By RP Gupta
The forex reserves of India have fallen from $642 billion on 3 September 2021 to $580 billion on 8 July 2022 and the Current Account Deficit (CAD) might exceed 3.0% of GDP in FY2022-23. External debt (private & sovereign) of about $267 billion shall mature in the next 12 months; that might cause a big hit on the forex reserves. So far, forex reserves of $580 billion, about 19% of GDP, provide comfort to India. But considering the rising trend of CAD, depleting forex reserves, and falling rupee, India must not be complacent.
The pandemic followed by the Russia-Ukraine war has caused turmoil in the global economy. Even the US and other western countries are facing its heat. But the emerging economy like India must be more cautious about the external sector which is more sensitive compared to the domestic economy. However, both are interlinked to a large extent.
CAD is more damaging compared to Fiscal deficit. Typically, CAD is financed by global investors through external debt (private and sovereign) and equity investments. Hence, forex reserves are accrued by expanding “international liabilities”. However, the Fiscal deficit of India is financed majorly by the domestic debt liability. The external debt of the Government alone is below 5% of GDP and provides comfort to India over many other Nations.
The falling rupee against the US dollar is a big deterrent for retaining global investment in India and hence forex reserves are depleting. The process is somewhat cumulative. Recently, the RBI has taken few good steps for arresting this phenomenon but those are not enough. In such a global turmoil, India must quickly draw a “strategic plan” for mitigating any probable external risk instead of leaving the matter to RBI alone.
Such a plan should essentially include “structural reforms” for improving “global competitiveness”, boosting exports, and reducing or replacing imports. Global competitiveness doesn’t depend upon the producers alone but upon the host of policies and regulations. The easement of business and taxation laws should supersede all reforms.
All types of taxations on the “intermediate goods” such as, energy and minerals, must be reduced which have a multiplier impact on the production cost of entire goods and services. Even, the calibrated export incentives, along with the sunset clause, may be offered on the incremental exports of a few selected items. That will push both exports and GDP growth.
The fiscal debt of the central government, below 60% of GDP, is within the manageable limit compared to many large economies. Hence, the Government should not hesitate while choosing the proposed fiscal expansion for mitigating the probable external risk. Resolving CAD must get priority over the fiscal deficit by all means.
Vast potential in the export of services, processed food, textiles, and handmade goods must be unleashed. Inward remittances of about $85 billion from Indians working abroad must be preserved on priority; that is equivalent to “export of services”. MSME reforms are overdue; they will boost exports besides creating huge jobs. That also needs priority.
India must gradually develop self-dependency in energy, fertilizer, food, medicine, electronic chips, and rare minerals. The import of thermal coal must be replaced by domestic production. A new exploration of Oil and Gas must be done aggressively.
The railway must Increase its share of Goods Traffic for reducing diesel consumption and logistic cost. Public transport must largely substitute private vehicles for saving petrol. Power cuts must be abridged for saving diesel consumption in generators and pumps. Likewise, a series of reforms are needed which have a common bearing on the stability of the external sector and GDP growth. Both are interlinked to a large extent.
Gold imports must be drastically cut in the next 3-4 years by using an innovative Modified Gold scheme, as recommended by Author in his Book, Turn around India-2020. That alone shall supplement forex reserves by about $450 billion in the next 5 years. Remarkably, this will be without increasing international liability and therefore, Rupee shall stabilize. It could be, indeed, a game changer.
Considering the total assets of global financial institutions exceeding 400% of world GDP, the share of global investment in Indian debt & equity is too low compared to the size of its economy. A vibrant capital market shall certainly attract global investors and facilitate producers for new investments. For this, the facilitation must co-exist along with regulations.
Such a strategic plan, along with an implementation schedule, may be disclosed in public for infusing confidence among the global investors, capital market, producers and exporters of goods & services, etc.
Current global turmoil may be treated as an opportune time for enacting radical reforms. This will not only mitigate the probability of external risk but bring back the Indian economy on its growth track. India must act swiftly and emerge as a strong economy with a stable Rupee and comfortable forex reserves exceeding the international liabilities.
(The writer is an economist and the author of the book “Turn Around India-2020”. Views are personal.)