For a country like India, forex reserves have long been treated as precautionary savings that the government acquires as a “rainy day” fund to tide over any sudden decrease in capital inflows.
In other words, it acts as a buffer against shocks to external wealth.
On the other hand, countries like China, the UAE, Norway, Saudi Arabia, Russia, Singapore and many others prefer higher returns to liquidity.
The precautionary savings in such countries manifest in the form of Sovereign wealth fund (SWF), a state owned investment fund that is riskier than traditional forex reserves.
Over the last two decades, India has exhibited robust macroeconomic fundamentals and is one of the most attractive destinations of foreign investment. This has resulted in an unprecedented accumulation of forex reserves. It may be noted here that India’s forex reserves accumulated to a record high of over $600 billion a few weeks back.
This makes us the fifth largest holder of forex reserves after China, Japan, Russia and Switzerland, according to RBI.
Such a high accumulation of reserves has prompted the government to explore an in vestment strategy whereby the accumulated reserves can be better utilised. It is imperative to unleash the catalytic power of government in vestment to offset the shadow of the Covid-19 pandemic on India’s growth story.
The newly announced Pradhan Mantri Gati-shakti National Master Plan for infrastructure and other mega infrastructure projects necessitate a careful appraisal of our financial firepower.
That brings us to the fundamental question:
Does India have “too much” reserve buildup and hence “surplus” reserves for the government to explore an in vestment strategy?
To answer this question, we look at two popular measures of reserve adequacy of a country.
- The first measure of a country’s susceptibility to currency crisis is the ratio of reserves to short term external debt. Also known as Guidotti–Greenspan rule, the critical value of this ratio is one, with a value below one being undesirable.
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The Guidotti–Greenspan rule states that a country’s reserves should equal short-term external debt (one-year or less maturity), implying a ratio of reserves-to-short term debt of 1. The rationale is that countries should have enough reserves to resist a massive withdrawal of short term foreign capital
- The second indicator of reserve adequacy is the ratio of reserves to M3 or broad money. This ratio is especially relevant for countries like India that are a haven for ‘hot money’ investment by large foreign institutional investors and hence are subject to a major risk of capital flight. It is suggested that a critical value of this ratio in the range of 520 per cent is desirable.
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M3 (broad money) is commonly used to measure the money supply. Among other things, this includes currency with public and demand deposits of banks. So, withdrawal of Rs.100,000 in cash does not make any difference to the aggregate money supply.
An analysis of time-series data on Indian economy for past three decades suggests that India comfortably fulfills both these measures.
With the ratio of reserves to short-term external debt exceeding one in all the years since 1991-92 and the ratio of reserves to broad money above 20 per cent for all the years since 200203, there is ample evidence of “too much” of reserves buildup for the Indian economy.
However, the following precautions may be noted.
First, creation of SWFs tends to be common practice among major fuel and commodity exporting countries. SWF creator countries, which are not intensive fuel exporters, otherwise possess large current account surpluses (namely, China). India is neither an oil exporting country, nor has current account surplus.
Secondly, India’s growing fiscal deficit has the potential to create adverse trade imbalances, popularly known as ‘twin deficit’, thereby prompting the government to adopt a cautious approach.
In addition, RBI has advised a pragmatic assessment of reserve adequacy in view of existing level of forex reserves being projected to cover less than 15 months of imports (while countries higher than us in forex reserves position boasting anywhere between 16 and 39 months of import cover).
It has been held — rightly so — that accumulated reserves are not ‘owned’, they are liabilities. Essentially, forex reserves are built up from in vestment flows and have long been used as a cushion to avert crises that cause precipitate outflows of foreign exchange.
Nonetheless, just as a bank lends out money from its liabilities (read deposits) while keeping aside a part that is deemed sufficient to take care of exigencies, forex reserves may be suitably subject to this calculus.
While it is apparent that RBI is already diversifying its forex investments in a basket of currencies to earn higher returns, some part of our reserves can be committed for longer term investments.
As India turns 75, it is time to assess whether our forex reserves can help further our geo-economic and strategic priorities while not disregarding the above expressed concerns. A wider consultation on the subject is the need of the hour.
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- In the Small States category (overall), Nagaland tops, followed by Mizoram and Tripura. Towards the tail end of the overall Delta ranking is Uttarakhand (9th), Arunachal Pradesh (10th) and Meghalaya (11th). Nagaland despite being a poor performer in the PAI 2021 Index has come out to be the top performer in Delta, similarly, Mizoram’s performance in Delta is also reflected in it’s ranking in the PAI 2021 Index
- In terms of Equity, in the Large States category, Chhattisgarh has the best Delta rate on Equity indicators, this is also reflected in the performance of Chhattisgarh in the Equity Pillar where it ranks 4th. Following Chhattisgarh is Odisha ranking 2nd in Delta-Equity ranking, but ranks 17th in the Equity Pillar of PAI 2021. Telangana ranks 3rd in Delta-Equity ranking even though it is not a top performer in this Pillar in the overall PAI 2021 Index. Jharkhand (16th), Uttar Pradesh (17th) and Assam (18th) rank at the bottom with Uttar Pradesh’s performance in line with the PAI 2021 Index
- Odisha and Nagaland have shown the best year-on-year improvement under 12 Key Development indicators.
- In the 60:40 division States, the top three performers are Kerala, Goa and Tamil Nadu and, the bottom three performers are Uttar Pradesh, Jharkhand and Bihar.
- In the 90:10 division States, the top three performers were Himachal Pradesh, Sikkim and Mizoram; and, the bottom three performers are Manipur, Assam and Meghalaya.
- Among the 60:40 division States, Orissa, Chhattisgarh and Madhya Pradesh are the top three performers and Tamil Nadu, Telangana and Delhi appear as the bottom three performers.
- Among the 90:10 division States, the top three performers are Manipur, Arunachal Pradesh and Nagaland; and, the bottom three performers are Jammu and Kashmir, Uttarakhand and Himachal Pradesh
- Among the 60:40 division States, Goa, West Bengal and Delhi appear as the top three performers and Andhra Pradesh, Telangana and Bihar appear as the bottom three performers.
- Among the 90:10 division States, Mizoram, Himachal Pradesh and Tripura were the top three performers and Jammu & Kashmir, Nagaland and Arunachal Pradesh were the bottom three performers
- West Bengal, Bihar and Tamil Nadu were the top three States amongst the 60:40 division States; while Haryana, Punjab and Rajasthan appeared as the bottom three performers
- In the case of 90:10 division States, Mizoram, Assam and Tripura were the top three performers and Nagaland, Jammu & Kashmir and Uttarakhand featured as the bottom three
- Among the 60:40 division States, the top three performers are Kerala, Andhra Pradesh and Orissa and the bottom three performers are Madhya Pradesh, Jharkhand and Goa
- In the 90:10 division States, the top three performers are Mizoram, Sikkim and Nagaland and the bottom three performers are Manipur and Assam
In a diverse country like India, where each State is socially, culturally, economically, and politically distinct, measuring Governance becomes increasingly tricky. The Public Affairs Index (PAI 2021) is a scientifically rigorous, data-based framework that measures the quality of governance at the Sub-national level and ranks the States and Union Territories (UTs) of India on a Composite Index (CI).
States are classified into two categories – Large and Small – using population as the criteria.
In PAI 2021, PAC defined three significant pillars that embody Governance – Growth, Equity, and Sustainability. Each of the three Pillars is circumscribed by five governance praxis Themes.
The themes include – Voice and Accountability, Government Effectiveness, Rule of Law, Regulatory Quality and Control of Corruption.
At the bottom of the pyramid, 43 component indicators are mapped to 14 Sustainable Development Goals (SDGs) that are relevant to the States and UTs.
This forms the foundation of the conceptual framework of PAI 2021. The choice of the 43 indicators that go into the calculation of the CI were dictated by the objective of uncovering the complexity and multidimensional character of development governance
The Equity Principle
The Equity Pillar of the PAI 2021 Index analyses the inclusiveness impact at the Sub-national level in the country; inclusiveness in terms of the welfare of a society that depends primarily on establishing that all people feel that they have a say in the governance and are not excluded from the mainstream policy framework.
This requires all individuals and communities, but particularly the most vulnerable, to have an opportunity to improve or maintain their wellbeing. This chapter of PAI 2021 reflects the performance of States and UTs during the pandemic and questions the governance infrastructure in the country, analysing the effectiveness of schemes and the general livelihood of the people in terms of Equity.
Growth and its Discontents
Growth in its multidimensional form encompasses the essence of access to and the availability and optimal utilisation of resources. By resources, PAI 2021 refer to human resources, infrastructure and the budgetary allocations. Capacity building of an economy cannot take place if all the key players of growth do not drive development. The multiplier effects of better health care, improved educational outcomes, increased capital accumulation and lower unemployment levels contribute magnificently in the growth and development of the States.
The Pursuit Of Sustainability
The Sustainability Pillar analyses the access to and usage of resources that has an impact on environment, economy and humankind. The Pillar subsumes two themes and uses seven indicators to measure the effectiveness of government efforts with regards to Sustainability.
The Curious Case Of The Delta
The Delta Analysis presents the results on the State performance on year-on-year improvement. The rankings are measured as the Delta value over the last five to 10 years of data available for 12 Key Development Indicators (KDI). In PAI 2021, 12 indicators across the three Pillars of Equity (five indicators), Growth (five indicators) and Sustainability (two indicators). These KDIs are the outcome indicators crucial to assess Human Development. The Performance in the Delta Analysis is then compared to the Overall PAI 2021 Index.
Key Findings:-
In the Scheme of Things
The Scheme Analysis adds an additional dimension to ranking of the States on their governance. It attempts to complement the Governance Model by trying to understand the developmental activities undertaken by State Governments in the form of schemes. It also tries to understand whether better performance of States in schemes reflect in better governance.
The Centrally Sponsored schemes that were analysed are National Health Mission (NHM), Umbrella Integrated Child Development Services scheme (ICDS), Mahatma Gandh National Rural Employment Guarantee Scheme (MGNREGS), Samagra Shiksha Abhiyan (SmSA) and MidDay Meal Scheme (MDMS).
National Health Mission (NHM)
INTEGRATED CHILD DEVELOPMENT SERVICES (ICDS)
MID- DAY MEAL SCHEME (MDMS)
SAMAGRA SHIKSHA ABHIYAN (SMSA)
MAHATMA GANDHI NATIONAL RURAL EMPLOYMENT GUARANTEE SCHEME (MGNREGS)