To be forewarned is to be forearmed. The truism cannot be stretched too far, at any rate not in managing balance of payments. Even so, CRISIL, the rating agency for corporates, is right in highlighting its threat perception.As on March 31, 1997, it points out, India's short term debt (inclusive of one-year NRI deposits) amounted to $6.7 billion; and cumulative net portfolio investment by foreign institutional investors was $7.5 billion. Crisil's point is that "both have the potential to be easily withdrawn". The prospect is frightening since these two added up to a half of the country foreign currency reserves.
Latest data on short term debt, foreign portfolio investment and foreign currency holdings have in no way mitigated the vulnerability of the reserves to potential withdrawal. Mentioning the East Asian currency crisis in this context may seem alarmist, but the fact is that India is not as comfortable on the external account as official pronouncements would have us believe.
Non-resident Indiandeposits apart, short term debt is unavoidable. This comes in by and large as suppliers' credit. But short term debt could become a problem if exports continue to flag. Export performance has been weak for two years running. Fortuitously, the oil and non-oil import bill has not surged overly because of a decline in international prices; this has braked the growth of the trade deficit. FII investment is a different kettle of fish. For four years, FII inflows have grown. This had fostered the belief in a one-way flow. But of late, FIIs have been pulling out funds. If FII funds rush out, India will have a forex crisis on hand.
All this is enough of forewarning. But what does one do about it? Prescribing a lock-in period or a withholding tax may deter outflows, but they can make FIIs extra cautious in making fresh investments. This will be counterproductive so long as the country's forex reserves depend for their growth on FII inflows. Asking for a ceiling on foreign portfolio inflows, worked out as aproportion of foreign currency reserves, will be facile, unless the country revs up a strategy to get other inflows in place. Export or perish has become a jaded slogan, and the political class, frightened by the swadeshi lobby, is hesitant about getting in foreign direct investment in a big way. Crisil's forewarning will not go in vain if it leads to serious thinking on the options available to enlarge foreign currency inflows.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
