Millennium Post

External payments crisis in offing

Is India inching towards a crisis in external payments like in 1991? This question is coming up with increasing frequency now a days. The answer is not quite, but it cannot be ruled out if current trends are any indication. What is needed is some course correction, for sure.

The Economic Survey has recognised the problem on external payments, and suggested some measures for damage control. The Survey’s main emphasis appears to be on import control, since pushing up exports in the current context is somewhat unrealistic. That apart, Survey, mentions that exposure to external payments obligations by those who do not have access to external revenues should be carefully monitored and curtailed.

A country’s balance of payments is in economists’ terms the accounting of the total transactions with the rest of the world. India’s balance of payments is deteriorating and pretty fast. After rounding off all our current external transactions, which includes our exports and imports of goods and services, capital receipts (like FDI and FII investments), India had to pay $78 billion – which is the current account deficit, so called – to the rest of the world. This was some 4.2 per cent of our total GDP in 2011-2012.

That might not sound really alarming. But it actually is. How alarming it is should be clear if we look a little deeper into the figures. The current account deficit is arrived after taking into account the funds that we received from outside by way of investment or other incomes. Those funds are like a cushion available to meet our excess consumption in the country over what we produce.

But if we look at the exact amount of excess consumption the country over our gross production then we had to pay a total of $125 billion to outsiders last year. How do we pay so much extra over what is available to us? Obviously by borrowing. These borrowings are trade credit, as well as whatever we received from foreigners by way of capital investments.

Going further into the figures, we find that last year, our total exports were $310 billion, whereas our imports were $500 billion of gods. The total deficit on imports of merchandise goods (including, say, coal, petroleum to ordinary consumption items) over our exports was as huge as $190 billion. Consider the fact that only few countries in the world will have total national income of that size.

This year the trends are no better and if continues as such the situation would be even worse. The projections are that given the difficult global economic situation, India’s exports might not show any very great recovery. Exports had been going down compared with corresponding period last fiscal year, until last month showed some improvement.

There is cause for concern. This is because the large deficit in the balance of payments of the country is increasingly throwing up a challenge to the viability of India’s external sector. Take the fact that last year we had to draw down from the foreign exchange reserves to pay for the excess expenditure over our receipts on the external account. Given that the total reserves are just about $300 billion, it will not go along much at the way we are on a consumption spree.

The basic anomaly is that we are consuming more than we are producing as a nation. Our imports are larger than our exports. Ordinarily that should not have caused much of a problem. India had always been importing more than it exported. However, when imports are higher by a huge margin then it does become a threat. Many of the principal imports are simply somewhat avoidable expenditure.

The two top import items are, for example, petroleum and gold. Last year oil imports amounted to $160 billion and gold imports were another $60 billion. With current price trends, both these items would cost more and the aggregate import bill for these two items should go up further. Of these, gold imports are a sheer waste of savings in the sense that the funds used up in gold imports get locked in the precious metal without producing any worthwhile social goods.

The government sought to contain this last year, however, to no effect. Taxes on gold imports were whittled down and further stringent controls were avoided. Many of the other imports are on the other hand because as a nation we are not raising our production and rather going for imports. Take for example coal or iron and steel. Instead of raising production capacity in the country to meet rising demand for coal or steel, we are going for larger imports.

On the other hand, raising exports in the current situation is difficult as global markets are rather depressed. When global exports are dwindling it is unreasonable to expect that we should be able to increase our exports much.

Hence, there is a slowly brewing crisis on hand. If not now, it will break with full force within a year or so. But there is time to take actions now to prevent such a recurrence of payments crisis. Action is needed now. Economic Survey prescriptions are right. But will it be possible to implement these, such as, cracking down on gold imports? (IPA)
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