http://in.rediff.com/money/2005/jan/24guest.htm Large reserves, poor country
January 24, 2005 While writing about the level of foreign exchange reserves some time back, I had expressed an apprehension that it may give our political masters the delusions of being rich. One manifestation of this was the previous government's petty gestures like prepaying some concessional aid from the smaller countries, and refusing foreign help at the time of the Gujarat earthquake. Even the present government initially seemed to take a similar stand to the tsunami devastation in Andaman and Nicobar, and east coast. But the prime minister quickly changed that and acknowledged that "our response was not shaped by false pride or by chauvinism". However, it did look like that to many. In fact, the incident reminded me of an experience I had about 30 years ago. I was working with the State Bank of India and one of my colleagues had been selected to go abroad for a training programme. He was told this just a couple of weeks before the programme was to commence. Though he did not even have a passport, he was keen on not missing out on the opportunity. He also knew that in the normal course it would be impossible for him to get a passport and visa in two weeks. He requested me to talk to one of our exporter clients and seek his help in getting the passport. Businessmen then, as now, knew ways of expediting things. The passport was delivered in a week's time. I called the colleague to my room so that he could thank the businessman for his help. He did so, and offered to reimburse any taxi or conveyance expenses that may have been incurred. While thankful for the help, he did not like to have anybody's "obligations". I wonder sometimes whether some of our actions in refusing a helping hand do not fall in the same category. Surely, prickliness and haughty refusal of help that is genuinely offered are not signs of a nation mature, confident of its place in the world, and of its strength. While we may not ask for help, surely there should be no loss of pride in accepting what is offered? After all, the resources that would get diverted to the tsunami victims will surely come from some other equally worthy, if less headlined, need -- the provision of schools, drinking water and roads in villages, for instance. In this connection, much has been made of the $4 billion worth of aid committed by the world community to help the tsunami victims. Past experience suggests that many such pledges do not get converted to disbursements, and that much of the money is merely diverted from other aid programs. To quote just one instance, the entire US pledge of $35 million-increased-to-$350 million is coming from the existing Agency for International Development budget. While on the subject of national pride, and in the context of the recent Pravasi Bharatiya conference in Mumbai, I noticed an interesting difference. When I used to work in the UK in the 1970s, British residents/ citizens of Indian origin preferred to call themselves Asians rather than Indians -- which is associated with poverty and the Hindu rate of growth. Lately, however, this seems to have changed with the Hindus and the Sikhs preferring the label Indian to Asian (even the BBC recently broadcast a programme "Don't Call Me Asian"). One reason could of course be an attempt to have a separate identity from the Muslims, post-9/11; but another reason is the identification with the second-fastest growing economy in the world. Coming back to the reserves, it would do well to remember that we remain one of the poorest countries in the world in per capita income, and that there are vast investment needs for which adequate rupee resources are not available. Yes, a poor country can have large reserves but it would be foolish to consider the latter to be synonymous with national wealth. The availability of reserves merely removes one historical (but of our own making) constraint on growth, namely foreign exchange for imports. Having said this, after reading a lot of media commentary on the governor's statements and the finance minister on foreign institutional investor inflows, I personally felt that the differences were overblown, that it was more a media-created storm in a tea-cup. All that the governor said was that, "A view needs to be taken on capping FII flows into the markets. Price-based measures such as taxes could be examined though their effectiveness is arguable." The finance minister also said that, "options would be kept open". If markets overreact, as they often have a tendency to do, is it right to blame the statement or its maker? Markets rarely respond consistently or proportionately to "news" (except in academic literature) and cause-and-effect relationships in market movements are often extremely tenuous. But that apart, one suggestion for the authorities: permit -- indeed encourage -- the corporate sector to float dollar denominated, rupee settlement bonds in the local market in lieu of external commercial borrowings. In the current interest rate environment, the full cost (inclusive of withholding tax) of fixed rate dollar and rupee bonds may not be too different. Corporations would get dollar interest rate loans as they want, converting fixed rate to floating rates through an interest rate swap if so desired, and residents dollar denominated assets without the hassle of going to external markets, reducing both capital flows and money supply. Any takers? -- Cheers, Gabe. Wimbledon - London England.
