AGENDA FOR THE ECONOMY

Economic & Political Weekly EPW may 24, 2014 vol xlIX no 21
41
that put public resources into private hands
allocations of radio spectrum, for example, and
of credit from state banks have come under
suspicion. Of the 10 biggest family rms by
sales, seven have faced controversies. The
brash new tycoons who came of age during the
boom years of 2003-10 are under a cloud, too
(The Economist, 15 March 2015).
2 For an economic historian, the unfolding of the
cycle would seem all too familiar. Writing
nearly a century ago, Taussig said in 1928: The
loans from creditor countries begin with a
modest amount, then increase and proceed
crescendo. They are like to be made in excep-
tionally large amounts towards the culminat-
ing stage of a period of activity and speculative
upswing, and during that stage become large
from month to month so long as the upswing
continues. With the advent of crisis, are at once
drawn down sharply, even cease entirely
(Taussig 1928) [as quoted in Dornbusch 1993].
3 This is true not just of India, but of many
EMEs including China, Brazil and many Latin
American economies. See Shin and Zhao (2013)
and Powell (2014).
4 [t]he major problems facing the banking sys-
tem, i e, the prospect of sustained low loan
growth for several years, as well as the still pend-
ing recognition of bad loans, are likely to persist
for several years. CS team has been highlight-
ing that there is Rs 8.6 tn of loans with the top
200 companies with interest cover less than one.
Only about 23% or Rs 2 tn has become NPA yet
(Credit Suisse: India Market Strategy, 19 March
2014). While we have no means of verifying
these claims, they so suggest the gravity of the
problem as perceived by an investment advisor
a view consistent with the analysis reported above.
5 Industry has been ruined by FTAs says Baba
Kalyani, Chairman of Bharat Forge, and Kalyani
group of companies with a turnover of $2.5 billion,
specialising in automotive forging, supplying to
major OE manufacturers worldwide said recently
in an interview, Industry has been ruined by
FTAs because of the FTA, due to which com-
panies come and set up plants here, they dont
manufacture anything, they just assemble
(The Hindu Business Line, 10 February 2014).
References
Bluedorn, John, Rupa Duttagupta, Jaime Guajardo,
and Petia Topalova (2013): Capital Flows Are
Fickle: Anytime, Anywhere, IMF wp 13/183.
Chaudhuri, Sudip (2013): Manufacturing Trade
Decit and Industrial Policy in India, Economic
& Political Weekly, Vol 48, No 8, 23 February.
Dhar, Biswajit, Reji Joseph and T C James (2012):
Indias Bilateral Investment Agreements:
Time to Review, Economic & Political Weekly,
Vol 47, N0 52, 29 December.
Domer, Evsey (1957): The Burden of Debt and
National Income, Essays in the Theory of Economic
Growth (New York: Oxford University Press).
Dornbusch, Rudigar (1993): Policies to Move from
Stabilisation to Growth in Stabilisation, Debt
and Reform (New York: Harverter Wheatsheaf).
Mani, Sunil (2011): National Manufacturing Policy:
Making India a Powerhouse?, Economic &
Political Weekly, Vol 46, No 53, 31 December.
Nagaraj (2013): Indias Dream Run, 2003-08: Under-
standing the Boom and Its Aftermath, Economic
& Political Weekly, Vol 48, No 20, 18 May.
Powell, Andrew (2014): Global Recovery and Mone-
tary Normalisation: Escaping a Chronicle Fore-
told?, Latin-American and Caribbean Macro-
economic Report, Inter-American Development
Bank, March.
Ramkumar, R and Pallavi Chavan (2007): Revival
of Agriculture Credit in 2000: An Explanation,
Economic & Political Weekly, Vol 43, No 52,
29 December.
Shin, Hyun Song (2013): The Second Phase of
Global Liquidity and Its Impact on Emerging
Economies, Keynote address at the Federal
Reserve Bank of San Francisco Asia Economic
Policy Conference, 3-5 November.
Shin, Hyun Song and Laura Yi Zhao (2013): Firms as
Surrogate Intermediaries: Evidence from Emerging
Economies, Asian Development Bank, December.
Stiglitz, Joseph (2014): Tapping the Brakes: Are
Less Active Markets Safer and Better for the
Economy? paper presented at the conference
on Tuning Financial Regulation for Stability
and Efciency, Atlanta, Georgia, 15 April.
Indias Current Account Decit
Causes and Cures
Biswajit Dhar, K S Chalapati Rao
Indias current account decit has
widened in recent years primarily
because of the steep increase in the
decit on the merchandise trade
account. While imports have grown
with the surge in gold imports,
export performance has been
indifferent despite the fact that
India has formalised several free
trade agreements. Policymakers
will have to move away from a
reliance on ad hoc solutions and
nd ways to address the inrmities
in the domestic economy.
O
ver the past few years, Indias
external sector has been tether-
ing on the brink of a crisis
caused by a sharp deterioration in
the current account decit (CAD). In
2007-08, the CAD was just above 1%
of the gross domestic product (GDP),
but within the next ve years, CAD had
got to cross 5%, twice the level that
the Reserve Bank of India (RBI) con-
siders as the safe threshold.
1
Indias
decit on the current account was
alarming not because of its high
ratio to GDP; the rapidity with
which the decit had reached the
unsustainable level was a major
cause of concern.
The reason for the widening of
the CAD lay in the rapid deteriora-
tion of the decit on the merchan-
dise trade account, particularly
since the onset of the global eco-
nomic downturn. Data obtained
from the DGCI&S (Directorate
General of Commercial Intelligence
and Statistics)
2
show that the merchan-
dise trade decit increased from around
$46 billion in 2005-06 to $190 billion in
2012-13 (Table 1). However, in 2013-14,
the trade decit fell by nearly 28% to
under $138 billion. A fall in imports
and a slight increase in exports (as
against a negative growth in 2012-13)
caused this turnaround. As a result,
2013-14 is likely to see the CAD-GDP ratio
drop below 4%.
The broad trend of a deteriorating
CAD situation had resulted not from
i solated developments, but was the
sum total of a series of structural inr-
mities of the Indian economy that had
developed over the past several years.
This article will try to identify these
inrmities and would make a modest
Biswajit Dhar (bisjit@gmail.com) is at the
Research and Information System for
Developing Countries, New Delhi, and
Chalapati Rao (chalapatirao@yahoo.com) is at the
Institute for Studies in Industrial Development.
Table 1: Growth in Exports, Imports and Merchandise
Trade Balance
Years Exports Growth Imports Growth Merchandise Growth
($ billion) (%) ($ billion) (%) Trade (%)
Balance
($ billion)
2005-06 103.1 149.2 -46.1
2006-07 126.4 22.6 185.7 24.5 -59.3 28.7
2007-08 163.1 29.0 251.7 35.5 -88.5 49.2
2008-09 185.3 13.6 303.7 20.7 -118.4 33.8
2009-10 178.8 -3.5 288.4 -5.0 -109.6 -7.4
2010-11 251.1 40.5 369.8 28.2 -118.6 8.2
2011-12 304.6 21.3 489.2 32.3 -184.6 55.6
2012-13 300.4 -1.4 490.7 0.3 -190.3 3.1
2013-14 312.6 4.1 450.1 -8.3 -137.5 -27.7
Source: DGCI&S.
AGENDA FOR THE ECONOMY
may 24, 2014 vol xlIX no 21 EPW Economic & Political Weekly
42
attempt to shed some light on the
way forward.
Explaining the Trade Decit
The merchandise trade decit reached a
record high of more than 11% of the GDP
in 2012-13, increasing from 6% in 2005-06.
The reason for this was twofold. First,
India was unable to provide sufcient
momentum to its export growth: the
a verage growth of exports since 2005-06
has been 16%, well below the 24% mark
that was recorded between 2002-03 and
2005-06. The moderation in export growth
resulted from two years of negative
growth and two others that saw relatively
slow expansion.
The second trigger for the increase in
the CAD was the rising level of imports.
Two factors were responsible for the in-
crease in imports. The rst stemmed from
the broad-based tariff reduction exercise
undertaken by India, both unilaterally
and through a number of comprehensive
economic partnership agreements (CEPAs)
that have been signed since the mid-2000s.
Not unexpectedly, average import growth
during the period 2005-06 to 2012-13
was nearly 19%, which pushed up Indias
import to GDP ratio to nearly 28%. Im-
portantly, countries like Indonesia, which
have seen very high levels of import in-
tensity in the past, have brought down
their i mport dependence substantially,
while Brazil has not allowed the imports-
GDP ratio to go far beyond the 10% level.
The Import Surge
The growth in imports was fuelled by
two commodity groups, gold, and crude
petroleum and products. The increase in
gold imports was very steep. In 2005-06,
gold imports were less than $11 billion,
but within the next six years, its imports
had increased to nearly $57 billion, or
nearly 12% of the import bill. Gold had
replaced the machinery group, whose
share of imports fell from a high of 18% in
2007-08 to 10.6% in 2012-13, coinciding
with the deceleration of the manufacturing
sector. However, in the previous scal,
following a series of measures taken by
the government, imports of gold plunged.
The share of gold in the countrys im-
ports had declined to just over 6%, the
lowest in nearly a decade (Table 2).
With gold imports reaching very high
levels, the then nance minister, Pranab
Mukherjee, took the rst steps towards
controlling imports. In the 2012-13 budget,
he doubled the customs duty on gold to
4%.
3
This move closely followed the
introduction of ad valorem duty of 2%
on gold from the earlier specic duty.
Import data for 2012-13 suggest that
the measures taken to curb gold imports
were successful: the value of gold imported
into India declined to less than $54 bil-
lion in 2012-13. However, the World Gold
Council (WGC) reports that although gold
imports had suffered in the rst half of
the calendar year 2012, Indias demand
for the yellow metal became extremely
buoyant in the second half. According to
the WGC, gold demand from India was
further stimulated during December by
expectations that the government would
again increase the customs duty on gold.
This contributed to stock-building by
both bullion dealers and jewellers, as
well as the consumers who had planned
to buy gold in the near future but had
brought forward their purchases to
avoid paying higher duties in 2013.
4
As the market had expected, the gov-
ernment clamped down on gold imports
in the following nancial year by adopt-
ing two sets of measures. The rst was
an increase in the import duty on gold
from 8% to 10%. The second was a rul-
ing that only 10 designated banks and
other agencies and entities could import
gold. These designated institutions had
to meet the 80:20 rule, which was that
at least one-fth of every lot of gold im-
ports had to be made available for ex-
ports and the balance for domestic use.
The impact of these measures on gold
imports as recorded in the ofcial statistics
was dramatic. During 2013-14, the value
of gold imports was $29 billion, a more
than 46% decline as compared to the
immediately preceding scal. There are,
however, serious doubts about the effec-
tiveness of the gold import restrictions
imposed by the government. A r ecent re-
port by the WGC has observed that the
underlying level of demand among Indian
consumers had remained robust during
2013. This report concludes, the sharp
decline in the ofcial import of gold into
India led to an increasing amount of this
demand being met by gold imported
through unofcial channels (read
smuggling). The report has given cre-
dence to the generally accepted view
that the gold import restrictions hardly
prevent outgo of foreign exchange from
the country, for they bring the hawala
traders into play. Clearly, measures for
restricting gold imports that are cur-
rently in place are not helping the coun-
try tide over its external payments prob-
lems. The government therefore needs
to think in terms of a more comprehen-
sive policy that looks at ways of reducing
the demand for gold on the one hand,
and provides effective mechanisms to
check smuggling of gold.
Indifferent Export Performance
Indias exports have suffered because of
a combination of the inability of the ex-
porters to take advantage of the opening
up of markets following the formalisation
of several free trade agreements (FTAs)
during the past decade and the slack in
the global markets in the aftermath of
the economic downturn.
Much was expected on the export
front after the government adopted the
Strategy for Doubling Exports in Next
Table 2: Import of Principal Commodities (% of total imports)
Product Groups 2005-06 2007-08 2009-10 2011-12 2012-13 2013-14
Petroleum crude and products 29.5 31.7 30.2 31.7 33.4 36.7
Gold 7.3 6.6 10.0 11.5 11.0 6.4
Machinery 14.4 18.0 12.6 10.5 10.6 10.0
Electronic goods 8.9 8.2 7.3 6.7 6.4 6.9
Pearls, precious and semi-precious stones 6.1 3.2 5.7 5.8 4.6 5.3
Organic and inorganic chemicals 4.7 3.9 4.1 3.9 3.9 3.5
Coal, coke and briquettes 2.6 2.6 3.1 3.6 3.5 3.7
Metalliferous ores and products 2.6 3.1 2.7 2.7 3.1 3.0
Edible oil 1.4 1.0 2.0 2.0 1.9 2.1
Iron and steel 3.1 3.5 2.9 2.4 2.2 1.6
Fertilisers 1.4 2.2 2.4 2.3 1.9 1.4
Machinery includes: machine tools, electrical and non-electrical machinery and transport equipment.
Source: DGCI&S.
AGENDA FOR THE ECONOMY
Economic & Political Weekly EPW may 24, 2014 vol xlIX no 21
43
Three Years 2011-12 to 2013-14, aimed
at increasing exports to $500 billion by
2013-14. This was to be realised through
strong performances by select manufac-
turing sectors, combined with effective
marketing and technology strategies.
These expectations remained unful-
lled, as the industrial sector was una-
ble to enhance its presence in the global
markets. The share of manufactured
goods in Indias export basket declined
from 54% in 2005-06 to 48% in 2013-14
(Table 3). There was thus, a large gap
between the policy pronouncements
and the reality insofar as manufactur-
ing exports are concerned.
The problem is not merely a decline
in the overall share of manufacturing in
the export basket: the declining techno-
logy content of manufactures exported
by India should be an even greater
cause of concern. The share of hi-tech
5

products in Indias manufacturing ex-
ports fell from 28% in 2005-06 to
21% in 2012. At the same time,
medium tech exports had barely
moved. Exports of high and me-
dium tech manufactures taken
together have thus fallen from
nearly 60% in 2006 to less than
55% in 2012 (Table 4). As com-
pared to India, Brazil and China
have performed signi cantly bet-
ter: their exports of high and
medium exports have been 68%
and 76%, respectively.
Economic Partnership Agreements
Indias deepening economic relations
with a large number of its trading part-
ners do not seem to have beneted the
export sector. Over the past decade,
I ndia has sought to enhance economic
integration with a number of countries
through FTAs and CEPAs. However, ques-
tions arise as to whether India was pre-
pared either to take advantage of the
o pportunities offered or to meet the
challenges posed by these agreements.
A preliminary assessment of the
FTAs/CEPAs indicates that India
has not been able to sufciently
leverage these agreements to in-
crease its presence in the mar-
kets of its partners. In most cases,
the Indias merchandise exports
to its FTA/CEPA partners have
grown much slowly than imports
since the middle of the previous
decade, which roughly c oincides
with the period when the
g overnment took the decisions
to enter into the agreements,
were taken. In overall terms,
while the average annual growth
of exports to FTA/CEPA partners
was below 13%, the imports grew
at more than twice this rate, at
26.6% (Table 5).
Indias inability to penetrate
into the markets of its partners
implies that it continues to remain
a marginal player in most of these
markets (Table 6). In all countries,
with the exception of Singapore, Indias
share in the partner countrys imports
had shown either little improvement
or had declined. In three of these cases,
Indias share is yet to reach 1% of the
trade partners total imports.
Thus, while India was unable to nd
market access in the markets of its part-
ner countries, its imports from its part-
ner countries had remained relatively
high. This phenomenon can be better
understood through the ratio of trade
balance and exports (Table 7). This ratio
was almost four times in case of Australia
and in case of Korea, the corresponding
gure was more than two times. The
terms of Indias engagement with its
trading partners has worsened over the
past few years.
State of the Invisibles Account
Before the onset of the economic down-
turn, increases in trade decit were
moderated by the favourable balance on
the invisibles account, in which the
surplus on services trade account and
private transfers (essentially workers
remittances) were major contributors
(Table 8, p 44). However, both these
components were affected by the adverse
market conditions in the large economies.
Table 3: Indias Exports of Principal Commodities
(% of total exports)
Product Groups 2005-06 2007-08 2009-10 2012-13 2013-14
Manufactured goods 53.8 50.0 47.6 46.0 47.8
Of which:
Leather products 2.6 2.2 1.9 1.6 1.8
Chemicals and related
products 15.2 13.7 13.7 13.8 14.0
Engineering goods 18.7 20.7 18.2 18.9 19.7
Electronic goods 2.2 2.2 3.2 2.8 2.5
Textiles and clothing 15.1 11.3 10.7 8.8 9.7
Petroleum products 11.3 17.4 15.8 20.3 20.1
Gems and jewellery 15.1 12.1 16.3 14.4 13.2
Source: DGCI&S.
Table 4: Technology Content of Exports of
Manufacturing (% of exports of manufactured products)
Years India Brazil China
High Medium High Medium High Medium
Tech Tech Tech Tech Tech Tech
2005 24.8 27.6 27.7 39.8 47.5 27.3
2006 28.5 31.3 28.4 39.1 49.6 27.2
2007 25.6 32.4 20.0 44.6 48.9 27.9
2008 24.6 36.8 24.6 43.4 47.3 28.8
2009 26.2 32.2 24.8 42.0 46.7 29.2
2010 22.1 30.4 24.6 42.3 46.0 30.5
2011 21.0 31.4 22.7 45.7 43.7 32.1
2012 21.3 33.4 23.0 44.7 46.7 29.7
Source: WITS database.
Table 5: Indias Trade Expansion with
FTA/CEPA Partners (%)
FTA/CEPA Partners Average Annual Growth between
2005 and 2012
Exports by India Imports into India
ASEAN 30.6 43.1
Australia 31.2 23.4
Canada 14.7 23.2
EU 16.4 18.2
Malaysia 33.1 47.3
New Zealand 16.5 38.6
Singapore 21.4 21.0
Japan 23.0 33.7
Korea 24.0 30.0
FTA partners 12.5 26.6
Source: WITS database.
Table 6: Indias Share in the Imports of Its Trade Partners (%)
Trade Partners 2005 2006 2007 2008 2009 2010 2011 2012
ASEAN 1.5 1.6 1.8 2.1 1.9 2.1 2.5 2.3
Australia 0.8 0.7 0.8 0.8 1.0 0.9 1.0 1.1
Canada 0.5 0.5 0.5 0.5 0.5 0.5 0.6 0.6
EU-27 0.6 0.7 0.7 0.8 0.8 0.9 1.0 0.9
Japan 0.6 0.7 0.7 0.7 0.7 0.8 0.8 0.8
Korea 0.8 1.2 1.3 1.5 1.3 1.3 1.5 1.3
Malaysia 1.0 1.0 1.4 2.0 1.8 1.5 1.8 1.9
New Zealand 0.6 0.6 0.6 0.7 0.9 0.9 0.8 0.9
Singapore 2.0 2.0 2.2 2.6 2.3 3.0 3.9 3.4
Thailand 1.1 1.3 1.4 1.5 1.3 1.2 1.3 1.3
Source: WITS database.
Table 7: Trade Balance/Exports (%)
Trade Partners 2004 2005 2009 2010 2011 2012
World -30.4 -40.4 -50.7 -58.8 -53.4 -68.9
ASEAN -13.2 -3.4 -33.9 -29.1 -16.9 -32.3
Australia -436.5 -492.8 -752.2 -630.6 -540.2 -391.0
Canada 3.9 1.5 -96.5 -65.1 -22.4 -27.2
EU -3.4 -5.4 -5.5 -2.0 -0.9 -11.6
Malaysia -112.9 -113.0 -41.6 -68.6 -139.7 -176.8
New Zealand -12.7 -45.7 -69.9 -245.1 -199.5 -150.5
Singapore 27.1 41.8 10.0 19.9 47.8 42.5
Japan -60.3 -49.8 -108.0 -72.0 -100.6 -92.7
Korea -246.8 -190.4 -118.2 -173.0 -171.7 -235.5
FTA partners -16.4 -16.8 -32.3 -30.5 -28.6 -40.2
Source: WITS database.
AGENDA FOR THE ECONOMY
may 24, 2014 vol xlIX no 21 EPW Economic & Political Weekly
44
Between 2009-10 and 2012-13 (the latest
year for which data are available), services
exports could grow by only 9% as
compared to an average growth of 15%
a year between 2005-06 and 2012-13,
largely because of a sharp decline in
2009-10. Although optimistic assess-
ments about the recovery of major econ-
omies during 2011-12 resulted in a sig-
nicant higher growth in net services
trade and net private transfers, the mo-
mentum was not maintained in the fol-
lowing year as both indicators showing
growth of just 1%.
Table 8 shows that services exports,
together with remittances, provide the
lifelines for Indias current account, for
their contributions have kept the CAD from
assuming unmanageable proportions.
In this context, it may be useful to reect
on the export performance of the major
service sectors.
Table 9 shows the shares of major
service sectors in Indias exports of
services since 2005-06. It is quite evi-
dent that the composition of service ex-
ports has remained almost static. Soft-
ware exports, which include both IT
services and information technology
enabled service (ITES)-business process
outsourcing (BPO) services, have re-
mained by far the most signicant com-
ponent of services exports from India,
although its share has declined from a
high of nearly 52% in 2009-10 to just
about 45% in 2012-13. Software exports
have performed in differently as major
markets have been rife with protection-
ist sentiments since they have been be-
set with economic u ncertainties.
A recent study
6
conducted jointly by
ASSOCHAM and KPMG has highlighted
the challenges faced by the IT and the
ITES-BPO services sector. The report
states that India is currently losing about
70% of all incremental voice and call
centre business to competitors like Phil-
ippines and the eastern Europe. The re-
port surmises that unless the domestic
BPO (business process outsourcing) in-
dustry diversies the delivery footprint to
take advantage of low-cost centres, our
competitors will further consolidate
their position. There is therefore no
gainsaying that the failure of the
services sector to diversity its
export basket could put further
strain on the current account,
given that the IT and ITES-BPO
service providers are facing in-
tense competition from rela-
tively efcient rms from both
Asia and Europe.
One of the key factors inu-
encing the balance on the in-
visibles account was the out-
ows on account of investment
income (Table 9). With India
relying on capital ows, irrespective of
their nature, to tide over the difculties
created by large CAD, this development
acquires added signicance. This com-
ponent comprising income on equity
7

and on debt has increased rapidly since
2010-11. These outows were just a little
over $5 billion in 2005-06, but by 2012-
13 they had increased more than four-
fold to exceed $22 billion. A part of
these consist of reinvested earnings
which are balanced by an increase in
the direct investment liabilities. A long-
er term impact of the reinvested earn-
ings is that these will result in much
larger future payments without corre-
sponding actual inows.
It is also a fact that while dividend
payments as a part of the investment
income have gone up substantially during
the past few years, there are other items
which a cquired importance both in rela-
tive and absolute levels. Miscellaneous
items constitute a major portion of the
services payments. One such item is pay-
ment on account of royalties and fran-
chise arrangements (Table 10). Another
important but much less noticed item
is the maintenance of ofces abroad
other than diplomatic establishments.
Although the reasons for the sharp
increase in outgo on this account will
need detailed examination, it may be
pointed out that this phenomenon
roughly coincides with the growing out-
ward FDI from India.
Each of the individual items needs to
be examined closely. For instance, if the
fast growing royalty payments are relat-
ed to technology acquisition by Indian
companies, it could still be treated as a
welcome sign. However, if these are pay-
ments by FDI invested companies to their
foreign parents these could be a cause for
concern. This would be more so if these
Table 8: Major Components of the Invisibles
Account ($ billion)
Years Services Investment Private Transfers
Trade Balance Income (Net) (Net)
2005-06 23.2 -5.3 24.5
2006-07 29.5 -6.8 29.8
2007-08 38.9 -4.4 41.7
2008-09 53.9 -6.6 44.6
2009-10 36.0 -7.2 51.8
2010-11 44.1 -17.1 53.1
2011-12 64.1 -16.5 63.5
2012-13 64.9 -22.4 64.3
Source: RBI.
Table 9: Shares of Major Services Sectors in Exports of Services (%)
Years Travel Transportation Insurance Software Exports Business Financial Communication
Services Services Services
2005-06 13.6 11.0 1.8 40.9 16.1 2.1 2.7
2006-07 12.4 10.8 1.6 42.4 19.7 4.2 3.1
2007-08 12.6 11.1 1.8 44.6 18.6 3.6 2.7
2008-09 10.3 10.7 1.3 43.7 17.6 4.2 2.2
2009-10 12.3 11.6 1.7 51.8 11.8 3.8 1.3
2010-11 12.7 11.4 1.6 42.6 19.3 5.2 1.3
2011-12 13.0 12.8 1.8 43.7 18.2 4.2 1.1
2012-13 12.4 11.9 1.5 45.2 19.5 3.4 1.2
Business services include trade-related services (i e, commission on exports and imports); operational leasing services;
merchanting services; legal services; accounting, auditing, book keeping and tax consulting services; business and
management consultancy and public relations services; advertising, trade fair, market research and public opinion polling
services; research & development services; architectural, engineering and other technical services; agricultural, mining and
on-site processing services; inward remittances for maintenance of offices in India; and environmental services. For details
see, RBI (2010), Balance of Payments Manual for India, paragraph 4.37, page 61 (accessed from: http://rbidocs.rbi.org.in/
rdocs/Publications/PDFs/IBPM221110P2.pdf).
Source: RBI.
Table 10: Outflows on the Invisibles Account in Indias Balance
of Payments ($ billion)
Years Business Dividends Royalty Remittances for Business
Services Payments Maintenance of Management
Offices Abroad and Consultancy
Services
2005-06 7.7 2.5 0.6 2.1 1.8
2006-07 15.9 3.5 1.0 4.0 3.5
2007-08 16.6 3.2 1.0 3.6 3.4
2008-09 15.3 3.2 1.7 3.4 3.6
2009-10 18.0 3.8 2.0 3.6 5.4
2010-11 27.7 4.7 2.4 6.1 9.1
2011-12 26.8 4.9 3.2 5.1 9.8
2012-13 30.3 3.4 4.2 5.2 8.1
Source: Based on various releases by the RBI and articles published in RBI
Bulletin.
AGENDA FOR THE ECONOMY
Economic & Political Weekly EPW may 24, 2014 vol xlIX no 21
45
are substitutes for dividend payments,
both to deny the Indian partners their
fair share in the earnings and/or to take
advantage of the favourable tax treatment
available to such payments.
The case of Samsung India Electronics
is worth referring to in this context. The
company even while maintaining that
Considering the rapidly changing indus-
try scenario; need for further strengthen-
ing the business, your Directors have...
decided not to propose any dividend.
had given out Rs 7.2 billion as royalty
payments during 2008-09 to 2012-13
against the companys paid-up equity
capital of Rs 2.2 billion (Table 11). This
was in addition to the Rs 1.7 billion it had
already paid as royalty during the preced-
ing nine years. On the other hand, its
imports ballooned from Rs 38.9 billion to
Rs 174.3 billion bet ween 2008-09 and
2012-13 and exceeded Rs 500 billion for
the entire period. A few other foreign
companies like Maruti Suzuki, Hindustan
Unilever, ABB, Colgate-Palmolive gure in
the discussion on growing royalty pay-
ments. It is relevant to note here that out
of the 312 manufacturing companies
which paid royalties during 2012-13 and
are covered by the Prowess of CMIE, 746
foreign companies accounted for nearly
73% of the total $1.2 billion royalty pay-
ments. The remaining was made by 236
other companies.
The Way Forward
With the CAD reaching levels that could
make the Indian economy extremely
vulnerable, the government would have
to nd effective solutions expeditiously
since the payments crisis is threatening
to spiral into a debt overhang. Between
2005-06 and 2012-13, Indias external
debt has more than trebled to reach
$404.9 billion. Short-term debt contri-
buted to this increase substantially as
its share went up from 14% to almost
one-quarter of the total debt stock.
Another disconcerting feature is that the
ratio of reserves to external debt. After
peaking in 2007-08 at 138.0%, it rapidly
declined to 74.5% by the end of 2012-13.
8

The burden of the growing debt is also
getting reected in the ballooning of in-
vestment income payments which are
eating into the surpluses on account of
services and remittances.
Thus far, the responses of the govern-
ment to address the external payments
problems have been, at best, ad hoc. This
approach needs to be replaced by one
which seeks to identify the source of the
problem in order to nd a lasting solu-
tion. Take for example the responses of
the government to gold imports. As we
had mentioned in an earlier discussion,
the effectiveness of these measures taken
has been illusory for they have merely
shifted gold imports from ofcial chan-
nels to illegal channels since they could
not inuence the rising demand for gold.
It is a well-known fact that the demand
for gold in the country has risen with the
emergence of gold as an asset class. Un-
certainties in the real estate and equity
markets have made gold an attractive in-
vestment. The real returns on gold have
been high and have acted as the ideal
hedge against ination. Reducing the de-
mand for gold must, therefore, focus on
ways to design new nancial instruments
that can provide real returns. In addition,
suggestions have been made to consider
the introduction of new gold-backed
nancial products to reduce the demand
for physical gold. This includes a propos-
al made by the WGC to monetise gold as a
nancial asset.
9

Equally important is to nd a lasting
solution to the problem of sagging
e xport growth, particularly that of man-
ufactured products. Here again, the
e fforts made by the policymakers have
been myopic for they have not made any
attempt to strengthen the countrys
manufacturing base. The need to rejuve-
nate the manufacturing sector was
a rticulated in 2011 by then nance min-
ister, Pranab Mukherjee. However, the
National Manufacturing Policy, which
was adopted for increasing the sectoral
share of manufacturing in GDP to at least
25% by 2022 and to enhance global com-
petitiveness, domestic value addition,
technological depth and environmental
sustainability of growth, besides in-
creasing the rate of job creation, r emains
on the drawing board.
Notes
1 RBI, Report of the Working Group to Study
the Issues Related to Gold and Gold Loans
NBFCs in India, February 2013, paragraph 322,
page 49 (accessed from http://rbidocs.rbi.org.in/
rdocs/PublicationReport/Pdfs/RWGS02012013.
pdf).
2 DGCI&S provides data on merchandise trade
based on the reports available from the cus-
toms. In other words, the physical exports and
imports are captured by this organisation. On
the other hand, the Reserve Bank of India pro-
vides export-import data based on foreign ex-
change inows and outows resulting from
trade transactions. Since the basis of data cap-
ture is different as between the two organisa-
tions, the data are not strictly comparable.
3 The increase in customs duty was effected on
standard gold bars; gold coins of purity exceed-
ing 99.5%. See Budget Speech, paragraph 205,
page 34.
4 World Gold Council, Gold Demand Trends:
Full Year 2012, February 2013, p 4, accessed
from: http://www.gold.org/sites/default/les/
gdt/GDT_Q4_2012.pdf
5 Dened in accordance with SITC Rev 3. For de-
tails of the products identied as hi-tech or
medium tech see, UNIDO (2013), Industrial
Development Report 2013, Annex 4, page 204.
6 ASSOCHAM (2014), Indias Losing 70% Incre-
mental Voice & Call Centre Business to Philip-
pines: Study, Press Release, 6 April (accessed
from: http://www.assocham.org/prels/shownews.
php?id=4455).
7 Includes reinvested earnings.
8 Department of Economic Affairs, Indias Exter-
nal Debt as at end-December 2013, March 2014,
accessed from http://nmin.nic.in/the_minis-
try/dept_eco_affairs/economic_div/External_
Debt_QDEC2013.pdf
9 Monetizing 500 Tonnes of Gold Can Aid Cur-
rent Account Decit: Trade Minister, NDTV
Prot, 28 August 2013, accessed from: http://
prot.ndtv.com/news/economy/article-mone-
tizing-500-tonnes-of-gold-can-aid-current-ac-
count-decit-trade-minister-326364.
Table 11: Samsung India Electronics: Foreign
Exchange Outgo (Rs billion)
Year Dividends Royalty Payments Imports
2008-09 0 0.7 39.8
2009-10 0 1.0 67.6
2010-11 0 1.1 94.1
2011-12 0 1.5 125.0
2012-13 0 3.0 174.3
Total 0 7.2 500.8
Source: Company documents downloaded from the
Ministry of Company Affairs website.
EPW Index
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