Views | The rupee: 53.63, 295 billion, 2014, and other numbers

Views | The rupee: 53.63, 295 billion, 2014, and other numbers

It smells a bit like the pre-reforms days, but let that be. The trade deficit is already at 10.9% of GDP, and our oil import bill continues to be alarmingly high. The rupee does, perhaps, need to be shored up.

All foreign-exchange earners—including exporters—are now required to convert 50% of their total foreign exchange earnings kept in banks into rupees, within two weeks, and they can’t buy any dollars till their own dollar accounts are down to zero. After the Reserve Bank of India (RBI) announced this on Thursday, 10 May, the rupee began rising against the dollar, but when realisation struck that this would mean an inflow of only about $3 billion, it ended the day at 53.43 to a dollar, just 40 paise higher than the all-time-low closing it had seen the day before. On 11 May, the rate inched up again—the day closed at 53.63.

In the meantime, investors are sticking to a new Washington Consensus, moving their money to the—relatively—safe US. US stockmarkets have just had the best quarter in many years, and interest rates are at an historic low. But even considering all this, India and the rupee have done particularly badly, given that the economy is still growing at nearly 7%. The rupee, down 21% against the dollar since August, has been one of the worst performing among major Asian currencies. Even if it stabilizes at 51 or 52 to a dollar (and this is not likely), Indian exports are not expected to grow by more than 15% in 2012-13. And last month, India Inc voted with its feet when it invested $2.67 billion abroad. The clear message: Indian businessmen are increasingly finding it easier and safer to do business outside than at home.

The effect of the RBI’s latest move has taken just one day of trading to peter out. In fact, our $295 billion of foreign exchange reserves doesn’t look all that impressive when we notice that in the nine months from April to December 2011, India imported goods and services worth $ 356.2 billion, so it’s not like the RBI can go on selling vast amounts of dollars to drive the exchange rate down. Most foreign currency traders seem to be looking at the currency settling at 56 to 58 by the end of the year.

All economists point to the gaping current account deficit (4% of GDP) and the fiscal deficit (5.9%) as the underlying causes for the rupee’s downward movement. These are the fundamental problems, and the RBI can do little about these. But as far as the rupee is concerned, this is a vicious cycle. If we are not able to take advantage of a falling rupee and grow exports dramatically—which is unlikely given the weakened demand in the US and European markets—or attract large foreign investment flows, the current account deficit situation will not change. And with our government unable to take any measures—even cosmetic—to make India look like a good place to invest your dollars in, investors are hardly queuing up.

Global oil prices have fallen a bit in the last few weeks. But the government seems to have postponed the necessary price hikes to after the Presidential elections. First it was the UP elections, then it was the “let’s get the Budget passed", now this. Among other things—like pulling the oil companies out of the abyss they have been steadily pushed into—a domestic petrol and diesel price hike could suppress demand and lower our import bill. Simultaneously, if the government stopped raising minimum support prices dramatically for farmers at regular intervals (our support prices for several foodgrains are now the highest in Asia), one could even get some sort of handle on inflation. But then, to paraphrase the opening line of the Communist Manifesto, a spectre is haunting the UPA—the spectre of 2014. In the corridors of the Indian central government, no other number seems to matter. Only 2014, when India goes to the polls again.

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