I am grateful to MINT Edit for saving me the effort to write on the United States adding India to the watch list for its accumulation of foreign exchange reserves and for India’s bilateral trade surplus with the United States. One finds the American report here.
The report is all of 46 pages long and it is easy to read the portions pertaining to India. The data on India’s national savings rate is most likely wrong. India’s savings rate has stagnated, at best, and declined at worst. The change in the base year to 2011-12 in India and failure to provide a historical time series for the new base year renders comparisons impossible. Same goes for the comparison of growth rates over time. The report acknowledges that India has a rising current account deficit (chart on page 14) but it says elsewhere that India has managed to raise its national savings rate, post-2008 crisis. Untrue.
As per official Indian data, Gross Savings/GPD ratio had dropped to 30.0% in 2016-17 from 34.6% in 2011-12. This is as per the 2011-12 basis. As per the old basis, 2004-05, the savings rate peaked at nearly 37% (36.8%, to be precise) in 2007-08. This is as per data from RBI Handbook of Statistics. In recent years, RBI has switched to report the savings rates as a percentage of Gross Domestic Income whereas the Government still provides the GDP ratio.
MINT Edit (ht Amol Agrawal of ‘Mostly Economics’) called the decision, ‘scandalous’. It is actually stupid. No one looks at bilateral trade balances to judge a currency’s under or overvaluation. India runs a overall trade deficit. In fact, the rate at which India’s trade and current account deficits are running this financial year, it is possible that the current account deficit reaches 3.0% of GDP in 2018-19!
Of course, the US knows that no one looks at bilateral trade balances. It is yet another arm-twisting exercise except that when it came to China a much stronger case for twisting their arms existed and both Presidents Bush and Obama ducked the opportunity.
The question for India is whether letting USDINR appreciate, in response to the American pressure, is a good thing since the price of crude oil is rising. Will it worsen India’s export performance that is already struggling, in any case? Or, will it suck in more imports? India is already on slippery ground with its external balances and this development does not help.
The Prime Minister should tell the MoF to take this up firmly with the US Treasury and get India off the watchlist. Pushing India to let Rupee appreciate for fear of ‘sanctions’ and seeing India facing a destabilising external balances situation is not in America’s interest. It goes against the geopolitical goals of the United States in the region. There is no co-ordination or consistency of logic in the American actions.