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Favourable impact of surging forex reserves

The growth in forex reserves in the past three years has been spectacular and in 2001-03 particularly, there has been a heady rise with a surplus emerging on current account for two years in succession and an increase in foreign direct investments.

THE BALANCE of Payments (BoP) position has never been so comfortable as it is now after the crisis witnessed in July 1991. Though forex reserves were rising significantly after 1993, the additions were mainly on capital account and non-debt receipts largely due to purchases of listed equities by Foreign Institutional Investors (FIIs) and their support to privately placed issues or other initial public offers (IPOs) by industrial enterprises.

However, the growth in the past three years has been spectacular and in 2001-03 particularly, there has been a heady rise with a surplus emerging on current account for two years in succession and an increase in Foreign Direct Investment (FDI). The current account surplus was $1.35 billion in 2001-02 against a deficit of $2.58 billion in the previous year. In the nine months of 2002-03, the current account surplus was sizable at $2.82 billion.

Thus forex reserves were at unbelievably high level of $81.33 billion during the week ended May 30, with foreign exchange assets alone accounting for $77.94 billion. A sizable current account surplus has emerged in 2002-03 in spite of the fact that the oil import bill increased by $3.75 billion in a whole year. Non-oil imports too were higher by $4.89 billion. But the rise of $8.64 billion in aggregate imports could be offset nearly fully by incremental export earnings of $7.90 billion.

The performance on the foreign trade front was impressive with exports rising by 18.05 per cent, the best in recent memory. There was, of course, a slight exaggeration under this head as a result of the serious bid made by the Union Ministry of Commerce and Industry to boost exports of foodgrains with a view to bringing about a significant reduction in bulging buffer stocks. Even allowing for the exaggeration on this score, exports of gem and jewellery, textiles, automobile and automobile components and electronic products have been growing steadily.

With no upset in calculations on account of a sharp rise in world prices for crude and petro products initially, the trade deficit increased only marginally by $74 million to $7.69 billion. The details relating to April cannot be taken as indicative of any trend. For, the slower rise in exports could be ascribed to the delays experienced in unloading cargo at various ports due to the Iraq war. The oil bill also will be lower only in later months, as deliveries against higher priced purchases would have to be completed. There is, of course, a surprising rise in non-oil imports and it remains to be seen whether this spurt is exceptional. The bulge in the deficit is due mainly to the increase in non-oil imports.

It was apprehended at one stage that world prices for crude and petro products would become prohibitive and the oil import bill would rise further in 2003-04. However, there is no need to worry about a further rise in oil import bill, as crude prices have dropped by over 30 per cent from the peak levels and it has been possible for the oil refining companies to reduce prices for gasoline and diesel oil for four weeks in succession.

As the happenings in Iraq after the end of the war have been encouraging from the point of view of oil importing countries, with the lifting of sanctions against Iraq by the United Nations, it is expected that oil exports from Iraq will increase in a big way after a few months. It is, therefore, anticipated that crude prices will tend to decline and members of Organisation of Petroleum Exporting Countries (OPEC) may feel compelled to effect a cut in their output. But their efforts to manipulate prices may not be equally successful, as Iraq and other non-OPEC producers will be augmenting production of crude as well as natural gas. In India too, new finds of gas and oil in the off-shore regions of Gujarat and Krishna Godavari Basin may be helpful in raising the output of both fossil fuels from the off-shore and onshore regions in the coming years.

These heartening developments and a sustained rise in forex reserves have also been responsible for the appreciation of the rupee as compared to the U.S. dollar and its less pronounced depreciation against other major currencies. Indian exporters were worried to a certain extent about the appreciation of the rupee vis-a-vis the U.S. dollar by over 4.5 per cent since June last year. But there may not be any upset in their calculations, as the Indian currency has remained depreciated against the Euro, British Pound, Swiss franc and slightly in terms of the Japanese yen. Though it is reckoned that over 65 per cent of world trade is still denominated in terms of the U.S. currency, the Indian economy stands to gain by the opportunity for securing cheaper oil imports.

Promising prospects

With new plans for improving bilateral trade with Germany, France, China, Britain and the Asean Nations, Indian exports can rise at the desired rate and it may not be difficult to increase export earnings by the targeted 12 per cent. Even if it is assumed that the oil import bill in the current financial year may be slightly higher at $15 billion as compared to $14.02 billion in 2001-02 and non-oil imports will be increasing by 15 per cent to $47.86 billion, the trade deficit may contract to around $5 billion. This prospect is fascinating and the current account surplus should be much higher than in 2002-03, as software exports will be growing in spite of the efforts made by the U.S. and others to minimise outsourcing to Indian companies.

It is, therefore, not surprising that Bimal Jalan, Governor of the Reserve Bank of India, has not expressed any concern over the strengthening of the rupee against the U.S. dollar and the less pronounced depreciation against some other major currencies. He has actually observed that the rupee is `underrated' in some directions. Against this background, it is imperative that the downtrend in interest rates should be sustained and exporters should be helped to overcome the adverse effects of a cheaper U.S. dollar with a saving in interest charges in respect of pre-shipment and post-shipment credit.

The monetary authorities may not be disinclined to lower further the Bank Rate to 5.75 per cent or 5.50 per cent, if the prospects for a smart recovery in agricultural production in the 2003-04 season brighten considerably with a satisfactory behaviour of the monsoon. As India's image in the world scene is also improving along with its credit worthiness, the outlook for the economy in the current financial year can be viewed with cautious optimism. It may then be possible to achieve a growth of even 6.5 per cent in the Gross Domestic Product (GDP) against the target of 6 per cent visualised by the Reserve Bank.

The question is, what should be the optimum external parity of the rupee in terms of the U.S. dollar and other currencies, as it is probable that the greenback may stage a recovery after some months. But it cannot be gainsaid that the complexion of the Indian currency has changed significantly and the Union Finance Ministry has again decided to utilise the opportunity for repaying foreign currency loans and reducing the external debt. In fact, the Central Government is keen to avoid bilateral agreements for securing foreign currency loans. Immediately, it has been decided to repay foreign currency loans for Rs.7,491 crores or $1.6 billion in respect of 14 countries. This arrangement will necessitate an increase in internal market borrowing correspondingly as in 2002-03.

Despite the plans of the State governments, State Electricity Boards and others to replace their costlier loans with open market borrowing on a cheaper basis and with the likelihood of the Central Exchequer also increasing its net borrowing, conditions in the money market may remain comfortable.

The scheduled commercial banks (SCBs) also will be augmenting their lendable resources with their moves for getting released the funds locked up in non-performing assets (NPAs) through various measures.

The borrowing programme for 2003-04 has made a brisk start and several Central loans have been issued for mobilising Rs.25,000 crores on a cheaper basis so far. The target of Rs.1,07,194 crores for net borrowing can be easily realised or surpassed, if need be, due to swap operations.

P. A. Seshan

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