By: M K Venu

An avoidable surplus

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The Governor of the Reserve Bank of India (RBI) revealed last week that India may end up with a small current account surplus for 2001-02. It is the first time in 24 years that the country will have a current account surplus, we are told.
But is this a cause to celebrate? Certainly not. Current account surplus becomes a cause to celebrate only when the economy booms and its exports become robust, bringing precious dollars into the system. This is something countries like South Korea and China had achieved through the nineties. Current account surplus is nothing but net dollar inflows on the current account. But to have a current account surplus in the midst of a deflationary economic condition and falling exports and imports is something really worrisome.
Export growth in 2001-02 has collapsed to less than 1 per cent. Import growth is also no more than 2 per cent in dollar terms. This is disastrous for a developing economy, which is striving to get on to a sustained higher growth trajectory. A growing economy must experience both higher imports and exports. Therefore, during this phase a moderate to high current account deficit of upto 2 per cent of GDP is desirable. This indicates demand for imported capital goods and raw material from the domestic industry. But in India exactly the opposite seems to have happened. In the last three to four years the current account deficit has consistently fallen from a little over 1.5 per cent of GDP to 0.5 per cent of GDP in 2000-01. This has been more because of falling imports than rising exports. This year the deficit fell further and has given way to a current account surplus. Mind you, this has happened in the backdrop of the GDP growth rate consistently falling since 1998. Any economist will tell you nothing can be more unhealthy than this.
So a current account surplus in the midst of a deflationary situation and a sluggish manufacturing sector is indeed indicative of more serious trouble ahead. The RBI Governor Bimal Jalan will be the first to recognise this. Regulator says yes, finance ministry says no

The Chief of Insurance Regulatory Development Authority(IRDA) has formally told the Parliamentary Standing Committee on Finance that the foreign institutional investments in insurance companies do not form part of the 26 per cent FDI limit which is meant essentially for a foreign promoter/partner.
This runs contrary to the finance ministry’s post budget clarification that both the FDI and FII investments form part of the overall 26 per cent limit for the insurance sector.
The confusion arose when the budget announced that in some sensitive sectors, the FII investment would be treated outside the FDI limit. This had led to speculation that for the insurance sector the overall foreign investment, i.e FDI plus FII, would touch 75 per cent.
The FDI limit for a foreign promoter in insurance companies is 26 per cent and the FII portfolio investment limit as per SEBI guidelines is 49 per cent. Adding the two one gets a total foreign investment figure of 75 per cent. The finance ministry stoutly denied this but the IRDA Chairman’s recorded assurance to the Parliamentary Standing Committee tells a different story.
To a specific question from the Parliamentary Committee whether the 26 per cent foreign investment cap is being removed for the purpose of FII investment, the IRDA Chairman N.Rangachary replied, “ All FIIs who are registered with SEBI, where there are no sub accounts related to the promoters, we do not treat them as foreign direct investment. That is the only concession we have given.”
This recorded statement clearly shows that the IRDA is treating FII investments as outside the FDI limit. But the finance ministry is singing a different tune altogether, perhaps under political pressure.The finance ministry is saying that under the IRDA Act no form of foreign investment can cross 26 per cent.
So is Chairman IRDA, N. Rangachary’s interpretation, as recorded by the Parliamentary Committee, wrong? Interest rate freeze

The Chief of India’s Central Bank, Mr Bimal Jalan, is a cautious man at the best of times. It almost certain therefore that he will not meet the industry’s expectation of a cut in the benchmark Bank Rate in the forthcoming credit policy announcement, though the finance minister had all but declared that interest rate would be reduced by the RBI.
Jalan will be deterred by two reasons. One global interest rates are showing signs of hardening as hinted by the Federal Reserve recently. Second, there is already excessive liquidity in the banking system, and the RBI had recently sought to mop up excess cash by offering higher short term repurchase rates.
Is this the first sign that RBI may be getting a bit worried about too much liquidity in the system in the face of sluggish offtake of bank credit by industry and, as a consequence, banks putting nearly 40 per cent of their incremental deposit in government securities!