Negative GDP growth


India’s foreign exchange reserves have zoomed by over $103 billion in the current fiscal, as of December 25. And with more than three months left, it looks set to surpass the all-time-high increase of $110.5 billion recorded in 2007-08.

  • In 2007-08, the economy was booming, registering a gross domestic product growth of 9.3 per cent on top of 9.6 per cent and 9.5 per cent in the preceding two years. The Centre’s fiscal deficit, too, was a mere 2.5 per cent of GDP. 
  • The economy has, by contrast, contracted by 14.9 per cent year-on-year in April-September 2020-21 and the Reserve Bank of India (RBI) expects growth for the whole fiscal to be -7.5 per cent (on top of a dismal 3.9 per cent for 2019-20). 
  • Nor are government finances in great shape, with the most optimistic projection of the Centre’s fiscal deficit for 2020-21 at 6.5-7 per cent of GDP (as against the budgeted 3.5 per cent).
  • In 2007-08, the $110.5-billion reserve build-up, amounting to 7.4 per cent of India’s then much-smaller GDP, was powered largely by foreign investment, external commercial borrowings and other capital inflows totaling $107.9 billion.



  • These inflows were more a result of ‘pull’ factors, having to do with global investors wanting to partake of the India growth story. 
  • The forex reserve accumulation in 2020-21 has been driven mainly by the country’s current account balance - the gap between exports and imports - turning positive at $34.7 billion during April-September. 
  • This surplus has, in turn, been due to imports in April-September 2020 falling by a massive $95.6 billion over April-September 2019. And that is further reflective of low import demand in a shrinking economy.
  • The current account surplus has also been supplemented by some foreign capital inflows. Reliance Industries alone, for instance, attracted global investments aggregating Rs 1,99,321 crore (about $27 billion) in its Jio Platforms digital and retail businesses between April 22 and November 9. 
  • Foreign portfolio investors, too, have pumped $28.65 billion into Indian equity and debt markets so far this fiscal. But total foreign capital inflows, net of debt repayments and other outflows, have been only $16.5 billion, as per RBI data for April-September 2020.
  • Moreover, unlike in 2007-08, the capital flows coming in now seem to be more courtesy ‘push’ than ‘pull’ factors. 
  • With 10-year US treasury yields currently at 0.91 per cent - they are even lower at 0.19 per cent for UK, 0.01 per cent for Japanese and minus 0.58 per cent for German government bonds of the same tenure - investors are being pushed to seek returns in emerging market economies offering relatively higher returns. Some of that dollar liquidity has been flowing into India, especially since November.
  • All in all, it makes for an extraordinary situation - of record forex reserves build-up when the economy is experiencing negative growth for the first time in 41 years and amid an unprecedented global pandemic.
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