RP Gupta
In Maysecond week, the forex reserve of India has reduced to $595 billion from $635 billion in September 2021. Existing reserves are about 18% of nominal GDP which is acomfort zone. Despite this, the value of rupee against US dollarfell almost by 6%to `77.4 in May, 2022 from `73 in September 2021. Such steep fall reveals that the value of the rupee is vulnerable to the net outflow of forex. Historically, India has been in the trade deficit (goods & services) and therefore, the forex reserves are generally built from the “capital receipts” in shape of debt and equity. Net “inward remittance” in the current account is about$60-65 billion which is consumed in the part financing of trade deficit and mostly, India had been in “current account deficit”. Trade deficit is somewhat similar to “operating loss” and the current account deficit is similar to”net loss” of Nation in the international trade. This is not a good scenario for the stability of rupee. Ideally, India should be in “trade surplus” for a stable rupee. For appreciation ofrupee value, India should have”current account surplus” on consistent basis. Import of energy (Petroleum & Coal) must be partially replaced with domestic production. India is having enough reserves of coal and its production must be increased through mineral and coal sector reforms. Indiahasalso good reserves of oil and gas, as quoted by ex-petroleum Minister VeerappaMoily and also by Vedanta's Anil Agrawal. However, thisneeds huge spending in prospecting. For replacing imports of electronics and defence items, Government has taken good steps; that may be pushed. Similar steps are also needed for other major imports. Government should bring a white paper for boostingexports and replacing imports with domestic production. Besides this, there is a vast scope of export of services in the field of tourism, consultancy (legal, accounting and engineering), shipping, education and health sector; that also needs a separate white paper.
The financial savings of India are not adequate for financing the investment needs and therefore, the dependency upon the inflow of global funds shall continue for few more years. As an interim measure, the physical savings in gold must be reduced to almostnil through financial innovation, as suggested by author in his Book ‘Turn Around India'. Huge import of gold is indeed a drag on the trade balance. In 1992,the regime of fixed exchange rate was ended. Thereafter, the value of rupee was almost stable from the year 2000 to 2010, as evident from the table below. It means that; it is feasible to maintain stability of rupee. Simultaneously, the reasons for subsequent fall inrupee value must be analysed and resolved. Total financial assets in the world are exceeding $200 trillion. Global investors are in search of such destinations which provide them a high return in terms of US dollars. In case, India succeeds in achieving stability of Rupee, the global funds shall rush in. In such case, it is imperative that global funds are mostly used for the investment in productive assets and not for consumption. Failing which, the inflation might aggravate and the servicing of global funds might pose problem. For boosting investment in productive assets, the regulatory easement and the simplification of Tax laws are the prerequisites. Theexternal risks, if any, arising due to outflow of forex anddepreciation of rupee shall be totally eliminated. Rather, due to surplus forex reserves, the diplomatic relation of India shall improve, particularly with neighbouring nations. And thus, India shall command high respect in the global fraternity.
(The writer is an economist and author. The views expressed are personal.)
