Indian rupee is at a historic low. Every day the downslide of the rupee makes for headline news. Coming at a time when the Euro has crashed to a nearly two-year low against the dollar, and when the exit of Greece from the Eurozone looks imminent, the continuous sinking of the rupee has baffled me. I can understand when I read that rupee is sliding against the US dollar, but how come the rupee is also sliding against the sinking Euro?
Providing some justification, Chief Economic Advisor Kaushik Basu points out that currencies of several emerging economies -- South Africa, Brazil and Mexico -- are also on the downslide. This only shows how true my concerns have been over the faulty economic pathway being followed by the BRIC countries. Like the erstwhile Asian Tigers, who blindly aped the World Bank/IMF prescription, BRIC too is repeating the same mistakes. I wouldn't be surprised if sooner than later BRIC economies too collapse.
Nevertheless, Kaushik Basu told a private channel: "The current exchange rate problems that you are seeing .. the very sharp depreciation that is taking place .. i don't think it really has anything to do with our policy or policy mistakes being made over here, which is causing that." Of course, you don't expect the Chief Economic Advisor to admit that it is because of his faulty policies that the country is deep in economic crisis. So when the government suddenly gave a crude shock on May 24 -- raising the petrol prices by the steepest Rs 7.50 per litre increase in one go -- it became clear that all is not well. Congress spokespersons can justify the increase linking it to global prices, but the fact remains that crude oil prices are decreasing over the past few months. Even with the rupee depreciation, there is no reason why the consumers should be made to cough out extra for every litre of petrol.
Hindi daily Dainik Bhaskar has come out with an interesting front-page analysis. It says that the crude oil price in May 2011 was US $ 114 per barrel. The rupee-dollar exchange rate at that time was Rs 46, and therefore the import bill was Rs 5,244 per barrel. A year later, in May 2012, the crude oil price is $ 91.47/barrel, and even though the exchange rate is Rs 56, the import bill does not exceed Rs 5098/barrel. So why have the petrol prices been increased? I don't think any economist or a spokesperson for the government will like to respond to this. In simple terms, the rise in petrol prices is the austerity measure that Finance Minister Pranab Mukherjee talked about the other day.
Returning back to the issue of the rupee sliding with every passing day, I read an interesting article by senior economic journalist Paranjoy Guha Thakurta. Writing in the Deccan Chronicle (And the rupee wept on, May 22, 2012), Paranjoy tries to explain the complex reasons behind the rupee depreciation. "In fact, the principle reason why the value of the Indian currency has come down sharply in relation to the US dollar is the huge 56 per cent hike in the country's trade deficit (the difference between the value of imports and exports) in 2011-12 over the previous year." Although there are other factors also impacting the rupee downslide, including foreign investors shying from putting money in stock exchange, but the widening trade deficit seems to be more reasonable of the causes.
He further goes on to write: "This is because of the fact that while imports have risen by nearly a third , the rate of growth of exports in 2011-12 has halved from the 41 per cent growth achieved in previous fiscal year (2010-11)." I can understand that the rising import bill is primarily because of oil imports. As Paranjoy says: "Imports are not coming down because one-third of India's total imports currently comprises crude oil and 80 per cent of the country's requirements of crude oil are imported." And since the markets for Indian exports has shrunk abroad, especially in the west, Indian exports are down.
Now, come to think of it. Although Kaushik Basu does not hold the UPA policies to be responsible for the widening trade deficit, I don't understand the reason why India has steadily and systematically opened up the trade barriers by reducing and phasing out import tariffs to encourage imports. Crude oil has to be imported because we don't produce enough, but why should we be importing edible oil for instance. India is the 2nd biggest importer of edible oil, expected to import 9 million tonnes this year. You will be surprised to know that in 2009-10, India had imported 9.24 million tonnes of edible oil valued at Rs 38,000-crores (source: Financial Express, http://www.financialexpress.com/news/vegetable-oil-imports-touch-new-high-at-9.2-million-tonne/712217/). In the past 5 years, edible oil imports have almost doubled.
The outgo of Rs 38,000-crore in terms of dollars (it would be much more in 2011-12) could have been easily avoided if the government had followed the right policies. Why I am saying this is because it was in 1993-94 India had turned almost self-sufficient in oilseed production following the launching of Oilseeds Technology Mission by Rajiv Gandhi. It was then that the Commerce Ministry started reducing import tariffs, and have actually brought the import duties to almost zero. The imports picked up in the process, and the oilseed farmers were forced to move to other crops in the wake of cheaper imports. It was therefore a double whammy. Farmers suffered, and imports (and import bill) grew manifold.
Similarly, I find that despite the 2009 global economic meltdown, India has not drawn any lessons. While all industrialised countries are pushing for export markets, India is merrily opening up its economy to unwanted imports. First under WTO, and now under the Free Trade Agreements (the two most recent and damaging bilateral trade treaties are the Indo-Asean and Indo-EU FTA still to be completed), that India is bowing to pressure to open up for imports. Well, if you are encouraging imports in areas where the country has enough production capacity don't blame the global economic crisis for the depreciation of the rupee. It is our own doing, and we must accept responsibility. It is high time India makes an immediate correction in its trade policies to ensure that it does not become a dumping ground.