 months imports and debt-

servicing payments.[12]

It has been recognised by numerous official committees that these

measures are no longer meaningful, if they ever were. After all, the

strength of a defence must be judged by the forces against which it must

defend. Apart from paying for imports and debt-servicing, the reserves may

be called upon to repay capital liabilities. Total external liabilities in

September 2012 were $713.2 billion (more than twice the size of Indias

reserves). While Indias external assets were larger than the foreignexchange reserves on that date, the remainder of the external assets

largely the direct investment abroad by Indian firms obviously cannot be

called on to repay the countrys external liabilities. Thus external liabilities

in excess of the foreign exchange reserves were $418.4 billion.

However, not all of these external liabilities are liable to be repaid on short

notice, which is what is relevant in relation to the foreign exchange

reserves. So let us look at the following items, which comprise what we cancall the short-notice liabilities: (i) short term debt (i.e., debt repayable


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within a year); (ii) portfolio investments (i.e., FII investments in the share

markets and in debt instruments), which can be withdrawn at any time;

and (iii) those NRI deposits which are fully repatriable at any time

(Foreign Currency Non-Resident and Non-Resident External Rupee

Account).

(i) Short-term debt[13] in September 2012 stood at $159.6 billion. As a

proportion of the foreign exchange reserves, it is 54.1 per cent. This

proportion has been rising with alarming rapidity as recently as in March

2012, it was 50.1 per cent of the reserves.

(ii) Portfolio investments by FIIs in September 2012 stood at $164.6

billion. As a proportion of the reserves, they are 55.8 per cent.

Two qualifications need to be mentioned here.

First, this is the historical value of cumulative portfolio investments, i.e.,

simply the sum of all the amounts that came in at different times over the

past two decades, but at the value at which they entered. The current

market value of portfolio investments in equity would be much higher than

these historical values. The exact value at which they would be repatriatedwould depend on the market price on that date.[14] Although the historical

value of cumulative portfolio investments in the equity markets stood at

$129.1 billion in September 2012, the market value stood at $236.2 billion

at the end of March 2013, according to a recent report by Citi

Research.[15] Thus as a proportion of the foreign exchange reserves in

March 2013, FII investment in equity alone (i.e., excluding FII investment

in debt) comes to nearly 81 per centof the reserves in March 2013.

Secondly, much of what is classified as FDI may be hardly different from

FII capital. FDI is supposedly more stable than FII capital, since it is not

merely financial investment, but is a long-term stake in Indian assets,

associated with management control. However, a recent comprehensive

study has found that, because of changed official definitions as well as

official eagerness to project a larger figure of FDI, more than half of what is

being classified as FDI is of the nature of purely financial investment, such

as by private equity firms, venture capital funds, and hedgefunds.[16] While it could be argued that such investments are not as


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unstable than FII investments in the share market, they cannot be

considered to be stable.

(iii) Thirdly, the outstanding sum in Foreign Currency Non-Resident

(FCNR) deposits and Non-Resident (External) Rupee Account deposits(NRERA) deposits was $54.7 billion in September 2012.

The total of the above three items, even taking portfolio investments only

at their historical value, comes to $378.9 billion in September 2012 128.5

per cent of the reserves. In other words, while the foreign exchange

reserves appear impressive, they cannot withstand a serious panic flight of

capital out of India.

At any rate, the negative effects of the large current account deficit would

be felt well before the foreign exchange reserves get exhausted. The RBI

Governor has pointed out recently:

Even as the CAD has been high, we have been able to finance it because of a

combination of push and pull factors. On the push side is the amount of

surplus liquidity in the global system consequent upon the extraordinary

monetary stimulus provided by advanced economy central banks.... Intrying to finance such a large CAD, we are exposing the economy to the risk

of sudden stop and exit of capital flows . This will be the case to the extent

capital flows in pursuit of short-term profits. Should the risk of capital exit

materialise, the exchange rate will become volatile causing knock-on

macroeconomic disruptions. (emphasis added)[17]

This is a remarkably direct warning, and it shows that the authorities are

alive to the dangers in the present situation, regardless of the seeming

security of the foreign exchange reserves.

Refusal to reduce imports

Despite this awareness, what is remarkable is that none of the authorities

even consider the idea of restricting imports by various means, including

by physical restrictions. The most glaring example is that of gold, imports

of which, already very high, have soared since 2009. In 2011-12, gold

imports (net of re-export) accounted for half the current account deficit of


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4.2 per cent of GDP. Despite various authorities taking note of this

phenomenon and raising the alarm, at no point did any of them even

mention the possibility of banning that part of gold imports not required

for exports. This despite the fact that (i) import of gold is pure

consumption, a diversion from savings; (ii) gold is obviously not part of

essential consumption, but elite consumption; (iii) gold imports have been

driven by speculative investors, attracted by the long rise in gold prices.

The RBI Governor himself noted recently that The concern about the

quality of CAD arises from the composition of imports. If we were

importing capital goods, we can maybe countenance a higher CAD because

investment in capital goods implies building production capacity for

tomorrow. On the other hand, import of gold... is a deadweight burden,

especially at a time when the CAD is beyond the sustainable level. [18] As

an official RBI committee notes, since 2006 gold imports have been

negatively correlated with share prices. [19] It appears that during the

2003-08 share prices boom domestic speculators got accustomed to annual

returns on shares in excess of 20 per cent. With the 2008 crash they

increased their purchases of gold, the rising price of which gave them rich

returns.

Since the liberalisation of all imports, including gold imports, is a tenet of

the post-1991 policies, the authorities gazed mutely as gold imports soared

in the post-2008 period. At the time of the presentation of the 2013-14

Budget, we witnessed the strange spectacle of the Finance Minister

appealing to the people not to buy gold, but himself failing to levy any

additional duties on gold.[20] With the bursting of the bubble in gold

prices, speculative purchases may decline, but the other component of

domestic gold demand middle class jewellery consumption may pick up

and keep gold imports high.

Similarly, the growth of consumption of petroleum products in India is not

a natural phenomenon like the weather. It is related to the overall pattern

of production and consumption, which are themselves the product of

economic policy, macroeconomic choices. It is glaringly obvious that the

reigning economic policies encourage vast, wasteful consumption of all

energy resources, including petroleum products. For example, the

Government has systematically promoted the shift of transport away from


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railroad to road transport, and constructed vast road infrastructure to

facilitate this; it promotes and subsidises the automobile industry in

multiple ways, and degrades public transport; it promotes the civil aviation

industry (the number of passengers has more than quadrupled in the last

decade).

The scope for reduction of imports is much larger than just these two

categories, however. The import of electronic goods was $32.8 billion, or

Rs 1.57 lakh crore, in 2011-12. Much of this can be eliminated right away,

and some of it can be eliminated by systematically developing truly

indigenous production (i.e., not mere assembly of imported parts). The

latter involves planning. The trade deficit in manufactured goods has risen

steeply in the last decade as a result of Government policy. The entire

telecom revolution in India has been based on imported equipment, down

to the handsets. India is considered a major software exporter, but it has

not developed any significant production base in computers. Its civil

aviation industry has grown on the basis of imported aircraft. [21]

We have seen earlier that, given the low and declining ratio of our current

receipts to current payments, it is impossible to address the external crisis

merely by scrambling to hike exports. It is necessary to suppress imports.The inability of the rulers to take any steps in this direction is not an

incidental flaw or shortcoming: it has deep roots in the political economy

of India, in the character of its class rule.

The entire liberalisation process since 1991was meant to render India

internationally competitive and overcome the balance of payments

difficulties which had plagued it in one form or another since the mid-

1950s. It has instead deepened Indias dependence on foreign capital,increased foreign ownership of Indian assets, and strengthened foreign

dictation of Indian economic policy. The part played by the IMF and World

Bank in 1991 has now been taken over by credit rating agencies, whose

employees extensively monitor Indian policy-making and spell out the

demands of foreign capital.

To take just the latest example: a news report of April 12 informs us:


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Armed with the Budget proposals to bring down the fiscal deficit, the

finance ministry would pitch for a ratings upgrade at a series of meetings

with global agencies over the next few weeks, beginning with Fitch

tomorrow.

The Fitch team will come tomorrow. Representatives from Standard &

Poors and Moodys are scheduled to visit on April 25 and May 5

(respectively), a senior ministry official said. The officials, sources said,

would impress upon rating agencies the resolve of the government to

follow a path of financial prudence and bring down the fiscal deficit to

three per cent of GDP by 2016-17....

The Fitch representatives would meet Economic Affairs Secretary ArvindMayaram and officials from various departments, including capital

markets, infrastructure, revenue and disinvestment, the official said. Both S

& P and Fitch had earlier threatened to downgrade Indias credit rating as

an aftermath of the expansionary policy which led to a rising fiscal deficit....

After the presentation of Union Budget, S & P and Fitch had said Indias

sovereign rating was unaffected but had warned that policy execution and

controlling subsidies would be the key risks to look out for during the year.

S & P currently rates India has BBB-, lowest in the investment grade, witha negative outlook. Any further downgrade would push Indias rating to the

junk status, making it difficult and costlier for Indian entities to borrow

funds overseas.[22]

What could be more pathetic, indeed, than Montek Singh Ahluwalia, the

deputy chairman of the Planning Commission of sovereign India,

supplicating tuppenny inspectors of international rating agencies in the

following fashion?

My guess is that if the rating agencies were to look at the Plan document, I

think they would be quite pleased. It conveys after all the two key signals

that any rating agency would want to know about, and one is are we

serious about fiscal consolidation. I think the Plan quite clearly says we

are.

The decisions that were taken on the diesel price are indicative even in apolitically difficult situation that the government is serious about taking


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those decisions. Some of the other things that have been done on the policy

front along with what we have said is necessary should persuade rating

agencies that we are well set on to a high-growth path.

Now they may or may not believe that we are going to reach 8.2 per centbut in my view if they feel we are on a 7 per cent plus path and they

perceive that we are serious about medium-term fiscal consolidation, my

guess is that they will not downgrade us in September....

I personally feel that the direction outlined in the Plan, the fact that the

government has endorsed this broad direction, the fact that the

government has taken some concrete steps in the last few days which point

in this direction all of them should persuade the rating agency that itstoo early to write off India.... Some of the steps have already been taken

which are not recent. For example, the finance ministry responding very

smarly to the concern of investors by setting up the Parthasarathi Shome

Committee and also the Rangachari Committee. If the Shome Committee

recommendations are actually implemented and accepted, it will take care

of a lot of concerns and I hope that the Rangachari committee also will

address some of these issues... There is a whole agenda and I expect that in

the next two months, we will see positive actions on all these points. Sotaken together, it will definitely alter the perception and anyone worrying

about Indias grading position would have to take the view that the

situation is a lot better now that it was three months ago. [23]

Notes:

[1] Kirit Parikh, who recently chaired an official committee which

recommended an increase in energy prices.

http://epaper.timesofindia.com/Default/Scripting/ArticleWin.asp?From=A


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rchive&Source=Page&Skin=TOINEW&BaseHref=CAP/2010/02/08&PageLa

bel=16&EntityId=Ar01600&ViewMode=HTML&GZ=T (back)

[2] 2012-13 data for imports, trade deficit and current account deficit are

projections by the Prime Ministers Economic Advisory Council. The sourceof the remaining data is the Reserve Bank of India. ( back)

[3] This was also due in part to the slowdown in industrial growth, which

led to a slowdown in imports, and hence the trade deficit. Nevertheless, it

is important to note that invisibles receipts nearly tripled, from $9.8 billion

in 2000-01 to $27.8 billion in 2003-04. (back)

[4] The average growth rate of current payments (in dollars) during 2004-05 to 2011-12. (back)

[5] The average growth rate of current receipts (in dollars) during 2004-05

to 2011-12. (back)

[6] C. Rangarajan, Why the India story is intact, Hindu Business Line,

4/5/13. (back)

[7] S.K. Verghese, Wilson Varghese, Indias Mounting External Debt andServicing Burden, Economic and Political Weekly, 26/11/88. (back)

[8] Reserve Bank of India, Annual Report, 2007-08 and 2011-12. (back)

[9] See N.K. Chandra, Indias Foreign Exchange Reserves: A Shield of

Comfort or an Albatross?, EPW, 5/4/08. (back)

[10] Prime Ministers Economic Advisory Council, Review of the Economy

2012-13. (back)

[11] That is, Rs 27,820 crore in 2008-09, and Rs 44,363 crore in 2010-11.

Finances of Foreign Direct Investment Companies: 2010-11, RBI Bulletin,

December 2012. (back)

[12] RBI, Half-Yearly Report on the Foreign Exchange Reserves,

September 2012. (back)


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[13] Here we are referring to short-term debt by residual maturity, i.e.,

including not only debt that was originally contracted as short-term debt,

but also that portion of long-term debt which falls due within a year from

the date. (back)

[14] N.K. Chandra, op cit. (back)

[15] Foreign investors increase stake in India Inc., Times of

India, 10/5/13. (back)

[16] K.S. Chalapati Rao, Biswajit Dhar, Indias FDI Inflows: Trends and

Concepts, ISID Working Paper, 2011. Also see N.K. Chandra, op. cit.(back)

[17] D. Subbarao, Indias Macroeconomic Challenges: Some Reserve Bank

Perspectives, RBI Bulletin, April 2013. (back)

[18] Subbarao, op. cit. (back)

[19] RBI, Report of the Working Group to Study the Issues Relted to Gold

Imports and Gold Loans NBFCs in India , February 2013. (back)

[20] The argument the Government and pro-liberalisation economists trotout against restricting gold imports either physically or through higher

duties is that such measures will revive smuggling of gold. However, this

argument does not hold. First, whether or not the State machinery is able

to check gold imports depends primarily on the availability of political will

to do so. Secondly, even if smuggling does revive, the total amount of gold

imports (including smuggled gold) would fall quite sharply, compared to

the present situation of free availability. Thirdly, whether gold is smuggled

or brought in legally makes no difference to the two negative impacts ofgold imports, namely, diversion of potential savings to luxury consumption,

and drain of foreign exchange. Hence whichever option results in a

reduction in total imports should be chosen, in this case, physical

restriction. (back)

[21] Sudip Chaudhuri, Manufacturing Trade Deficit and Industrial Policy

in India, EPW, 23/2/13. (back)


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[22] FinMin to pitch for ratings upgrade with Fitch, other

agencies, Business Standard, 12/4/13. (back)

[23] Interview, We are serious about fiscal consolidation, Mint, 17/9/12.

(back)

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