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that put public resources into private hands – allocations of radio spectrum, for example, and of credit from state banks – have come under suspicion. Of the 10 biggest family fi rms by sales, seven have faced controversies. The brash new tycoons who came of age during the boom years of 2003-10 are under a cloud, too” (The Economist, 15 March 2015).

2 For an economic historian, the unfolding of the cycle would seem all too familiar. Writing nearly a century ago, Taussig said in 1928: “The loans from creditor countries … begin with a modest amount, then increase and proceed crescendo. They are like to be made in excep-tionally large amounts towards the culminat-ing stage of a period of activity and speculative upswing, and during that stage become large from month to month so long as the upswing continues. With the advent of crisis, are at once drawn down sharply, even cease entirely” (Taussig 1928) [as quoted in Dornbusch 1993].

3 This is true not just of India, but of many EMEs including China, Brazil and many Latin American economies. See Shin and Zhao (2013) and Powell (2014).

4 “[t]he major problems facing the banking sys-tem, i e, the prospect of sustained low loan growth for several years, as well as the still pend-ing recognition of bad loans, are likely to persist for several years. CS … team has been highlight-ing that there is Rs 8.6 tn of loans with the top 200 companies with interest cover less than one.

Only about 23% or Rs 2 tn has become NPA yet” (Credit Suisse: “India Market Strategy”, 19 March 2014). While we have no means of verifying these claims, they so suggest the gravity of the problem as perceived by an investment advisor – a view consistent with the analysis reported above.

5 “Industry has been ruined by FTAs” says Baba Kalyani, Chairman of Bharat Forge, and Kalyani group of companies with a turnover of $2.5 billion, specialising in automotive forging, supplying to major OE manufacturers worldwide said recently in an interview, “Industry has been ruined by FTAs… because of the FTA, due to which com-panies come and set up plants here, they don’t manufacture anything, they just assemble” (The Hindu Business Line, 10 February 2014).

References

Bluedorn, John, Rupa Duttagupta, Jaime Guajardo, and Petia Topalova (2013): Capital Flows Are Fickle: Anytime, Anywhere, IMF wp 13/183.

Chaudhuri, Sudip (2013): “Manufacturing Trade Defi cit and Industrial Policy in India”, Economic & Political Weekly, Vol 48, No 8, 23 February.

Dhar, Biswajit, Reji Joseph and T C James (2012): “India’s Bilateral Investment Agreements: Time to Review”, Economic & Political Weekly, Vol 47, N0 52, 29 December.

Domer, Evsey (1957): “The ‘Burden of Debt’ and National Income”, Essays in the Theory of Economic Growth (New York: Oxford University Press).

Dornbusch, Rudigar (1993): “Policies to Move from Stabilisation to Growth” in Stabilisation, Debt and Reform (New York: Harverter Wheatsheaf).

Mani, Sunil (2011): “National Manufacturing Policy: Making India a Powerhouse?”, Economic & Political Weekly, Vol 46, No 53, 31 December.

Nagaraj (2013): “India’s Dream Run, 2003-08: Under-standing the Boom and Its Aftermath”, Economic & Political Weekly, Vol 48, No 20, 18 May.

Powell, Andrew (2014): Global Recovery and Mone-tary Normalisation: Escaping a Chronicle Fore-told?, Latin-American and Caribbean Macro-economic Report, Inter-American Development Bank, March.

Ramkumar, R and Pallavi Chavan (2007): “Revival of Agriculture Credit in 2000: An Explanation”, Economic & Political Weekly, Vol 43, No 52, 29 December.

Shin, Hyun Song (2013): “The Second Phase of Global Liquidity and Its Impact on Emerging Economies”, Keynote address at the Federal Reserve Bank of San Francisco Asia Economic Policy Conference, 3-5 November.

Shin, Hyun Song and Laura Yi Zhao (2013): Firms as Surrogate Intermediaries: Evidence from Emerging Economies, Asian Development Bank, December.

Stiglitz, Joseph (2014): “Tapping the Brakes: Are Less Active Markets Safer and Better for the Economy?” paper presented at the conference on Tuning Financial Regulation for Stability and Effi ciency, Atlanta, Georgia, 15 April.

India’s Current Account Defi citCauses and Cures

Biswajit Dhar, K S Chalapati Rao

India’s current account defi cit has widened in recent years primarily because of the steep increase in the defi cit on the merchandise trade account. While imports have grown with the surge in gold imports, export performance has been indifferent despite the fact that India has formalised several free trade agreements. Policymakers will have to move away from a reliance on ad hoc solutions and fi nd ways to address the infi rmities in the domestic economy.

Over the past few years, India’s external sector has been tether-ing on the brink of a crisis

caused by a sharp deterioration in the current account defi cit (CAD). In 2007-08, the CAD was just above 1% of the gross domestic product (GDP), but within the next fi ve years, CAD had got to cross 5%, twice the level that the Reserve Bank of India (RBI) con-siders as the safe threshold.1 India’s defi cit on the current account was alarming not because of its high ratio to GDP; the rapidity with which the defi cit had reached the unsustainable level was a major cause of concern.

The reason for the widening of the CAD lay in the rapid deteriora-tion of the defi cit on the merchan-dise trade account, particularly since the onset of the global eco-nomic downturn. Data obtained from the DGCI&S (Directorate General of Commercial Intelligence

and Statistics)2 show that the merchan-dise trade defi cit increased from around $46 billion in 2005-06 to $190 billion in 2012-13 (Table 1). However, in 2013-14, the trade defi cit fell by nearly 28% to under $138 billion. A fall in imports and a slight increase in exports (as against a negative growth in 2012-13) caused this turnaround. As a result, 2013-14 is likely to see the CAD-GDP ratio drop below 4%.

The broad trend of a deteriorating CAD situation had resulted not from i solated developments, but was the sum total of a series of structural infi r-mities of the Indian economy that had developed over the past several years. This article will try to identify these infi rmities and would make a modest

Biswajit Dhar (bisjit@gmail.com) is at the Research and Information System for Developing Countries, New Delhi, and Chalapati Rao (chalapatirao@yahoo.com) is at the Institute for Studies in Industrial Development.

Table 1: Growth in Exports, Imports and Merchandise Trade BalanceYears Exports Growth Imports Growth Merchandise Growth ($ billion) (%) ($ billion) (%) Trade (%) Balance ($ billion)

2005-06 103.1 … 149.2 … -46.1 …

2006-07 126.4 22.6 185.7 24.5 -59.3 28.7

2007-08 163.1 29.0 251.7 35.5 -88.5 49.2

2008-09 185.3 13.6 303.7 20.7 -118.4 33.8

2009-10 178.8 -3.5 288.4 -5.0 -109.6 -7.4

2010-11 251.1 40.5 369.8 28.2 -118.6 8.2

2011-12 304.6 21.3 489.2 32.3 -184.6 55.6

2012-13 300.4 -1.4 490.7 0.3 -190.3 3.1

2013-14 312.6 4.1 450.1 -8.3 -137.5 -27.7Source: DGCI&S.

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attempt to shed some light on the way forward.

Explaining the Trade Defi cit

The merchandise trade defi cit reached a record high of more than 11% of the GDP in 2012-13, increasing from 6% in 2005-06. The reason for this was twofold. First, India was unable to provide suffi cient momentum to its export growth: the a verage growth of exports since 2005-06 has been 16%, well below the 24% mark that was recorded between 2002-03 and 2005-06. The moderation in export growth resulted from two years of negative growth and two others that saw relatively slow expansion.

The second trigger for the increase in the CAD was the rising level of imports. Two factors were responsible for the in-crease in imports. The fi rst stemmed from the broad-based tariff reduction exercise undertaken by India, both unilaterally and through a number of comprehensive economic partnership agreements (CEPAs) that have been signed since the mid-2000s. Not unexpectedly, average import growth during the period 2005-06 to 2012-13 was nearly 19%, which pushed up India’s import to GDP ratio to nearly 28%. Im-portantly, countries like Indonesia, which have seen very high levels of import in-tensity in the past, have brought down their i mport dependence substantially, while Brazil has not allowed the imports-GDP ratio to go far beyond the 10% level.

The Import Surge

The growth in imports was fuelled by two commodity groups, gold, and crude petroleum and products. The increase in gold imports was very steep. In 2005-06, gold imports were less than $11 billion, but within the next six years, its imports had increased to nearly $57 billion, or nearly 12% of the import bill. Gold had replaced the “machinery” group, whose share of imports fell from a high of 18% in 2007-08 to 10.6% in 2012-13, coinciding with the deceleration of the manufacturing sector. However, in the previous fi scal, following a series of measures taken by the government, imports of gold plunged. The share of gold in the country’s im-ports had declined to just over 6%, the lowest in nearly a decade (Table 2).

With gold imports reaching very high levels, the then fi nance minister, Pranab Mukherjee, took the fi rst steps towards controlling imports. In the 2012-13 budget, he doubled the customs duty on gold to 4%.3 This move closely followed the introduction of ad valorem duty of 2% on gold from the earlier specifi c duty.

Import data for 2012-13 suggest that the measures taken to curb gold imports were successful: the value of gold imported into India declined to less than $54 bil-lion in 2012-13. However, the World Gold Council (WGC) reports that although gold imports had suffered in the fi rst half of the calendar year 2012, India’s demand for the yellow metal became extremely buoyant in the second half. According to the WGC, gold demand from India was further stimulated during December by expectations that the government would again increase the customs duty on gold. This contributed to stock-building by both bullion dealers and jewellers, as well as the consumers who had planned to buy gold in the near future but had brought forward their purchases to avoid paying higher duties in 2013.4

As the market had expected, the gov-ernment clamped down on gold imports in the following fi nancial year by adopt-ing two sets of measures. The fi rst was an increase in the import duty on gold from 8% to 10%. The second was a rul-ing that only 10 designated banks and other agencies and entities could import gold. These designated institutions had to meet the 80:20 rule, which was that at least one-fi fth of every lot of gold im-ports had to be made available for ex-ports and the balance for domestic use.

The impact of these measures on gold imports as recorded in the offi cial statistics

was dramatic. During 2013-14, the value of gold imports was $29 billion, a more than 46% decline as compared to the immediately preceding fi scal. There are, however, serious doubts about the effec-tiveness of the gold import restrictions imposed by the government. A r ecent re-port by the WGC has observed that the underlying level of demand among Indian consumers had remained robust during 2013. This report concludes, “the sharp decline in the offi cial import of gold into India led to an increasing amount of this demand being met by gold imported through unoffi cial channels” (read smuggling). The report has given cre-dence to the generally accepted view that the gold import restrictions hardly prevent outgo of foreign exchange from the country, for they bring the hawala traders into play. Clearly, measures for restricting gold imports that are cur-rently in place are not helping the coun-try tide over its external payments prob-lems. The government therefore needs to think in terms of a more comprehen-sive policy that looks at ways of reducing the demand for gold on the one hand, and provides effective mechanisms to check smuggling of gold.

Indifferent Export Performance

India’s exports have suffered because of a combination of the inability of the ex-porters to take advantage of the opening up of markets following the formalisation of several free trade agreements (FTAs) during the past decade and the slack in the global markets in the aftermath of the economic downturn.

Much was expected on the export front after the government adopted the “Strategy for Doubling Exports in Next

Table 2: Import of Principal Commodities (% of total imports)Product Groups 2005-06 2007-08 2009-10 2011-12 2012-13 2013-14

Petroleum crude and products 29.5 31.7 30.2 31.7 33.4 36.7

Gold 7.3 6.6 10.0 11.5 11.0 6.4

Machinery 14.4 18.0 12.6 10.5 10.6 10.0

Electronic goods 8.9 8.2 7.3 6.7 6.4 6.9

Pearls, precious and semi-precious stones 6.1 3.2 5.7 5.8 4.6 5.3

Organic and inorganic chemicals 4.7 3.9 4.1 3.9 3.9 3.5

Coal, coke and briquettes 2.6 2.6 3.1 3.6 3.5 3.7

Metalliferous ores and products 2.6 3.1 2.7 2.7 3.1 3.0

Edible oil 1.4 1.0 2.0 2.0 1.9 2.1

Iron and steel 3.1 3.5 2.9 2.4 2.2 1.6

Fertilisers 1.4 2.2 2.4 2.3 1.9 1.4Machinery includes: machine tools, electrical and non-electrical machinery and transport equipment.Source: DGCI&S.

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Three Years 2011-12 to 2013-14”, aimed at increasing exports to $500 billion by 2013-14. This was to be realised through strong performances by select manufac-turing sectors, combined with effective

marketing and technology strategies. These expectations remained unful-fi lled, as the industrial sector was una-ble to enhance its presence in the global markets. The share of manufactured goods in India’s export basket declined from 54% in 2005-06 to 48% in 2013-14 (Table 3). There was thus, a large gap between the policy pronouncements and the reality insofar as manufactur-ing exports are concerned.

The problem is not merely a decline in the overall share of manufacturing in

the export basket: the declining techno-logy content of manufactures exported by India should be an even greater cause of concern. The share of hi-tech5 products in India’s manufacturing ex-

ports fell from 28% in 2005-06 to 21% in 2012. At the same time, medium tech exports had barely moved. Exports of high and me-dium tech manufactures taken together have thus fallen from nearly 60% in 2006 to less than 55% in 2012 (Table 4). As com-pared to India, Brazil and China have performed signi fi cantly bet-ter: their exports of high and medium exports have been 68%

and 76%, respectively.

Economic Partnership Agreements

India’s deepening economic relations with a large number of its trading part-ners do not seem to have benefi ted the export sector. Over the past decade, I ndia has sought to enhance economic integration with a number of countries through FTAs and CEPAs. However, ques-tions arise as to whether India was pre-pared either to take advantage of the o pportunities offered or to meet the challenges posed by these agreements.

A preliminary assessment of the FTAs/CEPAs indicates that India has not been able to suffi ciently leverage these agreements to in-crease its presence in the mar-kets of its partners. In most cases, the India’s merchandise exports to its FTA/CEPA partners have grown much slowly than imports since the middle of the previous decade, which roughly c oincides with the period when the g overnment took the decisions to enter into the agreements, were taken. In overall terms, while the average annual growth of exports to FTA/CEPA partners was below 13%, the imports grew at more than twice this rate, at 26.6% (Table 5).

India’s inability to penetrate into the markets of its partners implies that it continues to remain a marginal player in most of these markets (Table 6). In all countries,

with the exception of Singapore, India’s share in the partner country’s imports had shown either little improvement or had declined. In three of these cases, India’s share is yet to reach 1% of the trade partner’s total imports.

Thus, while India was unable to fi nd market access in the markets of its part-ner countries, its imports from its part-ner countries had remained relatively high. This phenomenon can be better understood through the ratio of trade balance and exports (Table 7). This ratio was almost four times in case of Australia and in case of Korea, the corresponding fi gure was more than two times. The terms of India’s engagement with its trading partners has worsened over the past few years.

State of the ‘Invisibles’ Account

Before the onset of the economic down-turn, increases in trade defi cit were moderated by the favourable balance on the “invisibles” account, in which the surplus on services trade account and private transfers (essentially workers’ remittances) were major contributors (Table 8, p 44). However, both these components were affected by the adverse market conditions in the large economies.

Table 3: India’s Exports of Principal Commodities(% of total exports)Product Groups 2005-06 2007-08 2009-10 2012-13 2013-14

Manufactured goods 53.8 50.0 47.6 46.0 47.8

Of which: Leather products 2.6 2.2 1.9 1.6 1.8

Chemicals and related products 15.2 13.7 13.7 13.8 14.0

Engineering goods 18.7 20.7 18.2 18.9 19.7

Electronic goods 2.2 2.2 3.2 2.8 2.5

Textiles and clothing 15.1 11.3 10.7 8.8 9.7

Petroleum products 11.3 17.4 15.8 20.3 20.1

Gems and jewellery 15.1 12.1 16.3 14.4 13.2Source: DGCI&S.

Table 4: Technology Content of Exports of Manufacturing (% of exports of manufactured products) Years India Brazil China High Medium High Medium High Medium Tech Tech Tech Tech Tech Tech

2005 24.8 27.6 27.7 39.8 47.5 27.3

2006 28.5 31.3 28.4 39.1 49.6 27.2

2007 25.6 32.4 20.0 44.6 48.9 27.9

2008 24.6 36.8 24.6 43.4 47.3 28.8

2009 26.2 32.2 24.8 42.0 46.7 29.2

2010 22.1 30.4 24.6 42.3 46.0 30.5

2011 21.0 31.4 22.7 45.7 43.7 32.1

2012 21.3 33.4 23.0 44.7 46.7 29.7Source: WITS database.

Table 5: India’s Trade Expansion with FTA/CEPA Partners (%)FTA/CEPA Partners Average Annual Growth between 2005 and 2012 Exports by India Imports into India

ASEAN 30.6 43.1

Australia 31.2 23.4

Canada 14.7 23.2

EU 16.4 18.2

Malaysia 33.1 47.3

New Zealand 16.5 38.6

Singapore 21.4 21.0

Japan 23.0 33.7

Korea 24.0 30.0

FTA partners 12.5 26.6Source: WITS database.

Table 6: India’s Share in the Imports of Its Trade Partners (%) Trade Partners 2005 2006 2007 2008 2009 2010 2011 2012

ASEAN 1.5 1.6 1.8 2.1 1.9 2.1 2.5 2.3

Australia 0.8 0.7 0.8 0.8 1.0 0.9 1.0 1.1

Canada 0.5 0.5 0.5 0.5 0.5 0.5 0.6 0.6

EU-27 0.6 0.7 0.7 0.8 0.8 0.9 1.0 0.9

Japan 0.6 0.7 0.7 0.7 0.7 0.8 0.8 0.8

Korea 0.8 1.2 1.3 1.5 1.3 1.3 1.5 1.3

Malaysia 1.0 1.0 1.4 2.0 1.8 1.5 1.8 1.9

New Zealand 0.6 0.6 0.6 0.7 0.9 0.9 0.8 0.9

Singapore 2.0 2.0 2.2 2.6 2.3 3.0 3.9 3.4

Thailand 1.1 1.3 1.4 1.5 1.3 1.2 1.3 1.3Source: WITS database.

Table 7: Trade Balance/Exports (%)Trade Partners 2004 2005 2009 2010 2011 2012

World -30.4 -40.4 -50.7 -58.8 -53.4 -68.9

ASEAN -13.2 -3.4 -33.9 -29.1 -16.9 -32.3

Australia -436.5 -492.8 -752.2 -630.6 -540.2 -391.0

Canada 3.9 1.5 -96.5 -65.1 -22.4 -27.2

EU -3.4 -5.4 -5.5 -2.0 -0.9 -11.6

Malaysia -112.9 -113.0 -41.6 -68.6 -139.7 -176.8

New Zealand -12.7 -45.7 -69.9 -245.1 -199.5 -150.5

Singapore 27.1 41.8 10.0 19.9 47.8 42.5

Japan -60.3 -49.8 -108.0 -72.0 -100.6 -92.7

Korea -246.8 -190.4 -118.2 -173.0 -171.7 -235.5

FTA partners -16.4 -16.8 -32.3 -30.5 -28.6 -40.2Source: WITS database.

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Between 2009-10 and 2012-13 (the latest year for which data are available), services exports could grow by only 9% as compared to an average growth of 15% a year between 2005-06 and 2012-13, largely because of a sharp decline in 2009-10. Although optimistic assess-ments about the recovery of major econ-omies during 2011-12 resulted in a sig-nifi cant higher growth in net services trade and net private transfers, the mo-mentum was not maintained in the fol-lowing year as both indicators showing growth of just 1%.

Table 8 shows that services exports, together with remittances, provide the lifelines for India’s current account, for their contributions have kept the CAD from assuming unmanageable proportions. In this context, it may be useful to refl ect on the export performance of the major service sectors.

Table 9 shows the shares of major service sectors in India’s exports of services since 2005-06. It is quite evi-dent that the composition of service ex-ports has remained almost static. Soft-ware exports, which include both IT services and information technology enabled service (ITES)-business process

outsourcing (BPO) services, have re-mained by far the most signifi cant com-ponent of services exports from India, although its share has declined from a high of nearly 52% in 2009-10 to just about 45% in 2012-13. Software exports have performed in differently as major markets have been rife with protection-ist sentiments since they have been be-set with economic u ncertainties.

A recent study6 conducted jointly by ASSOCHAM and KPMG has highlighted the challenges faced by the IT and the ITES-BPO services sector. The report states that India is currently losing about 70% of all incremental voice and call centre business to competitors like Phil-ippines and the eastern Europe. The re-port surmises that “unless the domestic BPO (business process outsourcing) in-dustry diversifi es the delivery footprint to take advantage of low-cost centres, our competitors will further consolidate their position”. There is therefore no gainsaying that the failure of the services sector to diversity its export basket could put further strain on the current account, given that the IT and ITES-BPO service providers are facing in-tense competition from rela-tively effi cient fi rms from both Asia and Europe.

One of the key factors infl u-encing the balance on the in-visibles account was the out-fl ows on account of investment income (Table 9). With India relying on capital fl ows, irrespective of their nature, to tide over the diffi culties created by large CAD, this development

acquires added signifi cance. This com-ponent comprising income on equity7 and on debt has increased rapidly since 2010-11. These outfl ows were just a little over $5 billion in 2005-06, but by 2012-13 they had increased more than four-fold to exceed $22 billion. A part of these consist of reinvested earnings which are balanced by an increase in the direct investment liabilities. A long-er term impact of the reinvested earn-ings is that these will result in much larger future payments without corre-sponding actual infl ows.

It is also a fact that while dividend payments as a part of the investment income have gone up substantially during the past few years, there are other items which a cquired importance both in rela-tive and absolute levels. Miscellaneous items constitute a major portion of the services payments. One such item is pay-ment on account of royalties and fran-chise arrangements (Table 10). Another

important but much less noticed item is the maintenance of offi ces abroad other than diplomatic establishments. Although the reasons for the sharp increase in outgo on this account will need detailed examination, it may be pointed out that this phenomenon roughly coincides with the growing out-ward FDI from India.

Each of the individual items needs to be examined closely. For instance, if the fast growing royalty payments are relat-ed to technology acquisition by Indian companies, it could still be treated as a welcome sign. However, if these are pay-ments by FDI invested companies to their foreign parents these could be a cause for concern. This would be more so if these

Table 8: Major Components of the Invisibles Account ($ billion)Years Services Investment Private Transfers Trade Balance Income (Net) (Net)

2005-06 23.2 -5.3 24.5

2006-07 29.5 -6.8 29.8

2007-08 38.9 -4.4 41.7

2008-09 53.9 -6.6 44.6

2009-10 36.0 -7.2 51.8

2010-11 44.1 -17.1 53.1

2011-12 64.1 -16.5 63.5

2012-13 64.9 -22.4 64.3Source: RBI.

Table 9: Shares of Major Services Sectors in Exports of Services (%)Years Travel Transportation Insurance Software Exports Business Financial Communication Services Services Services

2005-06 13.6 11.0 1.8 40.9 16.1 2.1 2.7

2006-07 12.4 10.8 1.6 42.4 19.7 4.2 3.1

2007-08 12.6 11.1 1.8 44.6 18.6 3.6 2.7

2008-09 10.3 10.7 1.3 43.7 17.6 4.2 2.2

2009-10 12.3 11.6 1.7 51.8 11.8 3.8 1.3

2010-11 12.7 11.4 1.6 42.6 19.3 5.2 1.3

2011-12 13.0 12.8 1.8 43.7 18.2 4.2 1.1

2012-13 12.4 11.9 1.5 45.2 19.5 3.4 1.2Business services include trade-related services (i e, commission on exports and imports); operational leasing services; merchanting services; legal services; accounting, auditing, book keeping and tax consulting services; business and management consultancy and public relations services; advertising, trade fair, market research and public opinion polling services; research & development services; architectural, engineering and other technical services; agricultural, mining and on-site processing services; inward remittances for maintenance of offices in India; and environmental services. For details see, RBI (2010), Balance of Payments Manual for India, paragraph 4.37, page 61 (accessed from: http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/IBPM221110P2.pdf).Source: RBI.

Table 10: Outflows on the Invisibles Account in India’s Balance of Payments ($ billion)Years Business Dividends Royalty Remittances for Business Services Payments Maintenance of Management Offices Abroad and Consultancy Services

2005-06 7.7 2.5 0.6 2.1 1.8

2006-07 15.9 3.5 1.0 4.0 3.5

2007-08 16.6 3.2 1.0 3.6 3.4

2008-09 15.3 3.2 1.7 3.4 3.6

2009-10 18.0 3.8 2.0 3.6 5.4

2010-11 27.7 4.7 2.4 6.1 9.1

2011-12 26.8 4.9 3.2 5.1 9.8

2012-13 30.3 3.4 4.2 5.2 8.1Source: Based on various releases by the RBI and articles published in RBI Bulletin.

AGENDA FOR THE ECONOMY

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are substitutes for dividend payments, both to deny the Indian partners their fair share in the earnings and/or to take advantage of the favourable tax treatment available to such payments.

The case of Samsung India Electronics is worth referring to in this context. The company even while maintaining that “Considering the rapidly changing indus-try scenario; need for further strengthen-ing the business, your Directors have... decided not to propose any dividend….” had given out Rs 7.2 billion as royalty payments during 2008-09 to 2012-13 against the company’s paid-up equity capital of Rs 2.2 billion (Table 11). This was in addition to the Rs 1.7 billion it had already paid as royalty during the preced-ing nine years. On the other hand, its imports ballooned from Rs 38.9 billion to Rs 174.3 billion bet ween 2008-09 and 2012-13 and exceeded Rs 500 billion for the entire period. A few other foreign companies like Maruti Suzuki, Hindustan Unilever, ABB, Colgate-Palmolive fi gure in the discussion on growing royalty pay-ments. It is relevant to note here that out of the 312 manufacturing companies which paid royalties during 2012-13 and are covered by the Prowess of CMIE, 746 foreign companies accounted for nearly 73% of the total $1.2 billion royalty pay-ments. The remaining was made by 236 other companies.

The Way Forward

With the CAD reaching levels that could make the Indian economy extremely vulnerable, the government would have to fi nd effective solutions expeditiously since the payments crisis is threatening to spiral into a debt overhang. Between 2005-06 and 2012-13, India’s external debt has more than trebled to reach $404.9 billion. Short-term debt contri-buted to this increase substantially as

its share went up from 14% to almost one-quarter of the total debt stock. Another disconcerting feature is that the ratio of reserves to external debt. After peaking in 2007-08 at 138.0%, it rapidly declined to 74.5% by the end of 2012-13.8 The burden of the growing debt is also getting refl ected in the ballooning of in-vestment income payments which are eating into the surpluses on account of services and remittances.

Thus far, the responses of the govern-ment to address the external payments problems have been, at best, ad hoc. This approach needs to be replaced by one which seeks to identify the source of the problem in order to fi nd a lasting solu-tion. Take for example the responses of the government to gold imports. As we had mentioned in an earlier discussion, the effectiveness of these measures taken has been illusory for they have merely shifted gold imports from offi cial chan-nels to illegal channels since they could not infl uence the rising demand for gold. It is a well-known fact that the demand for gold in the country has risen with the emergence of gold as an asset class. Un-certainties in the real estate and equity markets have made gold an attractive in-vestment. The real returns on gold have been high and have acted as the ideal hedge against infl ation. Reducing the de-mand for gold must, therefore, focus on ways to design new fi nancial instruments that can provide real returns. In addition, suggestions have been made to consider the introduction of new gold-backed fi nancial products to reduce the demand for physical gold. This includes a propos-al made by the WGC to monetise gold as a fi nancial asset.9

Equally important is to fi nd a lasting solution to the problem of sagging e xport growth, particularly that of man-ufactured products. Here again, the e fforts made by the policymakers have been myopic for they have not made any attempt to strengthen the country’s manufacturing base. The need to rejuve-nate the manufacturing sector was a rticulated in 2011 by then fi nance min-ister, Pranab Mukherjee. However, the National Manufacturing Policy, which was adopted for increasing the sectoral share of manufacturing in GDP to at least

25% by 2022 and to enhance global com-petitiveness, domestic value addition, technological depth and environmental sustainability of growth, besides in-creasing the rate of job creation, r emains on the drawing board.

Notes

1 RBI, Report of the Working Group to Study the Issues Related to Gold and Gold Loans NBFCs in India, February 2013, paragraph 322, page 49 (accessed from http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/RWGS02012013. pdf).

2 DGCI&S provides data on merchandise trade based on the reports available from the cus-toms. In other words, the physical exports and imports are captured by this organisation. On the other hand, the Reserve Bank of India pro-vides export-import data based on foreign ex-change infl ows and outfl ows resulting from trade transactions. Since the basis of data cap-ture is different as between the two organisa-tions, the data are not strictly comparable.

3 The increase in customs duty was effected on standard gold bars; gold coins of purity exceed-ing 99.5%. See Budget Speech, paragraph 205, page 34.

4 World Gold Council, “Gold Demand Trends: Full Year 2012”, February 2013, p 4, accessed from: http://www.gold.org/sites/default/fi les/gdt/GDT_Q4_2012.pdf

5 Defi ned in accordance with SITC Rev 3. For de-tails of the products identifi ed as “hi-tech” or “medium tech” see, UNIDO (2013), Industrial Development Report 2013, Annex 4, page 204.

6 ASSOCHAM (2014), “India’s Losing 70% Incre-mental Voice & Call Centre Business to Philip-pines: Study”, Press Release, 6 April (accessed from: http://www.assocham.org/prels/shownews. php?id=4455).

7 Includes reinvested earnings.8 Department of Economic Affairs, India’s Exter-

nal Debt as at end-December 2013, March 2014, accessed from http://fi nmin.nic.in/the_minis-try/dept_eco_affairs/economic_div/External_Debt_QDEC2013.pdf

9 “Monetizing 500 Tonnes of Gold Can Aid Cur-rent Account Defi cit: Trade Minister”, NDTV Profi t, 28 August 2013, accessed from: http://profi t.ndtv.com/news/economy/article-mone-tizing-500-tonnes-of-gold-can-aid-current-ac-count-defi cit-trade-minister-326364.

Table 11: Samsung India Electronics: Foreign Exchange Outgo (Rs billion)Year Dividends Royalty Payments Imports

2008-09 0 0.7 39.8

2009-10 0 1.0 67.6

2010-11 0 1.1 94.1

2011-12 0 1.5 125.0

2012-13 0 3.0 174.3

Total 0 7.2 500.8Source: Company documents downloaded from the Ministry of Company Affairs website.

EPW Index

An author-title index for EPW has been

prepared for the years from 1968 to 2012. The

PDFs of the Index have been uploaded, year-

wise, on the EPW website. Visitors can

download the Index for all the years from the

site. (The Index for a few years is yet to be

prepared and will be uploaded when ready.)

EPW would like to acknowledge the help of

the staff of the library of the Indira Gandhi

Institute for Development Research, Mumbai,

in preparing the index under a project

supported by the RD Tata Trust.