The government may be adamant about not going to the IMF to look for a line of credit, and is touting its hiked $50-billion swap line with Japan as a sign of it having enough firepower to deal with any forex crisis, but the road to the $50 billion lies through the IMF.
Though finance ministry and RBI officials are tight-lipped about the conditions of the swap line, a press release on the Japanese ministry of finance for the first $3-billion swap arrangement in 2008, makes it clear “the BSA (bilateral swap arrangement) will be activated when an IMF-support program already exists or is expected to be established in the near future. Nevertheless, up to 20% of the maximum amount of drawing could be disbursed without an IMF-support program”. While finance ministry officials confirmed, off the record, that the $50-billion swap agreement inked at the G-20 summit last week has a similar IMF-clause, the official spokesperson of the Japanese embassy said, while the details of the current agreement are yet to be finalised, based on the current agreement, India can draw up to 20% without going to the IMF.
The reason for the IMF condition, the finance ministry official explained, has to do with the need to protect Japan’s line of credit. If India needs to access the Japanese emergency line, this means its external finances are in trouble. This means it has to undertake big reforms to attract investors and such reforms are always easier to sell politically as demanded by the IMF.
At the same time, finance ministry officials maintain the situation is comfortable enough not to require any access to the Japanese swap line as its $275-billion reserves are more than adequate to deal with any exigencies.
With gold imports in August falling to a mere 2.5 tonnes from 47.5 tonnes in July, 31.5 tonnes in June, 162 tonnes in May and 142.5 tonnes in April, the CAD is clearly under control and the finance minister’s $70-billion target may well be achieved in FY14. While India’s current problem is more one of capital flows than of the CAD, if the government goes in for a big diesel/LPG price hike — the finance ministry is pushing for full diesel decontrol — chances are the mood can change.
With the falling rupee, non-oil non-gold imports have already begun responding. The trade deficit has also improved with exports rising 11%