Depreciating value spells disaster for economy
Both Economic Affairs Secretary Arvind Mayaram and Chief Economic Adviser Raghuram G Rajan have sought to play down the panic that has set in after the rupee tumbled to new life-time lows against the dollar on Monday and Tuesday. But these two heavyweights cannot deny that the country's economic health will be severely affected by the development. The fall of the rupee directly impacts imports and current account deficit, raises the prospect of higher inflation and leads to a further slowdown of economic growth. What is even more alarming, according to economic pundits, is that the rupee may plunge still lower, given the prevailing conditions in the global currency market — such as the rising demand for dollars as a result of the latest buoyant figures for employment in the US and sluggish capital inflows for a variety of reasons. While a lot of these are not within the control of either the Union Ministry of Finance or the Reserve Bank of India, the fact is that neither the Government nor the RBI can stand by and watch the devaluation of the rupee. The RBI will have to sooner or later intervene to check the slide, but what it will do remains a matter of conjecture. Meanwhile, imports are going to get more expensive, and this will further increase the country's current account deficit. The Union Government cannot wash its hands of the matter because, as the Prime Minister's Economic Advisory Council Chairman C Rangarajan has noted, the erratic flow of foreign capital has added to the pressure on the rupee. This erratic flow is largely because the Congress-led UPA regime has failed to instil sustained confidence among foreign investors who wish to do business in India. let alone foreign investors being less than enthusiastic, even Indian businessmen are increasingly looking to foreign shores to expand and consolidate. All this is due to the Government’s economic policies which are like shifting sand. Worse, foreign institutional investors can pull out in large numbers if the rupee gets weakened, because a weak rupee leads to a drop in their stock value.
One of the measures that the Government can take — as it had in similar previous situations — is to rein in the import of goods that consume large foreign currency amounts. Primary among these are petroleum products and gold. It is difficult to imagine how the authorities can contain the demand for petroleum products in either the short term or even the medium term. But they can, and possibly will soon enough, place more curbs on the import of gold, a product whose glitter continues to lure millions of Indians who don’t seem to have enough of the yellow metal. The Government has been advising people to check their desire for gold, but the precious commodity remains a favourite with investors. The only good news is that export-oriented sectors such as the information technology industry can see an upward valuation of their dollar income.