No amount of forex reserves is ever adequate

In April 2018, India's foreign exchange reserves had hit a life-time high of $425 billion. Things have changed since then. The forex reserves have been falling by about $2 billion a week for seven weeks and present balance is under $400 billion. But government maintain that there's no reason to panic. Falling reserves are a result of RBI's intervention to arrest the slide of the rupee, which has depreciated around 8% in this year (16% in the past 2 years). On Aug 17, 2018 USD/INR touched 70-mark and analysts predict it may touch even 80. Widening trade deficit, sluggish export growth could put further pressure on the country’s forex reserves. 

• Our CAD worsened from $15 billion in 2016-17 to $49 billion in 2017-18. Higher oil prices were only partly to blame. Exports struggled, while we guzzled smartphones and gold. Our FDI/FII flows flipped from an inflow of $21 billion in FY17 to an outflow of $19 billion in FY18.
• The Centre’s response to the rupee weakness was nonchalant. RBI was mum and FM tweets that India’s FE reserves are comfortable, going by global standards and sufficient to mitigate any undue volatility in the FE market.
• Although India's FE reserves are better than many emerging economies, we should remember that no amount of forex reserves is ever adequate and it might not be right to feel complacent about the country’s FE reserves.
• Given that the country’s widening trade deficit, sluggish export growth and growing imports — our FE reserves are likely to be under pressure in the coming quarters. It is therefore better to acknowledge the challenges and think about corrective actions, rather than be in denial.
• After the 2013 crisis, the RBI has been careful about building its forex reserves. Reserves had increased from $275 billion in Sep 2013 to the life-time high of $426 billion in April 2018. Apart from low oil prices & higher NRI remittances, strong inflows from FII's/FPI's and FDI's helped to a large extent in shoring up reserves.
• But this support is likely to be withdrawn in the coming quarters.
• FDIs had been robust in the first two years of NDA rule, growing at 25% and 23% in FY15 and FY16 as PM Modi reached out to overseas investors to fund the country’s growth. But the momentum has slowed down since then with the FDI inflows growing 8% in FY17 and at an even slower pace of 3% in FY18.
• FII's have withdrawn ₹15,771 crore from the equity market for far in FY19 while the outflows from debt segment has been ₹35,449 crore. (In FY18, there were inflows of ₹1,44,682 crore in equity and debt markets).
• In addition between April and June 2018, RBI sold off $14 billion to stave off depreciating rupee. It is therefore not surprising that the reserves are down 10% their peak level recorded in April 2018.
• The Federal Reserve began shrinking its balance sheet since Oct 2017. This is reducing liquidity in global markets, the rate hikes from the Fed are making the cost of financing expensive. It is therefore not surprising that global investors are reducing their investments in emerging markets including India.
• The IMF estimates that the Fed’s tightening can result in reducing flows into emerging markets by $35 billion a year. The world is moving from a period of easy money to one were liquidity becomes tighter and funds become more expensive.
• With Federal Reserve and Bank of England hiking interest rates, the cost of refinancing the loans will become difficult, leading to repayment of some of these loans, causing forex outgo.

There are no easy fixes to this problem. The measures taken to improve the ease of doing business and GST are likely to improve FDI flows in the long term. The government needs to renew the efforts to boost exports, reduce dependence on imports in order to ensure a sustained improvement in the country’s reserves.

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Rupee is expected to remain under pressure in the near future due to rising oil prices, global trade wars, tightening of global liquidity and a strong dollar. When USD/INR touched 70, Union Minister Arun Jaitley said that India’s foreign exchange reserves are comfortable by global standards and sufficient to mitigate any undue volatility in the foreign exchange market. He is only monitoring and reassuring but not indicating any corrective steps. By not improving our exports and reduce dependence on imports, during the past 4 years of low oil price regime, we have squandered away the opportunity to consolidate our economy. Now we can only look eastwards and pray God to help us.

Modi unveiling cash restrictions and police raj

Cash is one form of wealth like gold, house, land, bank deposits, stocks, bonds etc. It is citizen's right to hold his wealth in what ever form he wishes. In fact no sane person will hoard cash or in bank deposits with inflation corrected bank deposits yielding negative returns. Prudent person will either invest cash or rotate it to earn more returns. In the recent hearing of Jayalalitha's disproportionate assets case, the Supreme Court Bench observed that merely possessing assets disproportionate to known income does not amount to corruption unless the source of that income is illegal.

Our Indian banks has of late became precariously unsafe with NPA's increasing manifold leading to downgrading of ratings to a notch above junk status. No prudent person will keep his wealth in bank deposits. However India has many weak, old and vulnerable persons who hold their wealth in the form of bank deposits. RBI's deposit guarantee is limited to just Rs. One lakh per person. In the absence of returns & safety, government coercing its citizens to maintain their wealth in bank deposits with negative yields is nothing but cruelty.

Cashless transactions is another fraud. In a country with 40% illiteracy and 80% internet banking illiteracy compelling electronic payments without reliable infrastructure, robust privacy laws, unbearable transaction charges and high level of frauds is nothing but enabling corporate's flourish at the expense of poor & needy and in violation of fundamental rights.

No one in the world pays taxes willingly and smilingly. Tax evasion in India is primarily due to unreasonable high tax regime, uncourteous and blatantly corrupt tax administration with umpteen loopholes deliberately meant for corrupt activities. Make taxes reasonable and taxmen citizen friendly, infrastructure reliable,  robust privacy laws protecting citizen rights, and cashless transactions affordable and people will use them as they see benefits. Without these in place, pressurizing citizens compromising their freedom & rights will prove counter productive.

Most of the cash wealth is getting rotated in informal economy which contributed 45% of GDP and employs 90% of people who are mostly less educated, less skilled and under qualified who are otherwise not employable in formal sector. Migrating them into tax compliant formal sector is slow process and government must promote the same with incentives and creating awareness rather than sudden changes of laws and unleashing taxmen & policemen with long sticks.

Almost all black money hoarders are from cities & towns and none from rural areas. Enacting laws which make all these men criminals and taxmen chasing them doesn't produce any positive results except for publicizing the government's efforts to fight corruption which any way doesn't yield desired results.

The recent demonetization has diverted large portion of working capital of informal economy into banking channels. Deprivation of working capital has crippled informal economy, which hitherto was booming since a decade, with millions losing livelihood and returning to their villages, and those who survived are making earnings at half level. No announcement was made by government to provide them with working capital infusing arrangements. Informal economy and formal economy are so much interdependent on each other, formal economy is likely get affected with a time lag of two quarters. The devastating effects and unintended consequences will surface incessantly for next two years and nothing can be done except dazing at them.

Modi's restrictions on cash at Rs. 3 lakh level will do no good to economy except it seems to increase tax compliance. Govt might get higher income tax collections but overall reduced economic activity will result in indirect taxes crumbling, offsetting gains and overall tax collections looking southward. On other hand increasing government will have disastrous effects like citizen harassment, legal entanglements, increase in corruption, ease of doing business looking southward, FDI's reduction and ratings remaining at junk level will do no good to any one. Authoritarian type of decisions will yield quick results in dictator ruled small countries but while doing no good, will run into legal tangles in large democracy like India.

Modi has ignited 'spiraling down' of economy with his senseless, authoritarian, illegal actions destroying institutions like RBI, without even pretense of process of law and now he has no 'magic wand' to control it or stop it and normalization is two years away and in the mean time common man is the casualty.

All dirty politics!!


My View:
Modi badly managed Indian economy during past 30 months, despite favorable crude oil prices and retaining 85% in the form of increased duties, and growth of over 7.5% highest in the world, inflation fairly in limits of below 8% mainly due to his industrialist friends defaulting on bank loans with NPA's rising alarmingly manifold and crippling banks with no funds even for their normal operations and not taking any solid action against willful defaulters despite warnings. Even in 4th budget revenue deficit is at unacceptably more than 3% of GDP. He is under pressure from World Bank and rating agencies to set house in order and unleashed quack advised senseless demonetization for quick benefits of Rs. 4-5 lakh crores as disclosed in affidavit filed in Supreme Court. With deposits exceeding 97.5% of cash in circulation his scheme failed miserably and is dramatizing with cashless transactions and as lone crusader against corruption, which requires focused efforts continuously for few decades.  In a hurry to make quick financial and political gains Modi is resorting to half baked actions with loop holes which will end up in fiascoes and citizen harassment. He is not bothered about long term national gains but focusing on the immediate political mileage needed to win UP, Punjab elections in the aftermath of demonetization pain inflicted on rural masses and urban poor. Attempting to manage country's finances in this botched fashion will only end up horribly both for people and for himself, with no gains whatsoever.