A. National Economic security
National security is essentially understood in terms of the state of physical (i.e. defence related) security of the nation vis-à-vis the neighbouring countries with whom we share the borders; particularly the ones with whom we have inimical relationship largely due to territorial disputes.
However, in the modern global times, the national security also has an economic perspective, which is as important as the concept of physical security; particularly in view of global trade environment wherein a nation is also economically dependent on its trade partners.
A. I. Concept of National Economic security
In addition to the defence forces (including its weapons and other military hardware) that defines the physical capability of the national security, the economic situation of the nation has an important bearing on its national security.
An economically strong nation is in a position, not only to spend substantial part of the national financial resources towards constantly upgrading and maintaining its physical security, but also leverage its economic strength against other weaker nations, both allies and enemies- strengthening ties with the allies by helping them in their difficult times and threatening the enemies by exerting economic pressure to choke enemy nation economy.
The economic security of a nation could therefore be defined, as its ability to leverage its economic strength vis-à-vis its enemies to:
a. enhance its defence capabilities to exceed those of the enemies,
b. exert pressure on the economic situation of the enemy state, so as to make it suffer economic downturn/disruption, thereby causing deterioration of the living conditions in that nation causing social/civic disturbance.
The economic security of the nation depends on robust development of a combination of strategic, industrial, commercial, financial and social sectors.
A.I.1. Components of economic security
The components of the economic security include the following major aspects:
a. Economic resilience -Consistent and high economic growth with high GDP and high per capita income.
b. Economic stability – National debt- external and internal, Forex reserves, Central Bank‘s gold reserves, core inflation
c. Currency-position vis-à-vis reserve currencies, Current a/c surplus/deficit
d. International Trade- trade surplus/ deficit (particularly vis-à-vis the enemy states)
e. Research and development capabilities in the fields of science and technology with thrust on strategic areas of space and missile technology, defence technologies, biological and genetic sciences, etc.
f. Socio-economic factors- Population, economic distribution of population, unemployment levels, agricultural developments and agricultural production, education systems and standards, social security systems.
A strong economic security necessitates strong development broadly in all the different sectors of the economy as described in the para A I above; with a high degree of self-dependence in the key sectors that can be further classified as under:
B. India’s economic security
The state of Indian economic security needs t be evaluated on the basis of the parameters discussed in the preceding paragraphs under A. I. 1 above. A comparison with our neighbour China serves as an evaluation of the real economic strength.
B. I. Economic resilience- growth of the economy
The size of Indian economy is estimated to be about 3 trillion USD, as at the financial year ended March 2020 with per capita GDP of USD 2,200.00.
During the last 6 years, Indian economy grew at an average annual GDP growth rate of around 6.8%. While it was the fastest growing economy between 2014-2018 with the annual GDP growth rate between 7-8% during 2014-2018; the growth started declining from FY 2018-19 and in 2019-20, it was the decade low of 4.2%, with growth slowing to 3.4% during January -March 2020. The year-wise trajectory of the growth is as under1
In comparison the size of Chinese economy is around 13.8 trillion USD at the end of 2019 with per capita GDP of 9,800.00. The Chinese GDP has also grown at an average annual growth rate of 6.8% during 2014-2019; though the growth rate has dropped from the high of 7.3%in 2014 to 6.2% in 2019.
In 1987, nominal GDP of India and China was almost equal. But in 2019, China‘s GDP is 4.78 times greater than India. China crossed $1 trillion mark in 1998 while India crossed it 9 year later in 2007 (at exchange rate then prevailing).2
India was richer than China in 1990 whereas in 2019, China is almost 4.6 times richer than India in nominal GDP. Rank of China and India based on Per capita GDP is 72th and 145th, respectively.
The above data clearly reveals the superior economic resilience of the Chinese economy vis-a-vis that of India.
In order that India is able to achieve a meaningful economic resilience, the economy will have to grow at an average annual rate of 10-12% for the next 15 years.
B. II. Economic Stability
The economic stability is measured by the total national (sovereign) debt, sovereign debt as a %ge of GDP, composition of the debt-external and internal, forex reserves, Central Bank‘s gold reserves and core inflation.
B. II. 1. National Debt
A high national debt in relation to the GDP denotes a weakness whereas low national debt indicates strong economic stability. A high debt indicates that a larger part of GDP may have to be spent on servicing the interest and repayment of the loans.
Further, the purpose of raising debt is an important aspect of the national debt. Debt, if raised for investment in infrastructure and social sectors helps in the national progress; whereas debt raised to meet revenue deficit has a negative impact on the national economy.
A high national debt also does not augur well for the sovereign rating, a lower rating makes it difficult for a nation to raise funds at reasonable cost, particularly external debt.
In Indian context, the debt is raised largely to support revenue outlay for the so called ̳welfare measures‘ provided as social benefits to the low-income segments of the society and is therefore, undesirable in the long run.
In order that the sovereign does not have to raise debt to meet revenue expenditure, it must have a high ratio of ̳tax to GDP‘; a tax net cast far and wide that ensures efficient tax collection mechanism. A high tax rate requiring the few affluent to pay more taxes may be politically correct, but it invariably leads to an economic disaster on account of wide scale tax evasion. The tax regime needs to be progressive with minimal concessions; providing a clear, consistent and transparent statutory and regulatory framework.
A high level of external debt is undesirable for economic security, unless the currency risk that towards the foreign currency denominated external debt. The extent of exports earnings of the nation provides a natural hedge against the possible currency risk. A nation must therefore aspire for higher exports earnings to effectively balance its external debt.
As at March 2020, the gross national debt of India stood at about USD 2.2 trillion3 , about 70% of the GDP. This can be considered as reasonable in comparison with some of the developed countries, where the debt exceeds GDP. With the implementation of ̳Fiscal responsibility and budget management-FRBM‘ framework, the fiscal deficit in a financial year is expected to be within 3-3.5% of the GDP; except under unprecedented economic disaster. This control results in avoidance of financial profligacy to raise debt for undesirable expenditure.
Post the COVID pandemic, some of the economists have suggested invoking the exception clause under FRBM framework and raise fiscal deficit by announcing a fiscal stimulus; some have also suggested monetisation of the consequent incremental fiscal deficit.
B. II. 1. a. External and Internal debt
India‘s external debt as at March 2020 is estimated to be about 564 Billion USD4 , about 25% of the total debt and about 19% of the GDP. It thus constitutes less than one third of the national debt. The external debt is at manageable levels considering the extent thereof and the forex reserves held by RBI.
A higher proportion of the internal debt as compared to external debt of the nation is a favourable situation. India is known to be a ̳saving‘ economy as opposed to a ̳spending‘ economy, where citizens with moderately high earning capacity (largely the middle class) are conservative in spending and tend to save more; to that extent India is not a ̳demand‘ driven economy. A major part of the savings flow in deposits with banks sovereign bonds and in quasi government savings schemes. A third of the deposits in the banking system flows into government bonds, by way of investments as ̳statutory liquidity ratio‘ prescribed under the Banking Regulation act.
The capacity of the Indian government to raise foreign currency borrowings in view of the recent downgrade5 of the sovereign rating to BBB-/Baa3, only one notch above the ̳junk‘ rating.
B. II. 1. b. Forex reserves
A nation must maintain a reasonable level of foreign exchange reserves to adequately cover its import liabilities. In developed countries that provide for a full capital account convertibility (CAC) for free movement of the currencies in and out, high level of such reserves is justified to absorb the outflow vis-à-vis inflow. As a general rule, the reserves in a country that does not permit full CAC is required to 6maintain reserves to cover 6-9 months of imports and other foreign currency obligations.
It must be remembered that a major part of such reserves carry a very low or almost zero yield. It is therefore necessary that a balance is struck in maintaining such reserves
India‘s forex reserves as at 31st March 20207 stand at about USD 475 billion, providing a 100% cover for one year‘s import into the country. The reserves have increased during the year due to capital inflow through FDI, investments by FIIs/FPIs, etc. RBI actively purchased US dollars during the year from the market so as to avoid an undesirable appreciation of INR vis-à- vis USD that could impair competitiveness of Indian exports.
India does not have a fully floated currency by way of total capital account convertibility; as a result, the currency is insulated from a shock of ̳flight‘ of capital overseas. Consequently, the reserves may appear to be higher than expected. However, considering that Indian imports largely consist of crude oil, prices whereof can sharply rise suddenly due to OPEC actions. Hence the current reserves can be deemed to put India in a very comfortable position on this count.
Full capital account convertibility has worked well by attracting investments, in well- regulated nations that have a robust infrastructure in place. India‘s basic challenges—a high dependence on imports, burgeoning population, socio-economic complexities, and challenges of bureaucracy—may lead to economic setbacks post-full rupee convertibility at present stage. In order that CAC is allowed in India, foreign investments through FDI route needs to be opened up on a larger scale. FII and FPI flows into financial market, considered ̳hot money‘ which can be withdrawn at will causing mayhem in financial markets as has been witnessed many times in not so distant past.
B. II. 1. b. i. Gold Reserves
Gold is considered as the ̳ultimate currency‘ and it provides a cushion against any depreciation of the currency due to unforeseen economic events. The central bank‘s gold holding can be used effectively to stabilise the currency, in exigent times.
The gold reserves forming part of the total forex reserves are valued at about 31 billion USD. Though the reserves can be perceived to be adequate, in a country that imports large quantities of gold largely for ceremonial and religious purposes, it is possible to buttress the reserves through regulatory subscription of gold bonds by the public trusts managing religious places of worship. This added stock can be leveraged to raise foreign exchange denominated external debt at competitive rate of interest against this gold as collateral.
