By the time he completes a year in office, Prime Minister
Narendra Modi would have visited about 20 countries with significant success. From vigorous promotion of Make in India to reconnecting
with the diaspora to taking further steps in ending nuclear isolation to
regaining the lost ground in the Indian Ocean region to rediscovering our
neighbors, to restoring investor confidence in the Indian economy, towards projecting
Indian soft power, Modi’s visits have all these and more. Yet, in some quarters, these recurrent visits are
treated with derision.
In a broad sense, Modi
doctrine seeks integrating geopolitics and geoeconomics into a possible
geostrategic doctrine. What is striking, however, is the fact that a quarter of
century of post cold war and post non-alignment, suspicions about the West have
not been erased from the Indian psyche.
Undeniably, conversation on geostrategic dimensions requires separate
engagement, it would be nonetheless imprudent to discount overt or covert linkages
between aggressive investor wooing with the need to shore up foreign exchange
(forex) reserves.
Investment (capital creation in macroeconomics jargon) is vital
in invigorating the economy, manufacturing sector in particular. Agriculture rejuvenation accompanied by prospective
transfer of surplus rural agrarian labour towards urban manufacturing demands substantial
flow of funds. Investment is financed either through or a combination of domestic
savings, government savings, and savings of the rest of the world.
Mathematically,
I= Spvt + Sgov + Srow
Where, I - investment, Spvt - domestic savings, Sgov -
government savings, Srow - savings of the rest of the world or in other words, current
account deficit [imports (M) > exports (X)].
Mathematically, Sgov is the difference between government
revenues (Taxes- T) and government expenditure (G). In case of fiscal deficit
(T<G), we term it government dissavings hence a negative Sgov.
Private savings or household savings are usually stable and
constant. When fiscal deficit persists, savings of the rest of the world will
have to increase to compensate the lower domestic savings. In other words, the
import- export gap has to widen to ensure increasing investment, meaning a
higher current account deficit. The outcome, what economists, term as twin
deficit paradox, has grim implications on the current account balances of the
economy as manifested during the 1991 economic crisis.
Balance of Payments statement [BoP-(Figure I)] comprises of current
account and capital and financial account. Current account comprises of trade
in goods and services, income and current transfers. Current account records
such transactions that involve economic values and occur between resident and
nonresident entities besides covering offsets to current economic values
provided or acquired without a quid pro quo. Capital account includes capital
transfers and acquisition or disposal on non financial non produced assets. The
‘financial account’ encompasses all transaction such as cross border trades in
equity and debt instruments.
If current account deficit persists, the country has to meet
its foreign exchange needs through a corresponding capital account surplus.
This is possible either through external government borrowings or grants,
borrowings from institutions like IMF or through attraction of private investment.
Mobilizing either foreign direct investment (FDI) or foreign portfolio
investment (popularly termed FII) has generally economically lucrative though
often politically incorrect.
FDI entails either greenfield capital creation or cross
border acquisitions giving it significant influence in managerial decision
making. FII involves cross border dealings in equity and debt markets, the
primary objective being earning a return rather than managerial control.
Portfolio investment is volatile relative to FDI. In short, motivation for FII primarily comes
from the prospects of the investor’s making long term profits in the companies
they directly control. Foreign bank lending and portfolio investments, are dictated
by the need to make short term gains and prone to herd behavior. In contrast, besides
adding to investible resources and capital formation, FDI can play a major role
in transferring production technology skills, innovations and managerial
practices.
Economies like India experiencing unceasing revenue deficit
and rare occasions of current account surplus might look outwards in the form
of overseas investment to complement domestic savings. Perhaps, a strong gesture
of assurance from the Prime Minister might go long way in reviving overseas
investor interest. Both legislative and executive actions like increased FDI in
defense, insurance and retail (permitted by UPA-II) all characterize the steps
in a similar direction. Regardless of the shortcomings in our economy, India
does have fairly comfortable balance of payments position. Yet somewhere one
gets a feeling that aggressive packaging of Make in India etc. is not about alleviating
the consequences of a probable twin deficit problem.
Burrowing deeper the answer might lie in the need for
extensive growth of forex reserves. Indians might have celebrated in recent
weeks given the reserves touched record $ 343 billion (decline marginally
later). Yet a reality check is in order. Table I presents the comparative
picture of forex reserves of different countries. The author has deliberately
omitted US for obvious reasons.
Table I- Forex Reserves of Select Countries
Country
|
Forex Reserves (in $ billion)
|
Comments
|
China
|
3980
|
|
Japan
|
1267
|
Taiwan
|
429.4
|
South Korea
|
364.8
|
Brazil
|
381
|
Saudi Arabia
|
756.1
|
Russia
|
418.9
|
South Africa
|
50.55
|
India
|
340.43
|
Source: RBI website
|
Notwithstanding the excitement, India appears no match to the
Chinese dragon. Huge forex reserves have
played a significant role in extending China’s influence in the contemporary
global economic order. China’s ability to influence IOR to Latin American to
sub Saharan Africa and now virtually reducing Pakistan to a vassal state in
many ways is a manifestation of how reserves distributed as munificence
transform into geopolitical and geoeconomic influence. China’s forex reserves are a consequence of
steadfast export oriented policies modeled on cost arbitrage drawing in ample
foreign investment followed by a steady movement of domestic firms in the
global value chain through exploitation of FDI spillovers.
Realistic attempts to counter China’s grand strategy involves
the very least to mobilize foreign exchange reserves on large scale. This is
possible only when manufacturing shifts big time to India, resulting in quantum
leap in foreign direct investment. This investment translates into increased output,
the surplus which is exported to consumption rich economies like US and EU. The
resultant virtuous cycle generates further foreign exchange reserves improving
current account situation probably generating persistent current account
surplus. This will facilitate Indian investment abroad facilitating projection
of economic influence relative to its size.
Obviously, the task is daunting. It may be years before India
attains similar forex reserves levels. Yet a start has to be made. The Prime
Minister’s pitch on ease of business to facilitate Make in India is an
essential component of projecting Indian economic power. In some way, signals
albeit implicit to a good extent emanating from the government indicate
possible replication of the path China took in both post Mao as also post
Tiananmen era. However, there are can be no illusions about shortcuts and PM’s
task is cut out. It will be long drawn struggle in building reserves similar to
China. It is moot whether large scale is beneficial in the first place. But
what is undisputed is Indian show of strength would depend on its ability to
leverage its financial prowess. Attracting forex is a process. Therefore, the
Prime Ministerial visits represent the baby steps in projecting Indian economic
and knowledge power on the global arena.
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