India’s record forex pile may not be adequate: RBI

The country’s foreign exchange reserves crossed $600 billion for the first time for the week ended June 4, 2021, and further rose to $608 billion as of June 11. Only three countries are ahead of India in terms of total reserves – China, Japan, and Switzerland, while Russia is just behind India. Since September 2013, when reserves fell to $274 billion, India’s foreign exchange reserves have more than doubled in the last 8 years. In terms of projected imports for 2021-22, the current level of reserves provides cover for around 15 months.

But are India’s reserves adequate?

This is a question posed by researchers at the Reserve Bank of India (RBI) in a recent article. The article, which was prepared by RBI staff including deputy governor M D Patra argues that the levels are often deceptive, and a better gauge of external vulnerability is an assessment of specific indicators.

The article named State of the Economy, which is published in the Reserve Bank of India’s monthly bulletin, observes that some of the countries have a higher level of import cover as compared to India – Switzerland’s (39 months), Japan (22 months), Russia (20 months) and China (16 months).

“India’s reserves co-exist with a net international investment position of (-) 12.9% of GDP. These factors warrant a pragmatic assessment of reserve adequacy on FX reserves, including exposure to valuation changes and market risk in a world of heightened global uncertainty,” the authors said.

The second wave

Analysing the state of the economy, the report pointed out that the second wave of the Covid-19 pandemic has taken a toll on domestic demand due to regional and specific containment rather than a nationwide lockdown. Also, the second wave, which impacted smaller cities and villages, hit rural demand.

The impact of the second wave, which was exacerbated in May, impacted public mobility but movement showed signs of bottoming out in the last week of May. Like mobility indicators, electricity generation readings too bottomed out, with supply recovering towards the last week of May.

The impact of the second wave on the demand conditions was also evident from the moderation of GST E-way bills for the second consecutive month in May 2021, reaching a one-year low.

“Sequentially, E-way bills plunged by 32%, and compared to May 2019, they contracted by 26.3%. This may indicate further moderation in GST collections going forward,” the report said.

“Going forward, notwithstanding the second wave, GST collections in 2021-22 (so far) have fared better than in 2020-21, infusing optimism that the revenue base for states will be protected with a growth rate of 7%, and it may result in some surplus to compensate for the shortfall in the previous year,” it said.

The gross GST revenue collected in May 2021 was Rs 1,02,709 crore, which is 65% higher than the GST revenues in the same month last year. The researchers estimate that the second wave has cost Rs 2 lakh crore of output loss for the country.

On the brighter side, the report said, several aspects of aggregate supply conditions such as agriculture and contactless services are holding up amidst pandemic protocols. “Industrial production and exports have surged on strong base effects, but there is also evidence of positive momentum,” the report said.

The report also pointed out that highway construction continued at a healthy pace despite the lockdowns during the second wave. Highway construction, which touched an all-time high of 13,298 km in 2020-21 (36.4 km/day) increased y-o-y, by 73.5% in April-May 2021 on a low base. Over 2019 (28.2 km/ day), the performance in 2021 (24.1 km/ day) remains creditable, it said.

The report said it is vaccination that will shape the recovery. The pace of vaccination is still slow due to unavailability – though there is some pick-up in June as compared to May. In case the country wants to achieve the target of vaccinating the eligible population by the end of 2021, the pace needs to be beefed up manyfold.

“The economy has the resilience and the fundamentals to bounce back from the pandemic and unshackle itself from pre-existing cyclical and structural hindrances that have caused its trajectory of output to deviate from potential into a negative output gap since 2019-20 Q4,” the report said.

Inflation

Commenting on the CPI inflation numbers of May, which was at six-months high of 6.3%, the report said a large positive price momentum (month-on-month change in prices in the current month) cutting across food, fuel, and core categories, along with an unfavourable base effect brought about the jump in headline inflation.

“The increase in domestic pump prices of petrol and diesel since early May 2021 continued unabated in June so far (June 1-14, 2021), scaling new historic highs…In June so far, domestic kerosene prices registered a sharp increase whereas LPG prices remained steady,” the report said.

Going ahead, the central bank said the inflation trajectory will be shaped by both upside and downside risks. Crude oil prices, logistic costs, cesses, and taxes pose upside risks to the inflation outlook. On the other hand, expectations of a normal south-west monsoon, recent supply-side interventions in the pulses market and further supply-side measures to cool pulses and edible oil prices, and easing of containment measures with declining infections are seen as forces that would mitigate cost pressures and inflation going forward. The monetary policy committee of the central bank has projected 5.1% inflation for the current financial year – which is at the upper side of its target range – 2-4%.

The writer is a Mumbai-based senior journalist)