Chidambaram needs to do more than engage in hard-sell to save the rupee. He needs to re-work the policy framework. It's a difficult, but not insurmountable, task. The regime can and must take tough measures
The falling rupee is an attraction. It makes investment cheaper in dollar terms. One has to shell out fewer dollars in India to start a business. This is what Union Minister for Finance P Chidambaram had been trying to tell the investors during his visit to the United States early July. Of course, he also tried to convince them that the growth would return despite International Monetary Fund scaling down the projection to 5.6 per cent from 5.8 per cent in its latest update.
Does it matter to the investorIJ It is a disincentive. A business would have to make more efforts and wait longer to convert it into dollars for repatriation. So, while Mr Chidambaram makes a good move and even offers to spread the red carpet for setting up manufacturing units in India, US businesses may not lap it up. For them, it is not just the dollar investment. The concern is how they would repatriate the dollars. A falling rupee would make mopping up dollars difficult.
Mr Chidambaram’s desire to make the country a manufacturing hub is a welcome thought. It opens up avenues for exports, though the automobile sector has shown that it is not easy to export. It generates employment and may rev up the economy.
But an economy in the reverse gear may not make investors gain enough confidence. Except indulge in rhetoric, India is doing little to really turn the economy. Jobs, production and sales are falling. Inflation remains uncontrolled.
The rupee has thrown another spanner in the works. Banks, including the prime State Bank of India, are in a state of disarray as credit demand continues to fall. Depositors are in a quandary as their deposits are negative returns as inflation is outstripping interest rates. The little gains are being undone by taxes on deposits.
The Government, driven by the sectoral interests of bureaucrats, refuses to apply political wisdom and think out of the box. It is pining on the Reserve Bank of India to firm up of the rupee. The RBI has intervened — in the limited capacity it has — by selling scarce dollars from its stocks to give rupee an edge of 60 paise. It is nothing for a rupee that has fallen from Rs 49 in August 2011 to beyond Rs 61. It may slip further to Rs 65, if strong steps are not taken and Government expenses are not curbed.
It is also interesting to note that the more India cosies up with the US, the more the rupee loses its sheen. The latest move is not restricted to the Union Finance Minister’s visit to the US but also the Union Minister for Petroleum and Natural Gas Veerappa Moily’s visit to the US vassal state of Iraq.
Mr Moily is happy that Iraq has offered three oilfields to India on mutually agreed terms. A fourth one which Saddam Hussein had given to ONGC Videsh limited is under active reconsideration. Iraq has also offered to invest in the upcoming 15 million-tonne-a-year oil refinery of Indian Oil at Paradip in Odisha. It may also allow India to participate in a refinery project in Iraq. For crude oil, Iraq is extending interest free credit for 30 days to 60 days. Iraq supplied 24.04 million tonnes of crude oil in between 2012 and 2013.
The nation cannot care only for the interests of a foreign currency of howsoever mighty a nation it might be. It has to position itself internationally. Every loss of the rupee becomes a gain of the Chinese yuan and the Japanese yen.
Export gains are not being boosted by a weak rupee. It means in dollar terms the country is not earning much. The recent crisis in Infosys is an instance of the poor performance of the information technology industry. The industry has been losing on international business because of slowdown.
The United States’ move to cut down on offshore business has begun to hit Indian IT sector hard. It had become difficult for them to maintain the balance sheet.
It is a loss for all others too. Automobile companies, telecom imports and crude oil are facing the pinch. Even jewellery re-exporters and other exporters are under great distress. As a few of them gain in rupee terms, their buyers intend to re-negotiate; meaning they want to reduce prices in dollar terms. Effectively it would have a long-term impact. Even if the rupee gains, the losses of the exporters would be for a much longer duration.
The prices of energy and electricity are tearing into the sky. The falling rupee is also preventing the RBI from declaring a rate cut — a crying need of the industry, individuals and the real-estate sector.
Mr Chidambaram needs to do more than just engage in hard-sell. He needs to re-work the policy framework. It’s certainly a difficult task, but not insurmountable. Its recent tough stand on increasing gas prices shows it can act when it wants to. The Government needs to lay special emphasis on increasing the purchasing power of the rupee.