The recently published balance of payments (BoP) data finally set at rest the undue concern generated last year by alarmist forecasts on India’s current account deficit (CAD). This was first triggered by concerns about reduced foreign direct investment (FDI) inflows and excessive outflow of hard currency and then the Reserve Bank of India’s (RBI’s) worrying projection of a CAD close to four per cent of gross domestic product (GDP). The data now show that the CAD, the difference between exports and imports, plus remittances and net invisibles, was $44.3 billion at the end of March 2011, that is 2.6 per cent of GDP, marginally lower than the 2.8 per cent logged in March 2010. What seems to have made the difference was the impressive growth in exports in 2010-11. However, the recent trend of exports growing faster than imports could easily get reversed, and remittances and earnings from software exports, which have held up remarkably so far, could also be subject to the vagaries of the global economy. Hence, adroit management of the external economy is necessary despite this good news.
The year-on-year increase of 17 per cent in total external debt from $261 billion to $306 billion is definitely a cause for concern, chiefly because it involves a sharp increase in external commercial borrowings, short-term trade credits and a mix of bilateral and multilateral borrowings. While India’s comfortable foreign exchange reserves currently provide a cushion for this debt, it could put India in an awkward position if forex reserves were to decrease for some unforeseen reason, such as a sharp increase in imports. As it is, the reserve-to-debt ratio has fallen from 107 per cent in March 2010 to 100 per cent a year later. While aggressive borrowing is par for the course in a growing economy, the RBI needs to exercise some regulatory oversight to curtail excessive borrowing. The 10 per cent year-on-year increase in capital inflows ($59.4 billion in FY 2011 against $53 billion in FY 2010) was lower than the projections by the Prime Minister’s Economic Advisory Council, which expected inflows to be of the order of $65 billion. The shortfall was mainly owing to foreign investors’ lower interest in the country as a result of a combination of the less-than-inspiring macroeconomic scenario and, more importantly, a perceived policy paralysis in the government, in carrying out much-needed economy-wide reforms.
India remains a very difficult place to do business in and the ready availability of alternative destinations for investment does little to help India’s cause! FDI, if effectively harnessed, can be a game changer, not merely because of the capital it brings with it, but a whole gamut of advantages such as access of advanced technologies, channels to export markets and exposure to global best practices. Ironically, the same factors that daunt foreign investors inhibit domestic investors, and this is reflected loud and clear in falling domestic investment! The latest external sector numbers, thus, need to be carefully reviewed — they reveal a lot more than what is on the surface.
