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An export effort and a drive to increase continuous availability of all goods are imperative.

The latest reports speak of an international agency indicating a downgrading of India’s credit status to reflect its concerns about the alleged or real weaknesses of the fiscal position of India. Time was when such sabre rattling by rating agencies would seriously upset India’s ability to sustain its imports of essential raw materials by raising funds on the international markets.

Thanks to the comfortable level of reserves, Indian authorities are in a position today to take downgrading of rating in their stride. India has substantial reserves and an abundance of capital flows, which enable us to look rating agencies in their eyes. But it is important to look at elements of our balance of payments to see how sustainable the position is.

The latest review of macroeconomic and monetary documents released with the first quarter review of the annual policy for 2008-09 provides an instructive analysis of details relating to the external position and analysis of other aspects of the economy.

Here, let us take a look at the external dimension. While the indicators of sustainability, such as the level of reserves, the ratios of debt servicing to exports, and current account deficit to GDP are within levels of tolerance, there are areas of concern.

First, the positives. The level of India’s reserves is comfortable and has provided a safety margin for contingencies. The reserves exceeded the external debt by $88.5 billion, giving a cover of 146 per cent of total external debt stock at end March 2008.

Of course, the fact remains that the external reserves of India, unlike those of China, Japan and Taiwan, are built up by a combination of capital flows, including external commercial borrowing and portfolio flows, which are capable of being reversed over time. The other nations mentioned by me built up their reserves through current account surplus — excess of exports over imports. This is a weakness in our position.

This leads me to the main weakness in our external position — the deficit on trade account. We have been running a trade deficit for years now. The latest figures for 2007-08 show a trade deficit of $90 billion in 2007-08 as compared to $63 billion in 2006-07. As proportion of GDP, the trade deficit increased from 6.9 to 7.7 per cent. What does a trade deficit mean? It specifies that we are exporting less than we are importing. We have obviously been inclined to splurge on commodities which we import.

What supports this craze for goods ‘foreign’ is our “invisibles”. This is a quaint expression for earnings from services by our compatriots abroad and such transportation services as we provide. It is significant that “invisibles” in our balance of payments amounted to $72.7 billion in 2007-08 as compared to $53.4 billion in 2006-07. Mainly, the components of these invisibles are travel, transportation, insurance, software, transfers (remittances by expatriate Indians).

These represent a sizeable element in our balance of payments, overshadowing the trade in goods. Indeed, we have to be thankful for all our invisible earnings that we are able to maintain our standard of living, such as it is. It is perhaps apt to say that we earn our fuel and food in the sweat and labour of our services, both here and abroad. It is time that we paid equal attention to nurturing them. This is in contrast with the highly prejudiced attitude we display to our compatriots also when they return from their bonded or unbonded labour abroad. They are received almost patronisingly, our immigration and customs officials subjecting them to a detailed scrutiny of their belongings as if they are smugglers all. It is time that our immigration and customs services regard those who serve our country by sending their remittances to us, in a very hospitable and friendly manner.

Software services have been given a good deal of lip service in recent Budgets. But, there is still a suspicion that Government of India does not look kindly on the bastions of software industry. Niggardly are the tax concessions given to them considering that the software giants of India are facing considerable competition, not to say inhospitable political environment in countries, such as the US. India needs to do a great deal more to nurture and encourage software exports. Export concessions should be liberal and generously administered.

The break-up of our export earnings over the years is instructive. The increase of export earnings from petroleum refineries has been impressive. It shows the main advantages derived by our refineries, which have operated quite complex operations utilising crude of different blends. Their skill in exploiting their comparative advantages in exporting to countries, such as the US, deserves to be encouraged instead of being subjected to a windfall tax, as is being threatened by Johney come lately in the political scene.

The performance of exports in the recent past has been encouraging, notwithstanding the appreciation of the rupee till recently. The RBI needs to persevere in its policy of nudging exports through appropriate interventions in the forex market. Gains due to a benign tax policy are hard to make by other means. Productivity improvements can obviously be the mantra of choice, but given our infrastructural bottlenecks, it is a far cry to have an exporter succeed in bashing the bangs of difficult power supply conditions as well as an unfriendly forex rate.

I come now to the subject of the country’s net investment position. The fact that the country has a reserve of $300+ billion cannot make it oblivious to the reality that it is the net result of many liabilities. For instance, the investments by FIIs in the Indian market are assets for the FIIs, but liabilities for us. So too for FDI investments.

The tables produced in the RBI’s review of the net investment position of India show that we have an excess of liabilities over assets, to the extent of nearly $72 billion. That is, we owe more to the rest of the world than the rest of the world owes to us. The solution to this worrying imbalance consists in increasing our exports of goods and services and managing to meet more of our needs from local producers. The answer lies in increasing our investments in productivity enhancement in agriculture.

The macroeconomic review of the RBI has a clear message at its tail end — the net investment position is nothing to write home about. We need to do more to increase our exports and rely more on our farm products and manufacture.

The goal of self-reliance may be lost in the chronicles of our independence struggle. But, we cannot continue to live on the tender or not so tender mercies of capital flows and remittances to sustain our growing appetite for imports of various kinds. An export effort and a drive to increase continuous availability of all goods are imperative. This is not a call for protectionism. But, it is an answer to the economic message that our net negative investment policy unfolds.

Hopefully, the planners and policy-makers will consider on these issues of sustainability in their next encounter with authority after the ensuing polls — provided we see an unfractured outcome unlike last time.

More Stories on : Economy | Economy | Credit Rating | S Venkitaramanan

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