How to revitalize the Rupee

How to arrest Rupee’s slide?

Rupee slid to an all time low of Rs 58.15(11-6-2013) against the dollar as against Rs 57.32(June 28,2013)/dollar sending shock waves to the worried exporting fraternity, who have put on hold export dealings for the time-being in anticipation of better tidings. It could further erode to touch Rs 60/to $1, if no effective steps are not undertaken. Government’s lax in providing excuses instead of finding a permanent solution to the vexed problem is a result of party paralysis.

The slowdown in exports will irrestibly reverse the momentum of reforms, which is already shaky. It will impact economic growth momentum to the Asia’s 3^rd largest economy which has been beset with sharp deceleration of growth, worsening the public finances; Balance of Payment position (insufficient reserves in FER) (present FER enough to tide over only for 7 months)(the lowest ever in the last 13 years). Export substitution by importing inputs has made exports less glamorous due to pricing difference and thin margins. Fluctuation in the capital inflows has been a cause for Rupee weakening, says PM’s advisor C Rangarajan. Once the inflow eases, the weak Rupee will gain, he says. Experts don’t bite this bullet.

Partially convertible Indian currency’s nose drive has affected Indian exports adversely..

RBI’s inaction cannot be justified. There is a risk that needs to be taken note of in the currency fluctuation territory. There is also management of currency fluctuation for which remedial measures need to be taken. But RBI does nothing but remains passive. RBI needs to herald a realistic Policy by putting place humps which will restrict Rupees bump. A mature exchange risk mechanism should be an addendum to RBI’s annual fiscal Policy to control erosion of the Rupee value against greenback.

RBI’s present practice of piecemeal market intervention must be replaced by Policy intervention to stabilize Indian Rupee.

The problem rose in 2002 when Bimal Jalan was the Governor of RBI. He did nothing to look into the symptoms or the disease to arrive at an equitable policy mechanism. His successor too, did nothing (Dr YV Reddy). Subba Rao, is wild off the mark towards the issue. In 2002, Rupee was Rs 48.7341 to a dollar. Down 7 years, the value came down to Rs 40.82 (2007). The Tirupur Exporters Association (I was its Executive Secretary then) submitted a paper suggesting methodologies to rein in Rupees abrasion. In 2007, India’s exports rose from $ 40 billion in 2002-03 to $ 140 billion, which resulted in our Foreign Exchange Reserves turn around about $ 275.954 billion which was adequate to meet 1 year’s import bill.

Reckless import Policy which saw import of Rs 65 K Cr (edible oil), 100 K Cr (Gold), 40 K Cr (other imports0, burdened the exchequer in addition to import of petroleum products. While the economy suffered against import of petroleum products, and their domestic prices were often raised by the Oil companies which fuelled inflation. India’s higher BoT and the widening gap between BoP and BoT created huge trade deficit which affected economic growth. The price instability caused by high cost of import of inputs for export substitution substantially pushed the cost of production while the export returns were not commensurate with the high costs resulting in trade disadvantage.

RBI’s belief that crisis will blow over time and normalcy will return automatically is an undesirable economic conclusion which does not stand the test of theories. This is a faulty thought, part of policy paralysis, which has affected various growth institutions curtailing its growth. Services sector has borne the brunt of such a fallacy of thought; off shore infrastructure costs override few profits of the on-shore activity. IT industry is for Himalayan trouble.

It is high time, government and RBI take cognizance of the problems manifest in the Rupee devaluation direction. MoF would do well to keep quiet and leave it to RBI to do its job

India's economy past its balmy days

Over riding downside risks to Growth: economic Story

Politics and Contagion are the drivers of the underperforming world markets, not balance sheet nor earnings. Shaky Europe, political gridlocks, volatile markets, dysfunction in United States, have been a major cause to create disorder to world trade’s orderly growth. India has plentiful problems, short term, medium term, long term, combination of domestic factors and deteriorating global economy, stampedes in the elections to the state assemblies, has created a governance paralysis.

RBI gave a shock treatment, albeit a proactive stance by reducing the Cash Reserve Ratio (CRR) by 75 points to 4.75 from 5.50 effective March 10, 2012. The timing was perfect. On 15th March, advance taxation to the extent of Rs 60,000 Cr would be required which under the present liquidity deficit, it is difficult for the Banks to manage. The release of Rs 48,000 Cr into the liquidity inflow would help Banks to frontload cash balances.

The macro economic picture will be assessed by the RBI on 15th March 2012, when it has to do revelations to enable the government to bring forward a favourable budget, which is the last straw on the UPA’s back. With food inflation in the stable for now and the tamed general inflation may not cause any upheavals at least for the present. The winds are favourable and the sky is clear, which makes it incumbent for the RBI to educe the interest rates which were hiked 13 times during the last 20 months or so, to give respite to the manufacturing sector to beget a better index of industrial production. The REPO rate announcement is long overdue. The industrial growth in the last quarter was 0.4% due to a combination of factors.

The burnt of petroleum hike read petrol hike had a destabilizing effect on the inflation figures. As the demand for petrol goes up in proportion to the manufacture of more and more motor cars for the middle-class, and with favourable bank interest to buy cars, the automobile population has become weird. Now, any dent of pressure would slow down the automobile sector growth which would mar a better IIP. We need to choose between growth, or hiking the petrol prices to produce better figures for oil companies in the balance sheet, which is preferred? Government needs to think aloud.

The Financial accountants see everything from the prism held by them on seeing green figures. They look forward to ways by which they can reduce the red figures. In doing so, they have distraction that some red colour entries cannot be touched- being pet projects of the UPA Chairperson, Greenfield project for the giant development of a state where sympathy for the party in power is almost hundred percent, etc. Rural ministry has pumped money into the rural sector, where the retailers have made a fast buck because of enhanced purchasing power. Through a slew of government interventions, it is not enough if we increase the capacity of BPL to spend more; they must essentially earn higher and better with support initially and without support, further down the road. Does any government scheme evaluate the incidence of income capacity of any beneficiaries? No.

We see a BoP in the current account ( $ 166.8 billion) which is a glaring and high trade deficit. Exports between April-February 2011-12 showed a jump of 21.4% and is about $ 267.4 billion, with the export of the terminal month of the year to fetch $ 33 billion, to round off the exports to $ 300 billion. This seems incredible given the glut in India’s foster as well as traditional markets. There was risk as we moved over to new and emerging markets. Imports grew by 29.4% during the same period to touch $ 434.2 billion, posting a straight trade deficit of $ 166.8 billion. This is not sound strategy even though we have a comfortable Foreign Exchange Reserves around $ 300 billion.

While petroleum products occupy a significant value of imports, government should contain import considerably or recklessly. The annual import of sizable quantity of edible oil from various countries, more than the required demand at 0% customs duties, is hurting the domestic industry. There are also anti dumping charges against these importers, but the Indian Agricultural Ministry which has neither figures nor reasons to justify imports has been depending upon indiscriminate import. Domestic oil seeds industry, Coconut oil industry has gone red because of cheap import. Government should take a call whether it is wise to export Cotton in its raw form or give value addition and get 6 times its price especially since the export is directed at our direct competitators like Bangladesh and China? Gold imports need a rethink. Gold belongs to a class of investments that will never produce anything but whose growing value depends upon the belief that someone else may pay more for it. Rupee’s down trend against the Dollar for a period is not a good aspect considering exporters bag of problems. Our cardinal import policy through FTP needs revision.

In our anxiety to post higher economic growth, we had privatized certain sectors. Aviation sector was one that underwent a major transformation. Air India, Indian government airlines is cash strapped. Kingfisher has plethora of problems. When the going was bad, Kingfisher’s accounts were blocked by Income-Tax and Service Tax. Banks announced simultaneously, that Kingfisher account has become Non Performing Asset, hence any bail-out would depend upon cleansing the account. The Oil companies have stopped giving jet oil to the airlines. Airports are demanding their dues. Government is keeping a silence. If the Company fails, what about employees? Flight schedules? Alternative? Complete disorder can be expected in the aviation sector. Banks will lose their credits. What about goods and services which catered to the airlines on a daily basis. The vacuum cannot be created by a foreign airliner undertaking flights in the domestic routes. Jet Airways has also been served a notice. What government is contemplating is not clear. Already damage has been done, and the government would be doing greater damage if they do not act. Indian balmy economics is in the sorrow days trap!