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Mumbai , Nov. 21

A SURPLUS in the balance of payments may not be a one-off, Dr Rakesh Mohan, Deputy Governor, Reserve Bank of India, has said.

He was speaking at the 22nd anniversary of the Central for Banking Studies at the Central Bank of Sri Lanka in Colombo.

"With a significant increase in both saving rates and share of working age population over the next half-century expected, the current phenomenon of overall surpluses in the balance of payments being run by several emerging market economies, including India, may continue," he said.

The arguments being that within Asia, India and China can expect their savings rate to increase further, given that the private savings of these two countries are among the highest in the world, and in view of their favourable demographics over the next 20 years.

Countries such as India and China are increasingly urbanising with increasing needs for investment in infrastructure.

Accordingly he said it was vital to ensure that the investment rate rose in close co-movement with the saving rate. Sustainable growth hinged around the existence of a critical minimum in terms of physical infrastructure.

The acceleration of growth in the future requires massive investments to close the gaps between demand and supply in key infrastructural areas such as power, roads and highways, ports and telecommunication, cities and urban utilities.

"If the conjecture regarding the course of demography and associated savings pattern that I have just posited are correct," said Dr Mohan, "it is unlikely that the current low inflationary scenario will continue in the medium term to long term.

"It is also possible that the current phenomenon of increasing savings rates in Asian countries such as India and China does not continue to be valid over the next medium to long term. If that happens, there could again be a reversal of capital flows."

Thus, if the Asian countries are to run large capital account surpluses and current account deficits, the situation in the US and Europe would meet reversal. "The issue is to try to comprehend what would be required for this macro reversal to occur," he said.

With regards to liquidity and inflation he indicated that there "could be a tightening of liquidity in world capital markets with increased competition for resources.

"Thus, there is no assurance that the current trends of excess liquidity accompanied by low inflation will necessarily continue in the world. Recent experience tells us that such reversals can occur very rapidly." The issue dominating the conduct of monetary policy and exchange rate policy today in countries such as India and China is that of excess of capital inflows, he pointed out. "Are these flows resulting from temporary global imbalances emanating from current economic policies and problems of the G-3 countries? Or do they reflect global changes of a more lasting nature."

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