How can we revive the rupee?

How Can We Revive The Rupee?

The most commonsensical   way, very rare on the ground though, to revive the plunging rupee, is to make India a vastly more attractive investment destination.

This means opening up many more sectors and areas to FDI on liberal terms. Of course this needs more than a policy framework or even changes notified and implemented, because despite the size of our market, most foreign investors are both disappointed and wary of our lagging reforms process.  There are smaller places with less red- tape and bigger yields for effort put in. India is a difficult country for foreigners to operate in.

Foreign direct investment is the best way to bring in the dollars that stay because they go into local enterprise. This is not borrowed money and has great potential to prove a win-win situation for all concerned. We have no time to lose in doing this, even as we are losing it most callously.

Of course, this is a medium to long term solution, and not very useful in the present crisis but worth stating anyway because it can go a long way to prevent future crises with regard to the value of our currency.

Our moribund UPA Government, solely focussed on the assembly and general elections coming up, is not going to do anything to encourage FDI now in the 10 months or so left. They would not be keen on benefitting the next Government, unlikely, from all opinion polls, to be themselves.

And so, the rupee will continue to slide unabated. The Government is currently hell bent instead to increase our exposure to vast welfare schemes including the Food Ordinance in the works. The idea is to seek votes on the back of it, and all the other welfare schemes operating, and never mind the economic impact on our fiscal deficit. If it puts the Congress Party in a position to head the next coalition after the general elections, their objective is realised.

Our balance of trade deficit presently is some $20 billion a month. Our CAD, or current account deficit, is caused by this balance of trade working against us. With China it is $ 40 billlion and rising and is almost half of the total CAD if one does not count oil imports. And it is steadily rising. This trade imbalance is at the root of rupee weakness structurally speaking.

Our productivity and infrastructure shortcomings are such that it is a wonder we are the world’s 10^th biggest economy in nominal GDP terms and the 3^rd in purchasing power parity terms even today.

But thank God for the remittances from Indians working abroad. Next to China, we have the biggest inward remittance scenario, and this steady inflow keeps us ticking over somehow despite our sorry export figures as well as low FII and FDI flows.

A strong export showing could have done quite a lot for the strength of the rupee. But for that we need thousands of quality items that the world wants to buy. We export very little and exports overall account for around 12% of the economy.

But that too is under threat due to the external environment in Europe, the US and indeed most of the developed world. And of course our lack of a strong export track record, for all that we do including commodities, value- added goods and services.  The IT area, software, BPO, and so on, is an exception, but is currently under pressure too because of the external environment. Ditto is the case with diamond import and re-export.

The Government could do a lot more by way of allowing large investment in public debt from the FIIs, but it shies away because of the security and sanctity implications. The RBI could intervene more to shore up the rupee even though it would be like King Canute trying to part the waves, but our dwindling reserves which were twice as large some time ago, can only finance about 7 months of imports now. The oil bill is building ever higher and the cheaper rupee, depreciated 10% in one month alone since May 2013, is certainly not helping.

The Government could work on stimulating domestic growth but has chosen to try and curb inflation instead, unsuccessfully, as it has persistently stayed around the 8% mark at the wholesale level and much higher at the retail points.

So not only is there a crisis but no clarity or agreement on what macro action to take in order to make things better. The sinking economy and the rupee alongside does not seem to be a priority. Every suggestion any outside observer can make therefore is largely theoretical in purport. There is no time frame to putting things right or attempting to. 

Reading between the lines, it seems the Government thinks the situation has been caused by the US Federal Reserve announcements on cutting back on its debt acquisition in the light of a perceived revival of the US economy alone. So it will pass, it thinks, and the rupee will gain in value as the time goes on.

(845 words)

June 21^st, 2013

Gautam Mukherjee