Poor Indian Rupee

As if there were no woes on the political front for the Congress Govt. due to varied reasons (Corruption, scams, and political opposition for virtually any attempt to improve governance), rupee seems to pile up on their miseries in an attempt of fiscal consolidation. A one off dilemma for which the highly distinguished leaders of the nation seems unresponsive .Two month back who could have imagined a free fall in Rupee that takes it down to 64.08 per dollar as per the closing rate today. A depressing scenario for the Indian economy but there are a few smiling faces in BJP electoral improving their chances in the next general election.

One way of diagnosing this situation of rupee’s depreciation is tracing back the path when our political leaders boasted about India’s GDP growth rate but disguised the common people by concealing the building up Current Account Deficit (Value of {Imports- Exports}) which can now be no longer tolerated. It (CAD) forms the major ingredient in the cooking of Junked State of India’s Economy. The concept of CAD is simple, when an economy borrows more than it lends .It is on a debt, a debt that it owes to the economy from where the borrowing exceeded than the lending, and that unfinished business imposes a rate of interest on the debtor that grows compounded in a course of time making the debt rising exponentially. In India, imports kept on growing and so did exports though not commensurately enough to match the pace of imports. No steps were in place to keep CAD in check and now it’s beyond their control relying on market forces and buying some time to get the economy back to its pre-deprecating stage. Even South Korea has larger imports in terms of value but they manage to pay for it by their large manufacturing units which we are certainly lagging. Streamlining our manufacturing policies with theirs could bring some relief.

 Nutrients of CAD – The main constituents of CAD are Crude oil and Gold imports that comprises of more than half of the total imports of our economy. In case of oil, you can’t wish it to go away, it will exist .But our obsession with gold implied serious consequences. Nevertheless , it made sense to invest in gold when the market has remained stagnant in the past years when projections of no returns in equity market, mutual funds and never relaxing inflation seemed credible. With no choices in their hands, people invested in gold but it would have helped the economy had they invested through legitimate channels (Banks and industries) as it will help gold not being reduced to non-performing asset and at the same time provided larger forex reserves hence better stability.

After the US went open with their strong economy statistics making a stronghold for their currency, the speculative market further aggravated rupee’s depreciation with the FII’s pulling out their reserves worth Rs.18,000 crores. Rupee would have bounced back to its earlier position if the investors played more sensibly but it  ironically duped our markets stupendously by 40 billion USD due to sudden fall in the Stock Exchange which has a causal relationship with the prevailing negative sentiments.

 After all the lows that we had to witness in the past month , we still see a silver lining  which brings an opportunity to our Economy. Its a trick which has been the modus operandi for China to regulate its exports.  China is tagged as the biggest currency manipulator for devaluing its currency and thus spurting its exports .But India has a natural advantage here. Since our currency has depreciated by almost 20 % , it makes exports more competitive in international market and more profitable to start manufacturing in India for large manufacturers . Also it makes imports dearer thus curbing them. But there are strings attached in order to capitalize on this opportunity.

First the export duty should be brought down to a level that incentivizes producers and exhort more of them to come to the fore and secondly, sending the right signals to prospective investors.This prescription is more important than my first suggestion as India ranks way down in the list for ease of doing business report by the world bank and the recent pulling out of Arcelor Mittal and POSCO steel plant setback our economy by 80,000 crore corroborates this report.

Its laudable that our Finance ministry has taken some concrete steps to get rid of this situation with increased duty on gold and the RBI intervening in between setting up a higher MSF rate for the commercial banks,selling Gov securities .But much needs to be done not just on part of govt but ourselves as well if we foresee our economy competing with the likes of heavyweight as China and US by 2035 as per the various projections in economic reports.