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Deteriorating Balance of Payments
Deteriorating Balance of Payments
Deteriorating Balance of Payments
tight money policy and higher interest rates at home, as indicated by the Fed, these nancial players are withdrawing part of their investments in the emerging economies to meet their domestic liquidity requirements. The original nancial inows had propped up the rupee, but now the sudden outow has led to a precipitous fall in its value. But how does one account for the decline in the value of the rupee since August 2011, albeit with some short episodes of appreciation in-between? The US Federal Reserve was then persisting with its policy of quantitative easing (easy money and historically low interest rates), with Brazil even accusing it of indulging in a currency war to deter imports from the emerging economies. The downward pressure on the rupee is really a result of Indias weak balance of payments (BoP). On the merchandise trade front, import liberalisation, including that of gold, and increasing price-inelastic petroleum, oil and lubricants imports all this when exports were/are severely constrained by demand in the developed capitalist countries led to increasing merchandise trade decits. As regards invisibles, there has also been a deceleration of services exports, even as investment income payments have soared and net remittances from overseas Indians have moderated. As a result, the current account decit has widened, from 4.2% of the gross domestic product (GDP) in 2011-12 to 4.8% of the GDP in 2012-13. As regards the capital account of the BoP, net FDI has in fact fallen in 2012-13 as compared to the previous year, but this has been more than made up by the increase in foreign portfolio investment, non-resident Indian deposits and shortterm credit and advances in the same period. Indeed, despite the fact that net inows on the capital account increased from $80.7 billion in 2011-12 to $85.4 billion in 2012-13, and overall, there was an accretion of $3.8 billion in Indias foreign exchange reserves in 2012-13, the rupee continued to depreciate. The weakness of the rupee is a reection of the fundamental weakness in the current account of Indias BoP. Is the resumption of steady and high net FDI inows, as North Block and Mint Street seem to believe, the solution to the problem? The rising ow of dividends and interest payments over the last decade should be a pointer to the fact that with the rise of the stock of inward foreign investment, both of equity and debt, dividend and interest payments on the current account of the BoP are bound to increase, and with the export of goods and services faltering, the BoP will steadily deteriorate. Reduction of the countrys dependence on foreign nance seems to be part of the solution to Indias BoP problem, but this is the last thing that the mandarins in North Block and Mint Street want to hear.
july 13, 2013 vol xlviII no 28
EPW Economic & Political Weekly