Sinking Rupee

Dr Ashwani Mahajan
Rupee has declined by rupees 5.2 per US dollar in less than a month and half. Finance minister says there is no reason for panic as the Government is taking steps to push growth. Fast rising Current Account Deficit (CAD) in Balance of Payment and the resulting foreign exchange crisis is being cited as the main cause for this situation. CAD is rising because of huge and constantly rising Balance of Trade (BOT), due to big and fast rising import bill and lagging exports. For the last so many years, the Government has been a moot spectator of fast rising imports. Though petroleum products traditionally have been major item of our import bill comprising nearly one third of our imports, precious metals like gold and silver never used to be of great importance earlier. Likewise telecom, project goods like power plants etc. never used to carry much importance in our imports. However in the recent years their share has gone up. Import bill of gold and silver has increased from $22.8 billion in 2007-08 to $61.3 billion in 2011-12. Recent spurt in imports of these items has been the major cause of increase in our import bill. In the last three years our trade balance from China has gone up to $40 billion in 2011-12, from nearly $27 billion in 2007-08. Major reason for spurt in imports from China is increase in telecom and power plant equipments, project goods and continued imports of electronic and electric goods. Trade balance with rest of the world is also rising fast. Amidst this scenario of sinking rupee, the Government is finding itself completely helpless. Government and RBI both fear that any intervention to stem fall of rupee may deplete of foreign exchange reserves.
According to RBI Bulletin, June 2013, our trade balance has crossed US$ 191 billion and CAD is also expected to be near $100 billion. It is notable that in this era of globalization, our imports have been rising at record pace and import bill increased in leaps and bounds, from 24 billion in 1990-91 to 492 billion in 2012-13. In terms of percent of GDP imports were hardly 8.1 percent of GDP, which went up to 28.3 percent in 2012-13. Exports also did increase during this period, but only to 17.3 percent from 6.1 percent of GDP. As a result our trade balance increased from merely 2 percent to 11 percent during 1090-91 and 2012-13.
Why did exports lag?
The important argument in favour of the new economic policy adopted after 1990-91 was that nation’s debt was rising due to huge trade and balance of payment deficit. It was said that rising foreign debt was causing damage to the nation’s sovereignty and development. It was argued that the only way to save the country from foreign dominance and foreign exchange crisis is the policy of Liberalisation, Privatisation and Globalisation (LPG). Under World Trade Organisation (WTO) agreements, tariff and non-tariff barriers on imports were removed, resulting in skyrocketing imports; however, our exports lagged behind. The result was higher and higher trade deficit, year after year.
Our exports lagged, as other countries were not as favourable to India, as India was to them. They have been imposing mostly unfavourable restrictions, both tariff and non-tariff. As a result of tariff and non tariff barriers and non-level playing field, our balance of payment deficit i.e. CAD, which was 9.44 billion ( 3.3 percent of GDP), even in the most difficult year of 1990-91, is likely to increase to  nearly 100 billion in 2012-13. In the third quarter of the year 2012-13, it was 6.7 percent of GDP. In 2008, our foreign exchange reserves, which were sufficient to finance 3 years of imports, are now capable to pay for only six months of imports. As a result of increasing CAD, external debt increased from 224.5 billion to 374 billion between March 2008 and December 2012. This debt does not include loans raised by Indian business houses from overseas. Balance of Payment on current account is the net amount of foreign exchange payable (in case of deficit) or the amount receivable (in case of surplus) by the nation from rest of the world, due to current transactions, arising out of imports and exports of goods and services. In the post liberalization phase, balance of trade has been widening. However, due to huge remittances received from Non-Resident Indians (NRIs) and receipts from software exports, our Balance of Payment did not show very big deficit. Between 2001-2 and 2003-04, it so happened that our Balance of Payment deficit turned into surplus, continuously for three years. However, after 2004, our CAD did not stop rising and by 2012-13, it has crossed all limits. Between 1990-91 and 2000-01, our average CAD was only 4.4 billion annually. However, in 9 years, between 2004-05 and 2012-13, CAD has reached 37.4 billion (which is 8.5 times of average CAD in 1990s). Whereas, total balance of trade deficit in ten years between 1990-91 and 2000-01 was 103.56 billion, between 2004-05 and 2012-13, the same were 988 billion. Huge remittances from NRIs and great earnings from software exports, even during the most difficult years of global economic crisis also proved to be insufficient to make good this deficit.
Government is disillusioned even today
Today, the sole remedy being suggested and applied is encouragement to foreign investment, both FDI and portfolio investment. It is notable that the Government has been giving red carpet welcome to foreign investment, and now expecting that the foreign investment can suddenly be increased out of proportion, and the nation can solve the problem of payment crisis in a short period of time, does not seem to be practical. Therefore only possibility left with the government is to raise more commercial loan, which has already been hinted at by the Finance Minister. Increase in external debt again involves repayment of interest and principal in future. Compulsion to raise external commercial borrowings may also further reduce our credit rating. It is notable that total outgo on repayment of interest and principal in 2011-12 was 31.5 billion. Foreign investors were also not behind in remitting funds abroad in the name of interests, dividends, royalties, salaries etc., and sent 26 billion in 2011-12. Studies reveal that much larger amount of foreign exchange is remitted abroad illegally by foreign companies by way of transfer pricing and circumvention of law of the land. Under these circumstances, we find that the nation is heading towards a deep foreign exchange crisis. For a long time, all our efforts to increase exports are not fructifying, while imports are increasing by leaps and bounds. Today it is imperative for the Government to impose effective restriction on imports, especially of consumer goods, telecom, power plants and other project goods; capabilities of producing of which exist in India. Effective curbs on imports of gold and silver, provision of lock-in-period on FIIs could also help. It is also imperative to restrict foreign companies to take away foreign exchange illegally, by way of transfer pricing and/or circumventing law of the land. Failure on the part of the Government to take effective and timely steps may push the nation to deep payment crisis.

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