The way it should be

"It should not escape notice that gold and silver after circulating in every other quarter of the globe, come at length to be absorbed in Hinduston"

                         ~Francois  Bernier

Rupee fall: A postmortem report.

Posted by VASUDEVA REDDY on Saturday, July 20, 2013 Under: economic articles
It wouldn't be much of surprise if one asks question, the one who had seen/read about the crisis we had undergone in the year 1991, that, are we heading for another breakdown? What do you think? What i feel is, it would be nearly impossible to see the same kind of breakdown what we had witnessed in early 90's, given the sheer size of our economy and investors interest in India. But what worries me is our approach to the problem. We have a current account deficit which is ever widening, inflation that doesn't want to see the earth, falling exports, increased value of imports. Not to mention, aging rupee. Yes, in economy, everything is interrelated. We cant simply address any problem without considering the affect on its peers. One must admit the fact that RBI is the most busiest govt body in recent times. They kept on increasing the interest rates for almost twenty times, when finally got a chance to decrease, things started to move away. As i said, we cant address any economic problem  without assessing its affect on others. But, here, the solution is same for every problem. The solution would be, address the supply side constraints. What seems stupid to me is, tightening the monetary policy to control food inflation. Here, in India, the only thing that always has positive growth is 'Population'. Simple economic principle says, with the constant supply and increased demand, the prices would eventually goes up. It doesn't matter how much is costs, one must eat to sustain. People may trade other things to food. But they can't trade food with another. So,only option we had to fight with food inflation is, increase the production. Yes, i know, we cant achieve that in any time sooner. But, allow me to remind you, for how long we have been fighting with the rising inflation. Wouldn't that time be enough to deal with that problem.
Forget it,let the people starve with out proper food. What about rupee? We are solely dependent on FIIs. When they pull back their money, we need to sit and watch the falling rupee's graph. Yes, our 'brave' government had allowed FDI investments in retail sector. But why cant i see any major retail firm opening a store in India. Why IKEA's ₹12000 crore proposal is still in papers? No, we cant find answers and we are not allowed to. We are just eligible to scream out till those questions resonate to death. Here, i want to state a fact that would definitely surprise you. The current account deficit of India in the year of crisis, 1991, was 3% of GDP, and now it is hovering above 5% of GDP. Technically, we are at worse condition than we were in 1991. We may not witness any breakdown, but we definitely are vulnerable. To bring that deficit back to acceptable 3% level, our remittances should contribute 9% of our GDP, which is a herculean task. Targets have been set for manufacturing sector to contribute 25% of GDP in a decade from 18%. For this to achieve, our manufacturing sector should grow faster than our GDP.
We have the third largest coal resources in the world, still we import 135 million tonnes of coal every year. Still, you can see the stock outs of coal and under utilization of thermal capacity. This is where problem starts, there are certain industries which needs continuous power supply. Otherwise they had to shutdown the production or they had to run plant on alternate sources, which is not economically viable. Borrowings became costlier as RBI increased the interest rates to fight with ever rising inflation. Investments halted, and with the unreliable power supply, production halted. Ultimately, our manufacturing sector is sinking.
 We were leading exporter of garments to the world, and we lost our position to china and Bangladesh. Nearly 50% of employment and 15% of GDP comes from agriculture. Sadly, we had to import 33% of fertilizer needs. Again, we need to subsidize the same to the farmers which is costing around one trillion rupees. Would you believe, if i say, there was no significant fertilizer capacity have been added in the last two decades. Whom can we question for that? Nobody. Recently, government proposed to give twice the amount what is being given today to the domestic oil companies to encourage players for more exploration. But, we have only two players in the market. One is public sector ONGC, and another is private sector RIL. So, it is duopoly, which is ruling our domestic oil market. Anyone can easily say who is going to benefit with that. 
Forget about US stimulus programme. Though it had something to do with our falling rupee, we have more domestic reasons for the same. Every economic government entity in India is trying to halt the falling rupee. RBI planning to suck out the liquidity in the open market without addressing the fundamentals. Those actions may stop falling rupee for a while but in long run it will be useless, in addition to that, it may hamper the growth rates in longer period. Fundamentals of any country should justify the valuation of its currency. But, what proof we have to argue that our currency is undervalued? No, we just don't have any. Our rupee is adjusting to our fundamentals but in a rapid pace. Only way to deal the problem is, ADDRESS THE FUNDAMENTAL ISSUES.

In : economic articles 

Tags: rupee fall goverment india rbi finance stimulus export import trade gap current deficit inflation breakdown 

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