Import cover must be looked in conjunction with International Investment Position which gives a true picture of the adequacy of foreign exchange reserves. Discuss (200 Words)
Refer - Business Line
Enrich the answer from other sources, if the question demands.
IAS Parliament 3 years
KEY POINTS
· It is prudent to measure the adequacy of reserves with reference to the dynamics that prevails in the accretion of the reserves.
· 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.
· 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.
· 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.
· 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.
K. V. A 3 years
Kindly review
IAS Parliament 3 years
Good attempt. Keep Writing.
