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Monday, Jan 05, 2004

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India in $100-b forex club sans export boom!

Harish Damodaran

New Delhi , Jan 4

WITH disaggregated balance of payments data available up to September, a clear picture has now emerged as to how India has managed to pile up a $100 billion plus foreign exchange reserves kitty.

Between end-March 1991 and September 2003, total forex reserves (excluding gold) rose from a low of $2.34 billion to $87.22 billion. Subsequently, on December 26, they touched $96.55 billion ($100.59 billion, gold inclusive).

If one examines the factors underlying the $84.88 billion reserve build-up between March 1991 and September 2003 - these would not have changed much since then - the most striking feature is the absence of any significant impetus from exports.

The country's cumulative earnings from export of goods during this period stood at $431.06 billion, which was more than offset by imports of $577.24 billion. The resulting merchandise trade deficit of $146.18 billion should ordinarily have, then, brought down reserves levels to negative territory.

What precluded this, however, was the sustained buoyancy in the `invisibles' account, covering all current forex transactions not involving the physical shipment of goods in and out of the country. The invisibles account posted a cumulative surplus of $113.72 billion, reducing the overall current account deficit for the April 1991-September 2003 period to $32.46 billion.

The main source of buoyant invisible receipts was private transfers, largely comprising inward remittances from resident Indians working abroad. Such transfers, arising from export of `labour' or `natural persons', totalled $125.87 billion, i.e., almost 30 per cent of the earnings from export of `goods'. The other major contributor was `miscellaneous non-factor services receipts' amounting to $88.01 billion, including $40.42 billion from software exports.

But unlike private transfers, `miscellaneous non-factor services' have been a two-way street, entailing not just `receipts', but also `payments' aggregating $67.5 billion. Unfortunately, there is no detailed, up-to-date break-up of these payments, their sheer magnitudes notwithstanding. And neither do official documents shed light beyond general passing references like "the impact of the current account liberalisation is being reflected in rising outgoes in the form of technology-related payments, imports of financial services, management fees payments for official expenses, advertising and other business and commercial services."

Similarly, the reverse side to earnings from tourism ($34.05 billion) has been `travel payments' of $19.33 billion, indicative of how Indians themselves have, of late, turned prolific world travellers. A benign development though has been investment income of $20.57 billion, mostly earned by the Reserve Bank of India (RBI) on its forex assets. Such income has, to some extent, compensated for the huge interest outgo on foreign debt and other investment-related payments of $67.11 billion.

However, even after accounting for the net invisibles surplus, the country recorded a cumulative current account deficit of $32.46 billion, which ceteris paribus would still have depleted the forex reserves to minus $30 billion levels.

The reason for this not taking place was the massive net capital inflows of $112.75 billion attracted between end-March 1991 and September 2003. Of this, nearly half ($56 billion) was in the form of foreign investment, within which the portfolio component (as opposed to direct investment in plant and machinery) was roughly 49 per cent.

The bulk of the remaining inflows were debt-creating, whether by way of non-resident Indian deposits or external commercial borrowings. The capital inflows of $112.75 billion explain how the country has built-up a sizeable forex reserves chest, even without any noteworthy export boom fuelling the reserve accumulation process in Japan, China and the East Asian economies.

India, as in most other fields, seems a case in itself!

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