The looming shadow

Print edition : September 11, 1999

Recent trade data confirm that the government's management of the external sector has made future balance of payments problems likely.

IN the 15 months that the BJP-led government has been in power, it has done perhaps more in terms of liberalising imports and furthering the interests of international capital, and done it faster, than any previous government. Indeed, its effective polic y in this regard has been in marked contrast to its stated electioneering position, both in this election and the previous one. The party that once prided itself on its declared economic aim of "swadeshi" has been leading a government that has allowed a greater degree of import penetration, especially in the area of non-necessary consumer goods, than ever before in independent India.

This has largely occurred at the cost of domestic producers, in a whole gamut of manufacturing industries ranging from small-scale producers of marble and small consumption items to sugar manufacturers. And this in turn is likely to have had an unfavoura ble effect on employment in these sectors, which in turn will create negative multiplier effects.

However, there are other adverse consequences of the government's management of the external sector, quite apart from those relating to domestic economic activity and employment. The export-import policy has been associated with a widening of the trade d eficit, an increase in non-oil imports into the country even during a period of industrial recession, and a major deceleration (even decline) in exports in dollar terms.

This is made amply evident in the data relating to external trade which have just been released by the Directorate General of Commercial Intelligence and Statistics (DGCI&S). They indicate that the trade balance deteriorated substantially over 1998-99, l argely because of the increase in non-oil imports, even though the ongoing recession in domestic manufacturing industry at that time meant that the requirement of raw material and intermediate imports was less. Subsequently the trade deficit has recovere d slightly, largely because of the depressing effects of industrial recession, since the expansion in exports remains muted at best.

Thus, in the period April-July 1999, exports increased by only 4 per cent in dollar terms, compared to the same period of 1998. While this was still a slightly better performance than that of the previous year, when exports actually fell by 3 per cent, i t is hardly much cause for celebration, especially as this rate of growth still remains below the estimated rate of growth of world exports during these months.

Even more to the point, it still remains well below the average of $3 billion a month for export values that were achieved in 1997-98. So the export performance over the past 15 months has been such that it has not even recovered to the levels that were seen as barely adequate even two years ago.

Meanwhile, the only reason that the trade deficit has been kept within even manageable limits is the collapse in international oil prices, which has kept India's oil import bill low. Non-oil imports grew fairly rapidly until March 1998, suggesting that t he import liberalisation measures undertaken over the 1990s had contributed to a surge in imports despite fairly depressed domestic demand for manufactured goods. Since then, however, the recession appears to have taken its toll in terms of a reduced rat e of expansion of non-oil imports.

However, since April 1999 there has been a firming up of world oil prices, and this must have involved an increase in India's oil import bill. It is still not clear how much of the increase in imports over the period April-July is due to this factor, but this will certainly be a major source of concern for policy makers in future since it reduces the leeway for non-oil imports.

The large trade deficits have still not become a source of concern in the public perception because the current account deficit remains quite low. This is essentially due to the role played by worker's remittances from abroad, which have in fact shored u p India's balance of payments throughout the 1990s. In 1998-99, Reserve Bank of India data show that transfer incomes from abroad, which are dominated by worker's remittances, financed more than 80 per cent of the trade deficit.

The role of all invisible payments has been less because the country loses some income to profit remittances by multinational companies. Last year these amounted to nearly another one-third of the trade deficit. It is also worth noting that transfer inco mes from abroad in 1998-99 (as indeed, in every other year of this decade) have been more than all sources of capital inflow put together, by more than 22 per cent.

When considering the role of capital inflows, another legacy of the economic policies of the decade, which have been so avidly followed and pushed by the BJP government also, has been the growing share of foreign direct investment (FDI), which has been i n the form of purchase of shares in existing Indian companies rather than as greenfield investment. Even in 1995-96, the ratio of such investment to total FDI was only 1 per cent. By 1998-99, the BJP-led government had managed to raise this to 16 per cen t, and guesstimates for the current year suggest that it is likely to be even higher and could reach as much as one-third. It is interesting that this should be part of the economic legacy of the party that earlier presented itself as the champion of Ind ian business.

These mergers and acquisitions are important not only because of any simplistic nationalist economic sentiment. They also imply a future drain of foreign exchange resources because of the repatriation of profits by such foreign purchasers, where there wa s no such outflow in the past. This is not an idle concern. In Brazil at the moment, there is a heated debate over this issue, because the outflow of such remitted profits has soared from $37 million to as much as $7 billion in just five years from 1993 to 1998, following a wave of such FDI in the form of mergers and acquisitions.

All this becomes particularly worrisome because the other sources of capital inflow into the country have proved to be extremely fragile at best. Both portfolio capital inflows and net short-term external commercial borrowing into the country turned nega tive in 1998-99. While the reduction of reliance on such highly volatile capital is to be welcomed, it should be remembered that this has happened not because of the sagacity of the Indian government, but because foreign investors have turned away from t his emerging market. This suggests that it would be highly problematic to base a future growth strategy on reliance in such external capital inflows.

In sum, several features of the trade pattern and the balance of payments are major causes for concern. The chances are high that after the elections the new government will have to take on quite soon the challenge of coping with yet another incipient ba lance of payments crisis. It is a pity, therefore, that so few fresh ideas are evident in this regard from both the leading political combinations.

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