ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Captive of Hot Money

Given the power of hot money to steer the Indian economy, public policy has become its slave.

The dramatic change in the overall balance of payments (BOP) from the first quarter (April-June) to the third quarter (October-December) of 2011-12, accompanied, as it was, by a deceleration of the growth of the real gross domestic product (GDP), suggests that policy tinkering is not yielding the desired effect. One might recall the rather amateurish meddling with policy mechanisms to revive the gush of net capital inflows – a hiking of the limits on foreign investment in government and corporate debt instruments, a freeing of interest rates on nonresident deposits, a more liberal definition of a “qualifi ed foreign investor”, and now, on the anvil, further development of the bond markets to attract foreign institutional buyers. The sundry financial pundits in the commercial media keep complaining of a “policy paralysis”. And, of course, what a media storm in a teacup over the mere mention of a proposed retroactive change in the Income Tax Act to upturn the Supreme Court verdict on the Vodafone case. The government is now being dubbed immoral and even vindictive. Besides, of course, the media columnists of the institutionally-funded think tanks are crying hoarse about what will happen to India’s net international capital flows. But rather than jumping into the fray like these doyens to criticise the government, it might be better to take a quick look at the recent BOP data and try to discern patterns, if any.

The current account deficit of the BOP has been widening from the first quarter ($15.801 billion) to the third quarter ($19.419 billion) of 2011-12 but with the surplus on the capital account falling from $22.253 billion to $7.988 billion, the overall balance (after taking account of errors and omissions) turned negative by $12.812 billion in the third quarter (October-December). The merchandise trade deficit has worsened quite signifi cantly – it was $47.721 billion in October-December of 2011-12 compared to $31.522 billion in the corresponding period of 2010-11. (All comparisons hereafter are between the two corresponding quarters of 2011-12 and 2010-11.) And, exports of software services have not been buoyant enough ($16.123 billion vs $14.743 billion), though private transfers have done much better ($18.009 billion vs $14.081 billion).

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