May 24, 2012

Depreciating Rupee: Fault lies with our own policies.

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, 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.


गिरीश said...

Very well written sir, particularly in a language which a common man can understand ...with less on statistics and more on logic and reasons.

Girish Singh

Pakka said...

Devinder...I have to disagree opening trade barriers is good. Competition is always better and especially for the small guy. The problem however is half hearted opening ......... yes you can import or export but only after getting about 100 licenses. More corruption, a richer bureucrat and higher prices for all.

Coming back to petrol prices, with the risk of sounding very simple. The main reasons are 1) Depreciating rupee (the rupee is depreciating because our government is spending, printing and borrowing like crazy b) Very High Taxes- govt of India taxes oil companies, and every one along the line with all sorts of taxes (Excise duty, Additional Duty, Special Additional duty, Cess, Additional Cess and lastly, the State Sales Tax blah blah balh)

Why can’t we cut some wasteful spending and reduce the petrol prices so that my milkman who has TVS50XL save and make his life better. The real issue in India is govt spending and taxing. Why can’t we honestly look at it and debate the consequence and impact it has on all of us.

Note that when there is inflation & high tax it is always the poor and the weak who suffer the most. If you care for them, I would love to see you analyze and look at the problem with a different lens and not the Keynesian framework.

Devinder Sharma said...

I don't know why some people always think that it is the bureaucrat/politician who will make money. No one talks of the stinkingly corrupt corporate and business heads. I am looking for the day when industry and business stops looting the country's resources in the name of development. The recent exposure of the Delhi airport scam tells us how 5000 acres were given to the company at a lease of Rs 100 for 60 years. If the company had paid the market price for prime land, India would have been richer by Rs 1.6 lakh crore, good enough to write off much of the fertiliser and food subsidy.

This is only one company. There is hardly a company in India which is not involved in corrupt practices.

Devinder Sharma

Anonymous said...

their is many reason one can cite but biggest reason is lack of nationalism,120 crore people can not be made rich in a day, we need to start new development process thorough village level,west is place of high scientific equipment with huge production capacity , wheras india is nation of bull,cart and manual labours,their is not any competition, if we allow free competition ,we need to kill 40% population,india can only develop if we have strong undisputed leader who could chanelise whole resources towards development,transferency and strong system, whole world new order is simply consumption,sex,gambling and drinking,india etho are ingrained in ancient medieval morality,we are simply discussing problems but solution lies no where,urban life is made by uprooting villages with greater dreams of comfort,luxuries with media fleshy picture of modernity,capitalist slowly but steadfastly has to make way,how long indian masses can stick to traditionality is no big concern, sooneror later they need to adopt market economy but rule,law,mode of system can be made favourable to masses only by good leader,election of good spirited leader like chinese premiers,or brazian lulla,vanzeala chaves havles,,like leaders who could alter some direction to majorityof public welfare,but it need public support with strong radicalism,which india lacks,in capitalism land is biggest assets which always made appreciated with passage of time,like gold,,change has to come,dnot matter how long,it will be ushered in slowly or by fast turn depends upon backing of usa ,europian nation,,youth is inspiration of change,if they revolt orsupport depend upon them,,india is slowing getting in grip of market economy,,

Amitabh Pandey said...

Brilliant piece Devinder ji, I wish I had the capability to write in such a lucid way as you have done.

Somebody wrote about it above and it is often given as a justification that globalization policies started in 1991 which opened up trade barriers is healthy for the economy because it promotes competition. Now before I give counter arguments let me first agree that pre-1991 we had problems but these problems were not due to lack of capitalism or free markets or even due to socialism because none of the philosophy was adopted in an honest way. It was due to crony capitalism which is dangerous cocktail of socialism + capitalism. A famous intellectual of west, Gerald Celente nicely puts it "By the very definition...State controlled capitalism is fascism".
Now if we want competition we can do it amongst ourselves. Why do we need to invite Foreigners to use our drinking water (which is our precious resource) and sell it to us to take away profits. If we want to remove trade barriers we should actually fight against trade restrictions such as numerous regulations, licensing system etc which only acts as an impediments to trade and production. Besides these, several good measures can be adopted which will promote need based production such as decentralization of power, local production to meet local demand concept, promoting of amul style cooperatives etc. Regulations should be bare minimum understanding very well that by creating regulations we are increasing cost of compliance and thus increasing input cost. government should be small and not big. Govt's interference in people's life should be limited. We can't just take a shortcut to prosperity as we did in 1991 and have reached at a stage where another BOP crisis is threatening us.

Pakka said...

Devindar...There can be no corporate power without state power. When govt has excessive power, for example to seize property, to issue licenses, to hand out privileges etc., there will always be people, who want to take advantage of it. So if we want to reduce corruption we need to reduce the power of the state. Nobody likes to pay a bribe but when you have a bureaucrat and a politician saying the only way you can do business is by paying me, and then one has very little choice. I do not understand the logic of blaming the victim, the victim here is the one who wants to do business. And majority of Indians are businessmen.

The role of govt is to protect not to provide. When its role becomes to provide like we have in India, it begins to provide for the uber rich who are close to the power, taking things away from the poor and the middle class.

Address the root cause i.e. the role and power of the state, if we are truly living in a republic then we have to have the state small with maximum freedom for the individual.

Specific to the GMR case, the reason you have corrpotuin is…. there are a series of rules, regulations that need to be followed and licenses that be obtained. Above all the state has the power to choose the provider/supplier etc., Why are you surprised if such a scenario breeds corruption? When the govt has power to take land form anyone including the farmer it is bound to be abused. Our own people have replaced the British and the same system exists. The British system was setup to loot us and not for our development and we continue to live under it with our people in charge. The worst is, we are all educated that it is a good thing for govt. to take your property for the public good.

Anonymous said...

well said sir, give a chance to india(residing in the villages) no one can stop india to become the golden bird again

Anonymous said...

I think nationalism and patriotism are divisive nit inclusive philosophies. We need to think of long term solutions that are not based on import duties etc but some way in which the collective resources of this planet are harnessed freely for everyone's benefits - too idealistic ?