In the series of good news regarding the state of India’s economy comes the decision to prepay nearly $3.0 billion owed to the World Bank and the Asian Development Bank. The move is expected to have a salutary effect on many economic parameters.

India’s foreign exchange reserves are showing no signs of abating. As of date it stands at $72 billion. This embarrassment of riches is now being put to some creative use. Prepaying the loan will arrest the rupee rising against the dollar and make Indian exports more competitive.

Exports --up 34% this quarter-- are expected to forge ahead further in two months, when the prepayment is completed. The growth in exports is itself belying the myth about the uncompetitiveness of Indian manufactures, but then that is another story.

The Government of India is in fact going to borrow from the domestic market to pay the external debt but even this is a positive decision. These foreign debts cost 6.7% p.a. while domestic borrowing rate is only 6%. Also, raising of this domestic debt will suck out excess liquidity and control inflation.

The one continuing adverse economic parameter is the fiscal deficit which is running at 10%. Economic analysts however feel that additional borrowing in the domestic market will be matched by the fall in external debt: the exercise will be fiscal deficit neutral.

Overall this news of prepayment may be taken as a sign of a maturing economy. On another front, --not entirely unconnected with this news-- the Reserve Bank of India has expressed the opinion that unaccounted money that used to flee India may for the first time since Independence be returning to India. This is mostly because post-9/11, black money is being winkled out everywhere.  But it is also due to the fact that in a world beset with recession, India’s economy is growing at close to 6%. Money needs to be here to reap the opportunities.
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