For one thing, there has not been any great renewal of foreign interest in India. It is, of course, unfair to blame the BJP government for this, given the state of financial markets around the world. But it does throw up an interesting question or two. To start with, where did all this money come from? An interesting, if somewhat depressing, possibility is that these swelling reserves, far from being an indicator of the new-found virility of economic management, is actually a symptom of the malaise within. It mayjust be a result of the economy's inability to absorb foreign savings.

Look at it this way. We use foreign savings to bridge the gap between the funds we need to meet our investment needs and our supply of domestic funds. So when our foreign reserves increase, it may perhaps mean that we have become more interesting to foreign fund managers. It is equally likely that the gap between our investment needs and domestic savings might have been reduced of late, thereby reducing the need for foreign capital. If there were no changes in the inflow of capital into the economy, this would lead to an accretion of foreign currency reserves. Again, the gap between the demand and supply for foreign funds might be reduced in either of two ways. Our supply of domestic savings may have increased, but more likely our demand for investments might have decreased.

How likely is it that domestic savings have registered a jump large enough to account for this gap? If anything, the savings rate in the economy is lower than ithas been in previous years. According to the Economic Survey, the total gross domestic savings last year declined to 23.1 per cent from 24.4 per cent in the year before that. Public savings have declined progressively from 1.9 per cent in 1995-96 to just around 1 per cent now. The decline in the household savings rate in recent years has been estimated at 1 per cent of GDP. There has been no evidence since then of any exogenous increase in our propensity to save.

On the other hand, though data on aggregate demand for the last year is not yet available, there are enough indications that investment demand has been falling off. Over the last year, non-food credit offtake has been slower at 12.1 per cent, against a rate of 15.1 per cent for the previous year. This represents a fall in demand for funds, which begins to look all the more serious when you remember that our economic performance for the previous year was nothing to write home about.

According to the CMIE, there has been a sharp fall in newinvestments over the last year, with new investments this year at least a third lower than the figure last year and a full 62.7 per cent lower than the figure for 1997. The real growth in gross capital formation has continuously declined from 23 per cent in 1996-97 to just 3 per cent in 1997-98.

The reasons for the slowdown in investment demand are fairly straightforward. At the start of the reforms period, expectations about aggregate demand were very high. These expectations led a lot of companies to invest heavily, sometimes unwisely, in capacity expansions. But just as this capacity was coming on stream, the economy started slowing down. The crisis in Asia and other emerging markets further dampened growth. This fall in demand forced soft prices on the manufacturing sector, with the inflation in manufactured goods sector trailing well behind the general inflation level. In some cases, there has even been some mild deflation of prices in this sector. All this has hurt profitability in manufacturingsectors. Till aggregate demand picks up, demand for new investments is also likely to stay muted.

The political uncertainty over the past few years has also hurt us here in more ways than one. For a start, business confidence has suffered, and with it the desire to invest in new productive capacity. A less obvious effect has been on capital expenditure. Driven by the need to cut fiscal deficit, and yet lacking the political capital to cut subsidies, finance ministers over the past few years have resorted to cutting capital spending. As a result, planned investments in vital infrastructure projects have been put off. Such investments, if the government had gone ahead with them, would have made a big difference to core industrial sectors like cement, steel, and constructions. At the same time, failure to undertake any sensible reforms in tariff structures in the public utilities sector has kept investments in these sectors far below what they could be. All this obviously impacts on the demand for investmentsin the economy. As the demand for investments becomes smaller, the gap between the demand and supply of loanable funds decreases. The need for foreign savings becomes correspondingly smaller.

So, depending on the way you look at it, that current account deficit can mean entirely different things to different people. It is, of course, entirely possible that inflows have been increasing throughout the last year. But exports have declined, profits have gone on vacation, and our rabble-rousers in Delhi are still making merry. What kind of investment logic justifies enthusiasm for such a prospect? Isn't it at least as plausible that the falling demand for investments has reduced our ability to absorb foreign savings? If so, should we continue to see the present fall in the current account deficit as an entirely fortunate occurrence?