RBI Governor Y.V. Reddy: Re trouble

Cut your coat according to your cloth. It's a lesson we all learnt as children. And it's a lesson we have all forgotten as adults. Collectively! India (and Indians) is on a consumption binge. We are buying more than we can produce, and spending more than we can afford. Result: a current account deficit of $6.2 billion (Rs 27,280 crore) for the first quarter (April-June) of 2005-06, compared to a surplus of $3.3 billion (Rs 14,520 crore) during the corresponding quarter last fiscal. At this rate, the deficit for the whole fiscal may cross $25 billion (Rs 1,10,000 crore); that's 3 per cent of India's gross domestic product (GDP). A country's current account is in deficit when it imports more goods and services than it exports. Incidentally, India had enjoyed a surplus in its current account over the previous three years.

But wait; don't reach for the panic button just yet. A country's economy differs significantly from a household or corporate budget. Over-consumption, which can have disastrous consequences for the solvency of individuals, is actually good for countries; and a mere 3 per cent deficit is considered manageable. The US current account deficit is $650 billion (Rs 28,60,000 crore), nearly 6.5 per cent of its $10-trillion (Rs 4,40,00,000 crore) GDP.

Says Ajit Ranade, Chief Economist, Aditya Birla Group: "For a growing economy like India, a small current account deficit is no cause for worry. It can spur growth, provided it is used for importing capital goods." Moreover, the $140-billion (Rs 6,16,000-crore) forex kitty more than cushions the country against any negative fallout of the deficit.

But what items are we splurging on? The government is still collecting precise data. All it now knows is that the huge $15.81-billion (Rs 69,564 crore) merchandise trade deficit in the first quarter is attributable more to non-oil imports, which grew by 77.9 per cent, than to oil imports, which grew 31 per cent growth.

But a J.P. Morgan report says the current account deficit will put pressure on the rupee because it implies a greater dependence on inflows of foreign capital to bridge the deficit. It adds, however, that any decline in the value of the rupee would force the Reserve Bank of India to intervene in the market. It seems India Inc will have to learn to live with a falling rupee that won't go as far as it does now. But if higher imports lead to greater growth, it will be a small price to pay.

-Ashish Gupta

A New Alliance In The Works
An FTA with South Africa and Brazil could ramp up trade.

Commerce Minister Kamal Nath: More on his plate

India, South Africa and Brazil are allies in the World Trade Organization (think G-20). Trade and Commerce ministers of the three countries meet regularly to fine-tune strategies to extract concessions from tight-fisted developed nations. And now, they'll have something else to talk about as well-an India-Brazil-South Africa (IBSA) Free Trade Agreement (FTA). Says Rakesh Kumar, Additional Secretary, Ministry of External Affairs: "India is looking at ways to enhance trade between the three countries." There's certainly plenty of room for that. "We can ramp up trade with these two nations from $6 billion (Rs 26,400 crore) now to $10 billion (Rs 44,000 crore) by 2007-08," he adds.

"An FTA with Brazil will give India a toehold in the mercusor bloc," says Prasad D. Ranade, Director, Research, at Jaipur-based NGO cuts International, who is closely associated with the IBSA programme. Mercusor is a common market formed by Argentina, Brazil, Uruguay, Paraguay, Chile and Bolivia. "We can import ethanol from Brazil," he adds. And India can provide Brazil with it and biotechnology solutions and help develop its processed foods' industry.

An FTA with South Africa will give India access to the Southern African Customs Union-a common market comprising South Africa, Botswana, Lesotho, Namibia and Swaziland-and its vast natural resources. The region offers a huge market for Indian textiles, software, biotechnology and drug companies.

Huge distances, lack of awareness about these countries and language, however, could be barriers to realising the full potential of the agreement, but experts feel the colour of money, and a little effort by the three governments, can neutralise these hurdles. The IBSA programme is currently at the drawing board stage; a draft blueprint will be ready by late next year.

-Ashish Gupta

Up, Up and Up
FDI flows may touch an all-time high of $6.5 billion this fiscal.

P. Chidambaram: Good news

The world investment report 2005 says India is one of the top three most favoured destinations for foreign direct investment (FDI). Unfortunately, the figures don't bear this out. Total FDI inflows into India was $5.33 billion (Rs 23,452 crore) in 2004-05 compared to $60 billion (Rs 2,64,000 crore) in China, $96 billion (Rs 4,22,400 crore) in the US and $78 billion (3,43,200 crore) in the UK.

But performance may at last be catching up with potential. The government is expecting $6.5 billion (Rs 28,600 crore) in FDI this year on the back of a fast growing economy, large foreign reserves, low inflation, stable political conditions and strong macroeconomic fundamentals. This will mark a new high in foreign investments in the country, surpassing the 2001-02 peak of $6.1 billion (Rs 26,840 crore). "Inflows have already crossed $1.6 billion (Rs 7,040 crore) in the first four months of the current year, a 40 per cent increase over the corresponding period last year," says Ajay Dua, Secretary, Department of Industrial Policy and Promotion, Ministry of Commerce.

The government still hasn't collected detailed data on the inflows, but officials says sectors like automobiles and auto components, refineries and non-auto engineering are driving this uptrend. The floodgates could open once the retail sector is thrown open to FDI, say officials, adding that opening up the food processing sector could be the thin end of the wedge. "FDI in the back end (cold storages, factories, etc.) is only the first step," they confess. "It will, thereafter, only be a matter of time before the front end (food retailing) is opened up."

Officials also believe that the signing of the Comprehensive Economic Cooperation Agreement with Singapore will result in greater inflows than has been the case from Mauritius.

- Ashish Gupta