Dr Ashwani Mahajan
As election dates are nearing stock markets and foreign exchange markets have started booming and foreign exchange markets have started showing signs of strengthening of rupee; and new hopes are budding. Sensex of Mumbai Stock Exchange has crossed the historic benchmark of 22,000. Though rupee still looks not much stronger, however it is true that the market exchange rate which had reached Rs 68.84 per US$ in August, has now come to about rupees 60 per US$. That is, rupee improved by nearly 13 percent in less than seven months. This has given rise to new hopes for strength of rupee in international markets in coming months.
No doubt, India is not the only country facing devaluation of its currency. In fact, this trend is witnessed in almost all emerging economies except China and Russia. Our finance minister says that it is due to receding of United States’ policy of quantitative easing (QE). It is notable that though currencies of almost all emerging economies, including Brazil, South Africa etc., have gone weaker vis-a-vis US$; however no one, including P Chidambaram himself can claim with certainty, that receding of QEs is the sole reason behind downfall of rupee. This may only be one of the reasons for depreciation of rupee. Though, other currencies have also been vulnerable, depreciation in currencies other than Indian rupee has been less than 12 percent; India was the only country where the rupee weakened against the dollar by 26.5 percent. Clearly, slide in quantitative easing (QEs) could not be the sole reason for such a big depreciation of rupee. We find that there was an unprecedented crisis in the balance of payments in India. During 2012-13, trade deficit reached 11 percent of GDP and balance of payments deficit reached about 5 percent of GDP. In quantitative terms, Current Account Deficit (CAD) in Balance of Payment reached 88 billion US dollars in 2012-13, and trade deficit to whopping 195 billion US$. There were many old debts; repayment of those was due in 2012-13, apart from many new short-term debts raised during the year. Huge CAD on the one hand and heavy short term debts made payment situation further difficult. Our foreign debt, which was merely 260 billion US$ in March 2010, reached 400 billion US$ in September 2013, deepened the crisis, even further. Though foreign exchange reserves of 292 billion US$ were available with the country, Reserve Bank of India did not try to stem the decline in rupee due to the fear that the ever increasing demand for dollars may not deplete our foreign exchange reserves. Government also did not make much efforts to curb CAD or even trade deficit, except imposing tariff and non tariff restrictions on the import of gold into the country, which had reached 50 billion US$ by 2012-13. Unfortunately, a major reason for huge trade deficit, namely, heavy imports from China, not only of consumer electronics and other consumer goods even project goods, power plants and telecom equipments.
To somehow manage international payments, due to massive CAD, Government adopted the strategy of inviting foreign direct investment, foreign institutional investment and even resorted to heavy external commercial borrowing. Sensing this blind policy of the Government, foreign investors began taking undue advantage of the helplessness of the Government and started arm-twisting tactics to the disadvantage of the nation. MNCs started sending huge funds abroad both through legal and illegal routes. Transfer pricing became the tool to take away massive amounts of foreign currency by foreign companies. Tax evasion became an open game (such as Vodafone). Suzuki, ACC and many other companies enhanced royalty payments to their foreign masters. Outgo of foreign exchange on account of royalty, dividends, interest, salaries and pensions started increasing in leaps and bounds and income transfers which was hardly 9.6 billion US$ in 2004-05, increased to 31.7 billion US$ in 2012-13.
Nation Looks Forward to new Government
Growth rate which had reached nearly 8.4 percent in 2010-11 has come down to meager 4.5 percent now. The important question is whether the growth would rebound to 8-9 percent or exchange rate to Rupees 50 per dollar. It is expected from the new Government that it would speed up growth in manufacturing, which has dropped to near zero in recent years and take the economy forward. It is notable that in 2007-08 growth of manufacturing had reached 15.6 percent. To take the economy out of this mess and encourage growth in manufacturing we would need reduction in costs. To make Indian goods and services competitive in international market, we must reduce interest rates, prices of raw material and fuel cost. Today our imports are nearly 28 percent of GDP. Therefore week rupee continues to remain major cause of inflation in the country. To strengthen the rupee we need to restrict imports from around the world, especially from China. We also have to spend more on agriculture, especially support our farmers by offering them remunerative prices for agriculture produces and make provision for agricultural inputs at reasonable prices and also irrigation and other infrastructure. We need to make all possible efforts to reduce wasteful Government expenditure. No doubt subsidies cannot be reduced to zero, given the state of poverty and unemployment in the country, however more efficient use of public funds can always be attempted. We need more efficient management of the economy and bring changes in those policies, which have led to today’s crisis. Restricting import of gold by way of tariff and non tariff barriers is not enough; we should also ban import of telecom equipment and power plants. It is disgusting that on the one hand order books of our premier companies like Bharat Heavy Electrical Limited (BHEL) and Larsen and Toubro are drying, we are importing power plants from China. Whereas Iran is ready to accept rupee payments for crude oil imports, we are importing crude oil from different other countries, shedding billions of dollars. There are thousands of such examples. All this indicates at gross mismanagement of the economy. Need of the hour is to choose a government which thinks in right directions, work efficiently for development and take the economy back on the track of development.
(The author is Associate Professor, Dept of Economics, P.G.D.A.V. College (University of Delhi)
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