The Bjp And The Bop

Despite the export slowdown of the last two years, India has not faced any balance of payments (BoP) problems for three reasons. One: import growth too has been dull so the trade deficit has been kept in check. Two: current account deficits have been lower than trade deficits because of surpluses on the net invisibles account. Three: capital account surpluses have neutralised current account deficits. Since constraints to export growth will not be removed overnight and non-oil imports will increase as industry recovers, whether the incoming government can manage the BoP successfully will depend on invisibles and capital inflows.

All political projections suggest a very high probability of a BJP-led government. Therefore, the BJPs manifesto and Jaswant Singh and Govindacharya's interviews to this paper assume significance. Admittedly, there are conflicting views within the BJP. Jaswant Singh argues that FDI is not a dirty word, while Govindacharya is more ambivalent. FDI will be allowed in infrastructure and not allowed in consumer goods, says Govindacharya, while FDI is preferable in infrastructure rather than in consumer non-durables, says Jaswant Singh. No policy maker will disagree with Jaswant Singhs preference. The disagreement is about the modalities used to realise this preference. There are two reasons why FDI has been coming into consumer goods. First, thanks to quantitative restrictions (QRs) on imports, domestic consumer goods markets are still protected from import competition. Second, policies for private sector participation in infrastructure have been a mess.

 

While the BJP manifesto and the interviews are vague about the second point, on the first, the swadeshi flavour and resistance to tariff reductions on QR phaseouts suggest that the earlier policy bias will be reinforced. Thus, while there is no reason to presume that a BJP-led government will deter FDI inflows, these inflows are unlikely to be export-oriented. And there will be a lot of subjectivity and discretion about what constitutes consumer goods, where Indian companies need to be protected and the like. Moreover, since new FDI entry into consumer goods will not be permitted, an entry barrier will be created in favour of existing players.

On foreign institutional inflows, the earlier stance of a lock-in period has been given up, although the BJP has yet to figure out how such inflows will be attracted. The crucial test will be exchange rate policy. If a realistic policy is adopted, foreign institutional inflows need not be reversed and the BoP will be manageable. But if the exchange rate is equated with national pride and one roots for a Rs 17 to a dollar exchange rate, as Sushma Swaraj did, Indias BoP is headed towards another 1990-91-type of crisis.