Home / Opinion / Online-views /  The need to change gears

The successful landing of the Mangalyaan on Mars, evidencing India’s technological prowess, occurred on the eve of Prime Minister Narendra Modi’s highly successful visit to the US. Before he left, the Supreme Court decision on cancellation of all coal block allotments to the private sector between 1993 and 2010 once again proved that there are no full stops in India. The ruling followed the cancellation of 2G licences and closure of iron ore mines a few years back, and many other similar cases. Modi has promised to clean up the whole system in the next six months. One hopes he succeeds!

While I am no legal expert, one thought about the series of decisions: are we following the US’s and the UK’s “shareholder capitalism" ideology, or the “stakeholder capitalism" in say Germany and Japan? The former model focuses on the interest of the shareholders alone; the latter of all the stakeholders in a business. The cancellations have punished the promoters/shareholders, but, in the process, the interests of many innocent stakeholders have also been damaged, probably unwittingly. These surely include the employees; the banks which have lent the money; the citizens who will be deprived of power—or forced to pay much more for imported coal!

Meanwhile, the tax disputes, whose speedy resolution was promised in the budget, continue. (One reason could well be that the finance minister has been unwell for some time). If Modi’s “Make in India" objective is to be achieved, if manufacturing as a percentage of gross domestic product is to go up from 13% to 25% in a decade, the whole government machinery from policymaking to framing laws and regulations to implementing them through the bureaucracy will have to change gears; that will need a “cultural revolution". Modi has the mandate; the energy to put in 16/18-hour workdays (even while living only on warm water!); the earthy common sense; the articulation to “sell" unpopular measures; to create an environment of trust between the governing institutions and the governed. Else, Swachh Bharat Abhiyan and “Make in India" will remain catchy slogans like Indira Gandhi’s Garibi Hatao. To quote from the 2014 Edward Said memorial lecture by Raja Shehadeh, a Palestinian supporter, “Israel’s struggle takes the form of persistent, low-level administrative actions; the PLO (Palestine Liberation Organization)—and now the Palestinian Authority—have lofty, abstract aims that have great resonance but are almost empty of practical meaning."

The Reserve Bank of India governor has on several occasions, and rightly so, expressed concern over the extent of unhedged currency exposures of Indian companies. The central bank has also asked lending banks to monitor the exposures, and the deterioration in credit quality they can lead to.

As somebody in touch with the corporate culture on the issue, and also looking at the overall picture, I have two perspectives to offer:

At the micro level, the mental approach towards hedging short positions, particularly medium/long term, is the experience of the last two decades. For much of the time, the cost of servicing foreign currency debt on an unhedged basis has generally been lower than the cost of servicing a corresponding amount of rupee debt, as the rupee has not fallen as much as the interest differential say between the dollar and the rupee, despite the sovereign risk component built into dollar borrowings. In other words, since the interest differential broadly reflects inflation differential, the rupee has continued to appreciate in real terms. This is also the reason why bond funds abroad find the “carry trade" (borrow dollars, invest in rupees) so attractive!

The differing accounting treatment of interest costs and translation gains/losses;

At the macro-level, the huge and growing gap between potential demand and supply:

nAt the “flow" level, annual expenditure in foreign currency exceeds income (or current account net of remittances) by $100 billion.

n At the stock level, the net international investment position is almost $350 billion in the red. The corporate sector’s buyer’s/supplier’s credits, external commercial borrowings and other short-term credit total $260 billion (data as on 30 June).

Overall, even if the corporate world heeds the governor’s cautions, and wants to hedge all short positions, where will the supply come from?

As it happens, I am currently reading The Dollar Trap by Eswar S. Prasad: the theme is that the dollar will remain the predominant reserve currency in the foreseeable future. His credentials are impeccable: the International Monetary Fund (IMF), Brookings, etc. I got a new “insight" on inflation and exchange rates on page 141 of the book: “capital inflows lead to currency appreciation", and “worsen domestic inflation". He repeats the same point later in the page, citing Thailand as an example. Surely domestic currency appreciation lowers inflation by reducing the cost of imports, and forcing domestic producers to cut prices to compete with imports?

Another gem: in an article co-authored by him (Business Standard, 23 June), Arvind Subramanian has argued that the rupee is undervalued by 30%! Strange that we should have a current account deficit of the order of $100 billlion, net of remittances, which do not depend on the exchange rate!

And, we are so happy when we get a pat on the back from American rating companies!

A.V. Rajwade is a risk management consultant, columnist and author.

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