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Strength in reserve
Thanks to the inflow through the India Millennium Deposit scheme, India's foreign exchange reserves are now more than US$40bn. This is good news, but not good enough. China has accumulated foreign exchange reserves of close to US$170bn. According to a recent assessment of the International Monetary Fund, East Asia's major economies, namely Japan, China, Taiwan, Hong Kong, South Korea and Singapore now account for more than half of global foreign exchange reserves. Compared to the reserves built up by these East Asian economies, India's $40bn are a modest amount. How rapidly even this fund can be depleted by a crisis was demonstrated last year when the steep rise in oil prices depleted India's stocks of hard currency, forcing the government to float the IMD. Apart from the IMD flows, India's reserves have also been built up by a good performance on the export front during a period when non-oil imports have been depressed. With economic growth picking up and the manufacturing sector registering higher growth,non-oil imports are bound to go up. Even if part of this increase in non-oil imports is neutralised by the softening of oil prices, the revival of growth is bound to increase import demand.Rather than rest content with a $40bn reserve, the finance minister and the Reserve Bank of India should pursue policies which increase both the inflow and outflow of foreign exchange. The further liberalisation of the external economy, reform of the domestic financial sector and investment in infrastructure can all contribute to both increased inflow and outflow on the trade and capital account. After ten years of liberalisation, India's share of world trade still remains abysmally low at 0.6 per cent. Its share of foreign direct investment flows is still negligible compared to China and the South-east Asian economies. Worse still, outward investment from India to the rest of the world is a pittance. Indian companies, both in the public sector and the private sector, must be encouraged to invest abroad, particularly in the Asian neighbourhood. The Indian economy must engage more actively with the rest of the world. For too long has India viewed globalisation as a one-way street and adopted a defensive posture against it. Viewed as a two-way street globalisation offers opportunities. Increasing imports can be balanced by increased exports, increased inward investment by increased outward investment. It is the flows that matter, not just the stocks. Copyright © 2001 Indian Express Newspapers (Bombay) Ltd.
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