India seems to have chosen to be in the second category. It is heading towards a debt trap, as the government plans overseas bond issue to help repay the country’s large short-term foreign debt and also to partially tide over the current crisis arising out of rising dollar, depreciating rupee, increasing imports, falling exports and depleting forex reserves. In just three weeks’ time alone since June 24, India's forex reserves shrank by as much as $10.5 billion forcing a sharp fall of Rupee against US dollar and other hard currencies. It opted for the path of reckless sale of the country’s strategic assets such as telecommunications and defence production businesses by surrendering control over them.

Yet, these measures are unlikely to stem the rot. They will not help control the Indian currency’s exchange rate volatility and its downward journey. The economic reform had denied RBI’s once pivotal role as foreign exchange controller. The post-reform, the foreign exchange policy is almost entirely government framed. The central bank merely stores and disburses foreign exchange as per government dictats, which are passed off as RBI guidelines. So depleted is RBI’s forex kitty in recent weeks that it decided to sell 120 billion in Rupee stocks in the market to raise only about two billion dollars. If RBI had the power to even selectively exercise an exchange control regime until the forex reserves substantially improved, it could have saved wastage of tens of billions of dollars to take easy care of foreign debt repayment liability and stabilised Rupee’s exchange rate.

All that RBI needed to do were to make the government fix a temporary import quota system for gold, primarily keeping in mind the requirement of jewellery exporters. RBI could have tightened restrictions on purchase of dollars by Indians on account of foreign travel and tours, including official, business, leisure and pleasure, full-paid graduate-level overseas education by generally the rich for their less merited children, investment in realty abroad by Indian businessmen and unproductive foreign investment by corporates, among many others. In just last two months, May and June, the gold import alone cost the country as much as $10 billion. Last year, rich Indians purchased real estates worth over three billion dollars in preferred locations such as the USA, UK and continental Europe and Singapore. They spent in 2013 over $150 million to send their children abroad mostly for full-paid graduate level education. RBI could have acted against such profligacy by a small section of Indians.

Such measures would have, no doubt, made the government immediately unpopular among the rich and the profligate, but they would have certainly protected the poor and the middle class from the highly harmful side-effects of the continuous loss of exchange value of rupee raising the prices of import-dependent daily necessities such as petro-products, fertilizer, pesticides, power, edible oil and paper. Simultaneously, complimentary policy initiatives by the government to use the FDI stick to boost export production and the tariff mechanism to improve and conserve the country’s forex resources could have done wonder.

Unfortunately, the country’s economic policy makers seem to be looking at the current situation differently, ignoring the depressing macro-economic indicators. The currency reserves have dipped to $280 billion. The short-term debt maturing within a year could come to nearly 60 per cent of India’s total foreign exchange reserves by the end of this fiscal. In March 2008, it was only 17 per cent. If anything, it exposes the actual increase in India’s repayment vulnerability since 2008. The country’s external commercial borrowings represented 31 per cent of its total external debt of $390 billion at the end of 2012-13. Short-term debt with one-year maturity constitutes 25 per cent of the total external debt. The total short-term debt of $172 billion due for repayment by March end, including corporate borrowings, amounts to 44 per cent of the country’s external debt.

To add to the forex woes, the first quarter (April-June) exports were down by 1.41 per cent to $72.45 billion. But, imports shot up by 5.99 per cent to $122.6 billion, against $115.7 billion in the corresponding period, last fiscal. Oil imports in June grew by 13.74 per cent to $12.76 billion from $11.22 billion in the same period last year. The first quarter trade deficit was estimated at $50.2 billion, against $42.2 billion in April-June 2012-13.

India's forex reserves depleted by $3.2 billion in the week to June 28 alone as the central bank suddenly sold dollar to defend Rupee, the worst-performing Asian currency. Within three weeks, RBI again went into buying two billion dollars from the market at much higher prices. The action made no sense except to currency speculators who made some quick money at RBI’s cost. As mentioned earlier, India’s short-term debt maturing at the end of this fiscal is $172 billion. The corresponding figure in March 2008, before the global financial meltdown, was only $54.7 billion. Excessive imports led to excessive short-term borrowings. The repayment within the coming March 31 deadline may make RBI’s forex kitty almost 60 per cent empty before the nation goes to Lok Sabha polls.

The hurried and reckless changes in FDI restrictions appear to have been prompted by the spectre of a possible foreign debt repayment default and rescheduling. The situation is somewhat reminiscent of 1991-92 when RBI’s forex reserves could barely cover the country’s import bill for a fortnight. The government and RBI need to do more than the FDI reform and domestic money supply control. Going by the past experience, the FDI reform may not lead to an immediate rush of foreign investment to India. But, a selective and judicious foreign exchange control regime would certainly help conserve billions of dollars before the end of the year itself. (IPA Service)