100 billion: What next?

The achievement of the $ 100 billion level of foreign exchange reserves came as another contribution to the overall feel-good scenario sweeping the country these days.

Of course, the eternal pessimists could point to China's over $ 400 billion worth of reserves and say that 100 billion is no big deal. Be that as it may, the fact is that the number really has only a symbolic value.

As a matter of protection against external shocks, most people would argue that we reached adequate levels of safety a long time ago and continuing accumulation of reserves within the existing policy framework may actually be doing more harm than good.

The key question that needs to be addressed from the perspective of protection is whether the level of inflows that we have seen over the last few months is sustainable or if it was just a flash in the pan.

If it is sustainable, then there is an argument to be made for identifying a more realistic and practical benchmark for determining adequacy of reserves and pushing through policy changes that will generate domestic demand for the excess of inflows over that benchmark.

As things stand today, there are good reasons to believe that a substantial proportion of the inflows is driven by fundamental factors "" global expectations about the performance of the Indian economy.

Year 2003 was exceptional, in that India outperformed the global economy by a relatively wide margin. Unquestionably, therefore, the flow of money that was witnessed during 2003 may not continue.

But, by and large, optimistic expectations of growth cutting across both old and new economy sectors should keep the dollars flowing in, also because of a very comfortable macroeconomic environment.

Again, the pessimists will point to the fiscal deficit, but continuing growth should at least ensure that the situation does not culminate into a crisis. Investors can probably live with this assurance.

So, with reasonable expectations of continuing inflows, what does the government do? There are really two major steps to increase the domestic demand for foreign currency.

One is to widen the scope of convertibility, increasing the freedom of resident Indians to invest their savings outside the country.

A very large number of current account restrictions for individuals have been eased over the last several months as the degree of comfort with reserves increased.

So, it is not as if nothing has been done. But, taking this to its logical conclusion, along with, of course, appropriate prudential regulation, would be a strong signal of the government's acceptance of the performance of the economy. It would also lock the government into staying the course on policy.

The second imperative would be to bring tariffs on imports down to the often promised but never delivered ASEAN levels.

Everywhere, there are signs of the increasing competitiveness of Indian industry, certainly as far as the domestic market is concerned.

It is hardly a sign of confidence in this achievement if the government persists with the current levels of tariffs.