Are India’s forex reserves adequate?

India has witnessed outflows of $29 billion in 2022 YTD ($27 billion in equity and $2 billion in debt). Alongside, India’s foreign exchange reserves have declined
from a peak of $642 billion as of October 29, 2021, to $590.50 billion in June 2022, a fall of $51.50 billion. There seems no stopping these trends in the immediate
future.
While the large decline in forex reserves is comparable to that of previous episodes of stress (Table 1), there is an air of comfort that the current level of forex reserves
are large enough to cover almost 12 months of imports, whereas in the previous episodes of 2008, 2013 and 2018 it used to be between seven and nine months.
However, the key question is whether the metric of import cover reflects adequacy of reserves? It is prudent to measure the adequacy of reserves with reference to the
dynamics that prevails in the accretion of the reserves.
India has had a structural current account deficit which has been funded by capital inflows. It is common knowledge that the accretion of forex reserves has been due
to surplus in capital account.
India’s reserves built on net capital surpluses therefore presents a double whammy as reserves have to fund the import bill, with around 27 per cent of imports in value
composed of oil, and the constant stream of capital outflows.
Therefore, the use of import cover as a measure of adequacy of reserves is not appropriate in the Indian context and one has to look at the adequacy of reserves from
the point of view of International Investment Position or IIP.

What is IIP?
IIP is a summary statement of the net financial position of a country viz. net of, the value of financial assets of residents of an economy that are claims on non-
residents and, gold held in reserve assets and liabilities of the residents of an economy to non-residents.

Assets comprise direct and portfolio financial investments of residents outside India plus reserve assets. Liabilities are direct and portfolio investments made by non-
residents into India (Table 2). Positive IIP indicates that the country’s assets are more than liabilities while negative IIP means that the country’s liabilities are more
than assets.
India is a net IIP negative country with its liabilities exceeding assets (Chart 1).
Not robust enough
Looking at the reserves-to-IIP ratio in India, it is observed that the current level is not as robust as it prevailed at the time of the Global Finance Crisis of 2008. In
addition, a look at the reserves to liabilities ratio shows that it has been steadily below 50 per cent since 2010 (Chart 2).
Out of $1.3 trillion of liabilities within IIP, as of December 2021, approximately 30 per cent comprises short-term debt and portfolio investments. In absolute terms,
outstanding portfolio investments is $277 billion and short-term debt of $110 billion. Which takes the cumulative portfolio and short-term debt to around $390 billion.
Against the backdrop of $591 billion of reserves, it leaves a cushion of $199 billion, which at the current rate of $60-63 billion of imports leaves an import cover
around 3.25 months.
Thus, import cover is not an appropriate metric to measure the adequacy of reserves for a country like India. Import cover must be looked in conjunction with IIP
which gives a true picture of the adequacy of reserves.
In the present situation, thinking of a robust import cover of reserves alone without taking IIP and liabilities into context indicates “a glass half full”.

Strong dollar and its implication for India

Why is the US dollar strengthening?

The US Dollar Index, which measures the greenback’s exchange rate against six major global currencies, recently surpassed its 20-year high and is currently trading at
over 105. It began the year at 96. Three macroeconomic developments have propelled the Dollar Index upwards.
One, US consumer price inflation which was edging up since October 2021 hit 8.6 per cent in May 2022, its highest level since December 1981, driven by high energy
and food prices. When inflation rises, interest rates in an economy generally catch up. This makes bond investments in the country more attractive, leading to higher
demand for the currency. The yield on the 10-year US government bond has doubled from 1.4 per cent to 2.8 per cent in a year.
Two, after being in denial about the stickiness of inflation until early 2022, the US Federal Reserve has gone into overdrive to quell it with rate increases in recent
months. Since March, the Fed has raised its policy rates by 150 basis points. With its recent hawkish pronouncements, market watchers expect it to put through a
further 75 basis point hike in July.
Three, with Western central banks closing the tap to easy money and raising rates, the tidal wave of cheap global money originating from these countries, that
propelled all risky assets from cryptocurrencies to junk bonds to equities in the private and public markets, has suddenly begun to recede.
This has led to sharp falls in risky assets, prompting a global flight to safety. A majority of global institutional investors are based out of the US. As they withdraw
from risky assets and repatriate their money back home, dollar demand surges, further strengthening the Dollar Index.
What does this mean for the Indian rupee?
When the US dollar strengthens, the Indian rupee usually has no choice but to give in. India relies on dollar-denominated imports for over 85 per cent of its crude oil
requirements and imports more goods than it exports. Therefore, India’s import bill usually shoots up when the dollar strengthens, increasing the local demand for
dollars.
Foreign Portfolio Investor (FPI) pullouts worsen the situation because this further increases the domestic demand for dollars. Since the beginning of the year, the
rupee has lost about 6 per cent in value terms against the dollar.
How will this impact India and its economy?
A stronger dollar tends to bloat India’s import bill and widen the deficit between its imports and exports. If this gap gets out of control, it can lead to a balance of
payments crisis (though risks of this are low in the current context). Many essential commodities and intermediate goods that India imports also get costlier, thus
feeding into domestic inflation.
Recent dollar strength has magnified the impact of recent crude oil and edible oil price spikes on the Indian consumer. Indians who remit money in dollars to support
relatives will need to shell out more. A flight to the dollar by foreign investors precipitates a fall in local stock and bond prices.
To stem capital outflows, a fast-depreciating rupee can also force the RBI’s hand in hiking interest rates more quickly or steeply than it originally intended.
How is the RBI handling this situation?
When the rupee slides against the dollar, the RBI has two main weapons to stem the slide. It can put through sharp interest rate hikes in India, to make domestic bonds
and gilts more attractive to foreign investors, so that they rethink their pullouts.
Or it can use its large foreign exchange reserves, built up precisely for such contingencies, to intervene directly in the currency market. The RBI has been using
multiple routes to add to the supply of dollars in the market. So far this year, it is estimated to have spent over $40 billion out of its reserves to sell dollars and buy up
rupees.
It has also been taking sell positions in the dollar in the futures and forward markets. However, the RBI states it won’t stop the rupee from finding its true value
through depreciation. Its main intent is to prevent shocks to the economy from a bout of unruly exchange rate volatility.
What is the prognosis for the US dollar and Indian rupee in the near term?
With the Russia-Ukraine conflict persisting, oil prices still on the boil, and no sign of relief on the FPI pullouts, most forecasters expect the rupee to slide further to 80
or even 81 levels against the dollar in the coming months. However, such forecasts can change very quickly if the conflict ends, oil prices cool off, or FPIs suddenly
begin to find value at lower levels in Indian equities.

Strengthening cooperatives

The Union Cabinet, through notification dated July 6, 2021, created a new Ministry of Cooperation. In one year of its formation, the Ministry has initiated significant
steps to strengthen cooperative societies.
The aim is to deepen cooperatives as a true people-based movement reaching up to the grassroots and develop a cooperative based economy model to realise the
Prime Minister Narendra Modi’s vision of ‘Sahakar se Samriddhi’.
The cooperative movement has fostered a membership of 270 million and a network of 8.5 lakh stretching across rural India. And this potential is being leveraged by
three recent steps:
Computerisation of PACS: In a significant move, the Government, on June 29, 2022, approved the computerisation of 63,000 Primary Agricultural Cooperative
Societies (PACS). This will provide a technology-enabled level playing ground for PACS that serve rural areas, particularly small and marginal farmers.
The computerisation will be backed by cloud-based common software with cyber security and data storage, digitisation of existing records including maintenance
support and training. This software will be in vernacular language having flexibility of customisation as per the needs of the States.
Computerisation will bring transparency and accountability to their operations and facilitate PACS to diversify their business and undertake multiple activities and
services. This will make PACS competitive and enable them to integrate with physical, commodity and e-markets, thereby enabling greater market access to small and
marginal farmers.
Procurement of cooperatives on GeM: Yet another considerable pathway has been procurement by cooperatives on Government e-Marketplace-Special Purpose
Vehicle (GeM-SPV). The Ministry of Cooperation is encouraging Multi State Cooperative Societies and Cooperative Societies registered under State Cooperative
Acts to join the GeM platform for the benefit of their members.
Purchases through GeM will provide the following benefits: (i) The cooperatives would get competitive prices through an open and transparent process, and this
would be economically beneficial to the members of the societies.
(ii) The cooperative societies can procure from about 45 lakh authenticated sellers/service providers available across the country on a single GeM platform.
(iii) Following the standard procedures on GeM would lead to saving of time and reduction in the administrative burden.
(iv) It would enhance the credibility of the cooperatives as complaints of mismanagement of funds will get reduced.
GeM will provide a dedicated on-boarding process for cooperatives, technical infrastructure to support additional users on the existing portal, and assistance to
cooperatives through available contact centres, in-field training and other support services.
Marketing, branding and export: The next step in the framework of enabling the ecosystem of computerisation and on-boarding of cooperative societies on GeM is
having a market plan with branding as a core strategy. Cooperative products have a huge potential in the domestic as well as global market as they are products by
entities where people and community are at the core.
They can be market positioned and subsequently branded in a unique way which brings out the strong aspects of a cooperative business model like cooperative
identity and cooperative value of concern for the community. Branding can be a reflection of the cooperative identity which will bring customer loyalty and increase
the number of members in a business ambit.
The sales proceeds are directly or indirectly used for member benefits and this can serve as a core positioning strategy. With a marketing and branding plan,
cooperatives could be ready for exports by proper identification of sectors, products and export markets.
Making cooperative societies ready to compete in the international market will require training to adhere to grades, standards, compliances to sanitary and
phytosanitary measures, etc. A concrete step in this direction has been the initiation of training on agri-exports and making a directory of cooperative brands to
showcase the strength of cooperatives as socially embedded business enterprises of India.

Labour reforms will hurt employment

Labour Minister Bhupender Yadav, in the article ‘Labour reforms and the rise of jobs’ ( BusinessLine, June 24), argues that “India’s labour regulatory framework has
been rigid and hindered the growth of output, investment and employment expansion”. He buttressed his arguments with the reports of four big employer associations
— Assocham, CII, FICCI and PHDCCI — along with a study of VV Giri National Labour Institute.
He then cites the labour reform undertaken by the BJP government in Rajasthan in 2014-15 and how that has paid off. Before getting into the debate on labour reform
vis-a-vis the growth stories that have repeatedly been dished out since the 1990s when the LPG (liberalisation, privatisation and globalisation) policies were first
rolled out in India, it would be relevant to assess the current unemployment scene. The Minister has portrayed a rosy picture, whereas the reality is alarming.
Thirty-one years after that watershed moment in India’s socio-economic history, the country is battling acute unemployment and job losses.
Informal sector jobs
In a 2019 report, data analysts at IndiaSpend reveal that the country had not created adequate jobs since liberalisation, and 92 per cent of jobs created were in the
informal sector.
Thus the unemployment situation has been alarming even before the huge dislocation unleashed by the unplanned lockdowns imposed in 2020-21 in the wake of the
Covid-19 pandemic. Much before the pandemic, the National Sample Survey Office (NSSO) reported a 6.1 per cent unemployment rate in 2017-18, the worst in over
four decades. The picture has become more dismal in the ensuing months since April-May of 2020.
For instance, in December 2021, the Centre for Monitoring Indian Economy (CMIE) estimated that nearly 53 million Indians were unemployed, a large proportion of
whom were women. The unemployment rate was hovering at 7.91 per cent in December 2021.
The recent agitations by the youth against the Agnipath scheme are a reflection of the gravity of the situation. Recently, the Railway Recruitment Board received 1.25
crore applications for a mere 35,000 posts. Many a time a few government jobs, that too at the bottom level, have attracted thousands of applications.
Clamour for govt jobs
Why is there this scramble for government jobs? Labour historian Prof Maya John says it stems from the fact that bulk of the jobs in the private sector is characterised
by high job insecurity (easy hire and fire), poor basic pay, and long hours of work. Historically, only a small number of employer-employee work relations —
associated mostly with the formal sector — have been subject to state regulation. However, in recent decades, there has been a steady decline of even that.
This deregulation has been coupled with a concerted push towards rapid privatisation of the public sector.
Together, these developments have contributed significantly to periodic and permanent mass unemployment among both skilled and less skilled workers.
In addition, avenues of gainful employment for new entrants in the job market have fallen drastically.
Contrary to the Minister’s claims, the VV Giri National Labour Institute study (No 122/2017), led by Sanjay Upadhyaya and Pankaj Kumar, did not find any evidence
that previous labour law reforms initiated in Rajasthan and other States had succeeded in attracting investment and boosting investment leave alone create jobs.
Rather it had concluded that that “so far as expected outcome/impact is concerned from the effected amendments in these States… the strains on labour are already
clearly visible which warrant attention to ameliorate and to offset the resultant hardships and uncertainty faced by the workers at least in the interim period.”
Rajasthan’s labour reforms
As the Minister has referred to the Rajasthan experiments in labour law deregulation as the most ideal, it would be in order to cite a more recent research on this. The
Azim Premji University’s Centre for Sustainable Employment has done an exclusive study on the Rajasthan experiments under the title ‘Labour Reforms in the Indian
State of Rajasthan; a boon or a bane?’, by Diti Goswami and Sourabh Paul and published as the CSE Working Paper in January 2021.
In this paper, the authors conclude thus: “Our empirical analysis shows the reforms to have an unintended consequence of the decline in labour use... The implications
regarding employment are similar to those presented by D’Souza (2010); Kapoor (2014); Chandru (2014); Chatterjee and Kanbur (2015); Deakin and Haldar (2015);
Roychowdhury (2019); Roy, Dubey and Ramaiah (2020) in the sense that higher flexibility (of labour laws) is associated with weaker employment growth. Also,
worryingly, the increased flexibility results in a disproportionate reduction in the directly employed workers. Heyes and Lewis (2015) and Avdagic (2015) find similar
results for the European Union.”
Importance of human capital
According to the ‘Ease of Doing Business’ study published by the World Bank in 2014, only a little over one-tenth of the respondent firms in India had perceived
labour regulations as a major constraint (World Bank Group 2014).
Research by Kucera (2002) showed that core labour standards of the ILO produce better human capital (that is, the elimination of child and bonded workers), greater
efficiency through the labour cost-productivity nexus, and more social and political stability via freedom of association and collective bargaining. Freeman and
Medoff (1991) have argued that trade unions contribute to the productive efficiency of a firm through voice channels and also contribute to equitable outcomes in
them.
Hence, to accelerate growth and provide jobs to all the aspirants in the labour market and, thereby, reap the huge demographic dividend, there’s a need to get rid of
pro-corporate, both domestic and foreign, policies. Economic growth and employment have nothing to do with labour reform. They are more specifically related to
demand constraints, which entail more redistributive measures.
Thus, the implementation of the labour codes and rules has no potential to accelerate India’s journey to lead the world’s strongest economies; rather, it would lead to
the enslavement of our workers, besides aggravating the choking of consumption and contributing further to the slump in the job-market as well as employment
generating investment. India has achieved higher rate of growth before 2014 without any drastic deregulation in the name of labour law codification.

How to curb AI-driven human rights risks

Artificial Intelligence has found wide applicability in India — from developing better products and services to improving public policy and governance. Stanford
University’s AI Index Report pegged the rate of AI skill penetration in India at 3.09 times the global average from 2015 to 2021.
This is mirrored in the increasing adoption of AI solutions by the Central government and various State governments such as the use of AI in aiding public schools in
Telangana to identify farmers ineligible for PM Kisan aid. However, AI deployment is not free from human rights concerns. As AI interacts with consumers and
workers on a daily basis, it can expose them to risks. Marginalised and/or vulnerable communities can be most impacted.
In a recent study, Bengaluru-based tech think tank Aapti Institute, in collaboration with the Business and Human Rights (Asia) programme at UNDP India, examined
the impact of AI deployment on the human rights of consumers in finance, healthcare, and on the labour-force in gig work and retail. This work builds on existing
research, which has found that a human rights-respecting approach by businesses can enhance individual and community well-being and drive sustainable economic
growth.
Unpacking human rights risks
In the healthcare sector, prominent risks include inaccurate diagnoses stemming from biased datasets. Doctors in India usually diagnose heart attacks based on
symptoms experienced by men. This means that any AI developed to diagnose heart attacks will under-diagnose Indian women, as the AI will be trained on data sets
that are biased. Further, AI predictions on health conditions can contradict the clinician’s diagnosis, raising concerns about their ability to provide satisfactory care.
Digital lending apps — an emerging source of credit — rely on AI-based credit scoring. This method scores borrowers’ credit based on non-financial data collected
through social media profiles and online purchasing history. While digital lending apps open up access to credit for those excluded from traditional modes, they have
also exposed these populations to numerous risks from inaccurate credit scoring, discrimination, harassment and financial exclusion.
In retail, AI-based automation is impacting workers on two fronts. One, the replacement of workers by AI systems. Second, the use of workforce management
software for tasks like attendance tracking and employee scheduling. The software operates within parameters and does not recognise subjective issues like delays due
to traffic jams or internet issues leading to non-recording of attendance.
Without adequate human intervention in the operation of the software, workers have to follow rigid systems that don’t appeal to subjectivity and impact worker
agency.
AI intermediation in gig work can also lead to poor work conditions. Allocation of tasks is tied to workers’ in-app ratings, determined by AI through factors like
customer ratings, job rejection rate, and timely task completion. This means that workers have to endure problematic customer behaviour, as complaining can likely
lead to a bad rating from the customer. Many delivery-based riders also break traffic laws to complete tasks on time, a trend noted by police forces across cities.
Poor working conditions have seen numerous protests by many gig work workers. The absence of adequate grievance redress and social security protection can
exacerbate the impact.
In addition to these sector-specific risks, there is an overarching risk to privacy that cuts across sectors. Sensitive data is collected from customers and workers without
adequate limitations on who this data can be shared with or for what purposes.
Company policy, regulations
While technology is often considered responsible for these risks, it is clear that the technology does not act in isolation, rather, the risks presented by the technology
are rooted in business policies and overarching regulatory frameworks. In many instances, the AI is designed to function as per the requirements of the business.
Therefore, the arising risks stem more from the company policy than the technology itself. For instance, in the gig sector, incentives to workers are based on their
ratings allocated by the AI algorithm, which is developed in accordance with subjective company policies.
Still, businesses can benefit from respecting human rights through reduced headline risks, better products and services, and workforce well-being. This is supported by
research: a 2019 London School of Economics and Political Science study found a clear connection between employee well-being and increased returns for
companies.
Regulatory frameworks also play a critical role. The lack of privacy and data protection regulation in India amplifies risks across sectors leaving consumers and
workers with no or unclear remedy for misuse of their data. Legal and regulatory frameworks can guide AI deployment to be more human-rights oriented, as noted by
the European Union in its regulatory framework proposal on AI.
Government and businesses
It is evident that in mitigating human rights risks from AI deployment, the State and businesses play a critical role, albeit with differing responsibilities.
Governments can incentivise businesses through policy, ensure compliance, and also establish capacity-building measures. For instance, the government can build
capacity by enabling availability of resources such as unbiased and representative data. They can also support the creation of evidence on the positive economic gains
from human rights compliance.
Businesses can enhance human rights protection in their corporate governance by making AI and its actions more explainable and ensuring adequate human
intervention and oversight. Initiatives like Uber’s Driver Advisory Council which enable participatory models of governance can also mitigate human rights risks.
As the use of AI grows, its impact on society cannot be neglected. Our research argues that increased profits, expanded market bases, and reduced headline risk are
reasons for businesses to start talking about human rights. A collaborative effort by businesses, AI developers, civil society organisations and the State would go a
long way in realising the true economic and social potential of AI.
Vinay is a Senior Research Associate at Aapti Institute, and Nusrat is the Business and Human Rights national specialist at UNDP India

Robots need our guidance

In the 1968 science fiction film 2001: A space odyssey, a supercomputer called HAL turns rogue and starts taking control of the mission. A computer run amuck
because it can think beyond what it has been programmed to do! This is what came to mind when I read about the engineer at Google who claimed that his company’s
LaMDA system had become sentient. Sentient is a term that you normally associate with Buddhist literature, not computer engineers. But this engineer was trying to
tell us that this system was an intelligent being.
That is worrisome, that a computer can now pretend to be a human being. The reaction of the company was even more odd — they suspended him. Was it because he
was talking out of turn, or were they wondering about his judgment and ability to continue working on the project?
Be that as it may, robots and artificial intelligence (AI) have been making progress in leaps and bounds. I’m clubbing the two together since their impact on what
happens to jobs and our societies are similar. And the question is: Should we adjust to robots and AI or should they adjust to us?
Different paths
Answering this question can take us down different paths. Research shows that in families that use the so-called digital assistants like Alexa or Siri, children develop
an authoritative voice which is required by these machines rather than more polite interactive styles. I suspect that children’s perception in their early years of their
parents as all-knowing beings takes a hit and has consequences for family norms and subsequent behaviour.
Technologists are thrilled with the growth of AI and robots that make use of them. Productivity goes up, and output is not affected by irascible human behaviour. With
unemployment at a low 3.6 per cent in the US, and rising wages, many companies are investing in robots to meet their production goals. And we are already seeing the
effects. Orders for robots are said to be 40 per cent higher this year compared to last.
Use of robots was traditionally confined to areas of production that were extremely repetitive or considered unsafe, such as welding and painting on auto assembly
lines. Nowadays, robots are said to be used in other industries such as food processing, pharmaceuticals, etc., and in complex tasks. The machines have helped to
speed up process, and allow for schedule changes quickly thereby cutting time to market. Reports show that in some operations, where a three-person crew would do a
task, now only one person is needed along with a robot.
Problems in the long run
That is a good deal at a micro level. But how should society handle the problem over the long run? When machines begin to handle more and more human jobs, is
society prepared with minimum basic income plans to deal for its people? Labour shortages come and go, people live longer and excessive reliance on automation will
leave a lot of people surplus. And surplus people, even when their minimum needs are taken care of, don’t just sit at home but create other issues in society.
And the people who will become surplus are not just the labourers in risky back-breaking jobs whose work (thankfully) has been taken over by the machine. They are
also the programmers and mid-level managers whose jobs are being taken over by those AI programs. RioTinto, the mining company, faced with difficulty in getting
machine operators and labourers moved into an environment of driverless vehicles and robots, all managed from remote centers. And now, it finds it is competing
with other industries to attract the data scientists and systems engineers and will look for AI ways to replace them.
Meanwhile, the dockworkers union in the US has taken a stand on continuing automation. Having given in to management demands in the past, the union found jobs
shrinking as mobile cranes and self-driving carriers pick up and move containers reducing manually operated vehicles and loaders. But this is a greater issue than a
labour-management dispute. Should governments take a stand and through fiscal and other policies direct robots and AI into areas that have the least long-term harm
to society?

Despite structural inequality, small acts of kindness have value

Panditji looked very worried. His eyes were searching the dense foliage which overhung the high wall and he was making sounds which one normally makes to summon an animal. In the end, he
just gave up and went back home. Another effort to locate the cat he had been feeding daily for months had failed.
The cat had been coming every day at around 6:30 pm and waiting at a specific spot on the wall for Panditji to come with the food. Panditji would leave the food and the cat would come down,
eat and leave. But now for several days, the cat was not coming and Panditji was distraught. He feared that a rogue dog that had recently been seen in the neighbourhood had killed it.
Panditji is a man of modest means who makes his living from officiating at weddings and funerals and other ceremonies. And yet, for the cat, he ensures that there is always branded cat food.
The reason, as he told me, is that cats are non-vegetarians and so need their quota of meat. He is obviously a strict vegetarian and thus to ensure that the cat gets a balanced meal, he buys a big
bag of cat food.