India’s soaring FOREX Reserves and visible Trade Surplus do not indicate ‘good days’ for the Economy

First time after 18 long years, India is noticing a slight trade surplus and an increase in the export-import ratio as the number of Indian exports surpassed the number of imports in the month of June, 2020 by an increase of approximately 0.80 billion USD as trade surplus and a decline of USD 15.3 billion as trade deficit. This news might sound very encouraging for the economy as usually the increased exports aid the currency valuation and signify the strength of the supply chain, but in this case the increased exports are actually much lower than that of June, 2019 and is more because of the steep decrease in imports which brings us to a more serious problem of demand deficit hounding our economy.

The major problem that the Indian economy faces at this very moment of an acute shortage of domestic demand generated by a severe reduction in the purchasing power of the people as a simple result of lower effective income. The demand deficit has been widening since the 2008 depression and was given a boost by the mismanaged demonetization exercise and the ill-implemented GST reforms. The decrease in the purchasing power has been a reason for the plight of MSMEs in India receiving negligible support from neither of the states nor from the union, resulting in an overall decrease in employment, lower wages and poor urban living standards. All these aspects are an integral part of the process of the downfall of the Indian GDP prior to the COVID pandemic to the nehruvian Hindu Rate of Growth at around 3% per annum, but the present situation of a widespread, uncontrollable pandemic is further decreasing the demand and deteriorating the purchasing power evidently leading towards an economic crash if proper and timely measure are not taken, unlike the farce 20 lakh crore rupee relief package which actually was only around 56,000 crore in the form of relief handouts.

The looming rate at which the imports are falling even below the exports which are negligible in number compared to last year and are struck by an upset supply chain clearly shows how the increasing surplus is actually the powering of the rate and in practical terms poses a serious threat to the economy, as industries are clamping down, businesses are closing up and employment is bleak with appallingly low rate of wages, there happens to be no one to purchase those imports hence, the increase in the trade surplus. The other thing that we must discuss is the nature of Indian imports, which is particularly not in the consumer field neither in electronics nor in agro industries. Then what is that India mostly imports? The data is rather surprising as Indian imports comprise of nearly 36 percent of industrial raw material and 21.3 percent capital, which brings us to the question of whether this trade surplus about which the Union Commerce and Industry Minister was celebrating is all about the imploding of industries and collapse of our MSMEs as a fall in material and capital imports without a radical policy change indicates towards.

The other news that we received this month was the steep rise in the foreign exchange reserves of India to an all time high of 516.362 Billion USD as on July 10, showing an increase of USD 3.1 Billion in just a month which is definitely good for our country as an increase in forex reserves will help the country to absorb any form of external or internal economic shock or atleast save us a ’91 like embarrassment. Foreign exchange reserves of a country are very important for strategic purchases or for emergency expenditure hence, a huge amount of foreign exchange reserves are highly beneficial for India but is it a win-win situation?

Foreign Exchange reserves comprise of Gold reserves, special drawing Rights from the IMF and Foreign Currency assets of which in India of the 516 billion reserve an appalling number of 475.635 billion USD is stored as foreign currency assets, 34 billion USD as Gold and a mere 1.453 billion USD as special drawing rights. Most of the increase that we have noticed so far is mostly from the foreign currency assets mostly due to an increased FDI or Foreign Direct Investment during the pandemic in forms of investment or takeovers of Indian firms in want of capital. According to a data by the Bank of America, most emerging economies spend an astonishing $240 billion of their foreign currency assets to support their domestic currencies. Whereas, the constantly deteriorating state of the rupee as one of the weakest Asian major currencies comparing at an all time high of 76 rupee per USD and one of the prime reasons for the same is the purchasing spree of the RBI primarily under the incumbent governor where massive amounts of US dollars have been purchased to soar-up the FCA at the cost of the Indian rupee and no efforts have been made to reduce the strain on our currency through the use of the FCA as seen in the case of several other economies in the past few quarters.

Finally, we can conclude that soaring Forex reserves of India may aid the Indian economy in case of a flux and is definitely a good sign as it may help us cope with a crash sooner or later but what makes the issue a little more worrisome is the fact that the Indian rupee is paying the price for the cushion which the government wants to protect the country from a crash landing which they are unable to / not capable of handling as they were the ones who made us jump.

Written by: Prateek Manjul

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