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By Dr. Lal Bhatia
Despite the lockdown, the Indian economy emerged somewhat victorious owing to an astounding foreign exchange surplus that breached the 500 Billion mark in the midst of the dreaded pandemic.
What follows are some facts pieced together through my humble observation and experience to attribute the definitive catalysts, and understand how the surplus can serve the contracting Indian economy.
A dramatic rise in India’s foreign exchange reserves emerged as a silver lining to the economic woes during its battle against the erstwhile COVID-19 pandemic. Remarkably, through the course of multiple lockdowns in the country from March to December 2020, India’s Forex reserves grew from US$ 477 billion to US$ 581 billion, recording a burgeoning increase of US$ 104 billion over nine months.
India currently has the 5th largest repository of foreign exchange reserves, ready to overtake Russia (which is at US$ 592 billion). The foreign reserves also amount to 99% of India’s external debt of $558.5 billion.
As the global economy came to a circumstantial halt, this counterintuitive rise in foreign exchange reserves is largely attributed to an increase in Foreign Current Assets (FCA) which constitute a major portion of the overall foreign reserves. This has been made possible by a motley of favorable conditions which has led to a fall in the value of India’s imports as compared to exports.
On the geopolitical front, the Oil-Price war between Russia and Saudi Arabia led to a steep fall in Brent Crude oil prices from 60-70$ per barrel to less than 20$ per barrel in March 2020. This has been particularly favorable for the third-largest oil-importing country i.e. India, where Brent Crude oil imports account for 85% of total consumption and roughly 20% of total import expenditure. This decrease in the value of imports was further boosted by a fall in the volume of imports as the nationwide lockdown brought the transport industry to a halt, consequently resulting in a decrease in the consumption of petroleum products by 45%.
Additionally, the central government’s decision to cut corporate tax rates in 2019 and create a favorable investment climate has managed to bring in lucrative foreign investments in the form of Foreign Direct Investments (FDI) worth $20 billion and Foreign Portfolio Investments (FPI) worth $26.8 billion. Tech conglomerates such as Facebook and Google have heavily purchased stakes in multiple Indian companies such as Jio Platforms, which has managed to rake in investment amounting to over 1 lakh crore in foreign currency throughout the pandemic.
The Country also witnessed a significant decrease in imports of commodities such as gold, oil, and electronics in response to the pandemic. According to the World Gold Council (WGC), gold imports fell by 95 percent for the quarter ending in June 2020.
While India and China have been locked in a military standoff along the Line of Actual Control (LAC) in eastern Ladakh since May last year which has also led to a rise in nationalist sentiments and a complete boycott of imported Chinese products such as electronic devices and applications. In 2020, India’s imports from China declined by 13% and exports grew by over 16%. This rapid decrease in imports is speculated to become sustainable with the help of India’s import substitution policy – the ‘Atmanirbhar Bharat’ program. India’s current account surplus for the first quarter stood at US$ 19.8 billion for the FY 20-21.
The formidable increase in foreign exchange brought in a huge respite for an otherwise tightening economy. Accounting for the financial ambiguity prevailing in the post-covid regime and the rising political tensions being witnessed across the globe, India has successfully managed to create a corpus of foreign exchange reserves to deter turbulent financial markets and economic distress. According to the economic survey 20-21, India’s Forex reserves have increased to a level that could cover 18 months’ worth of imports in December 2020. Recalling the balance of payments crisis of 1991 wherein foreign exchange reserves of India were barely sufficient to finance 3 weeks of imports, the current repository is considerably impressive. Even though the foreign surplus in itself would accrue negligible interest at best, the reserves will exhibit confidence to credit rating agencies and investors that a country can meet its external obligations, back its domestic currency by assets, assist the government, and maintain a ration for calamities and emergencies.
Even though the primary task of the RBI is to ensure that the reserves are invested in safe and liquid assets, in the recent past we have witnessed a transfer of Rs. 1.76 lakh crore surplus reserves to the government to attenuate the economic duress on the recommendations of the Bimal Jalan-led expert committee. It is up to the better judgment of the RBI and experts to utilize the plush surplus for effectively recovering the potent yet straggling economy. As the true value of the surplus will lay on the strategy of its utilization.
source https://nrinews24x7.com/indias-economic-silver-lining-during-covid-19/?utm_source=rss&utm_medium=rss&utm_campaign=indias-economic-silver-lining-during-covid-19
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