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Forex reserve fluctuations - the road ahead

By- Siddharth

India had less than $1 billion of foreign exchange (FOREX) reserves in 1991 and at that time country had to pledge its gold to meet its import obligations. Subsequently due to the liberalization of economic policies, there was a gradual increase in FOREX reserves. But again in 1997 during the Asian currency crisis India had to struggle hard to keep up the FOREX reserves. Following a large input of FOREX by Indian expatriates and continuing liberalization, the FOREX reserves again started to increase. The FOREX reserves crossed $ 50 billion in February 2002 and in December 2003 country's FOREX reserves crossed the $100 billion milestone. Despite strong economic indicator when Indiaís FOREX reserves that had touched a record high of $121 billion dropped by a whopping $1.53 billion to $119.57 billion for the week ended July 23, 2004, it surprised many.  

The annual budget presented by finance minister P. Chidambaram last month, for financial year 2004-05 initially generated euphoria amongst a certain section of society. But after in-depth analysis of the budget by some political and economic analysts, the initial euphoria seems to have all but disappeared. Analysts are likely to scale back their expectations for fiscal 2004-05 economic growths to below 6 percent from about 7 percent if the monsoon fails and hurts farm output.  Communist parties whose support is crucial for the stability of the present government stridently oppose budget proposals to raise foreign direct investment limits in the rapidly growing telecom, insurance and civil aviation sectors. With the budget facing so much opposition from the communists and probability of erratic monsoon has made FOREX market in India jittery.

A very imprudent decision on part of this government was to reduce the slab of taxable income for Non Resident Indians (NRIís) and to tax the interest generated by NRI deposits in Indian banks. As per the budget speech of Finance Minister, interest due from 1st September 2004, on NRI deposits in Indian banks is taxable. Interest generated by these deposits in Indian banks (such as NRE, FCNR deposits) will be taxed if the interest generated is more than Rs.50, 000. Therefore NRIs who want to avoid the tax, will have to maintain deposits in India in Indian rupees only to such an extent, that will yield less than Rs.50, 000 as investment income annually. It is needless to remind that previously all the interests generated by NRI deposits in bank were non-taxable. Taxation on interest along with the recently decreased interest rates (announced by Reserve Bank of India) on NRI will dissuade them from depositing money in Indian banks. They have played a crucial role in the economic development of India and have always supported the country in times of economic crisis. In 1992, during the FOREX reserve crisis, NRIs contributed through buying State Bank of Indiaís (SBIís) - India Development Bonds. In year 1998 SBIís Resurgent India Bonds for non-resident Indian's netted nearly  $4.5 billion worth of FOREX for India, while in year 2000 the NRIs contributed nearly $ 5.5 billion of FOREX by subscribing to Millennium Deposit Scheme. During year 2003-04 non resident Indians added approximately $8 billion to the FOREX reserves in form of direct deposits. 

Volatile oil prices in international market, inadequate monsoon and reckless decisions on part of a government guided by communist agendas will hurt countries FOREX reserves and economy as a whole will suffer. At a time when India needs more and more foreign investment, alienating the NRI community isn't very prudent. I earnestly hope that wiser sense will prevail on the people leading the country and they will not sacrifice the gains made by Indian economy in last few years for their political ambitions.