WEAK RUPEE IS A GREAT OPPORTUNITY, LET’S USE IT P. S. Deodhar Former Technology Advisor to the PM Rajiv Gandhi and the Chairman of the Electronics Commission Why we are in panic? Weakened rupee is an opportunity. I wonder why our Finance Minister P. Chidambaram is battling to stem the collapse of the Indian rupee from 55 to a dollar a month ago to 67 this week. He really should be busy to exploit this opportunity. Fall of rupee is a political, not an economic disaster. Our traders and big business that have been growing based on cheap China import of all and sundry are in panic but he should ignore them. This indeed would help him since import of goodies, especially for the rich, will be curbed. Our traders are importing even zadus from China. He and his boss must know that a weaker rupee is inherently not a terrible problem but an opportunity. Our Foreign Exchange reserves at about US$250 Billion are low but nothing to panic about when exports grow, imports drop and investors start knocking our doors once again. Instead of worrying and getting bogged down by the phony experts rampant on the English new media, the government should get busy with removing the structural impediments in export by reducing formalities and with innovative incentives to push exports. Let us reward those exporters who have a large domestic value addition with full tax exemption. If government does this on a priority, both Indian and foreign investors will flock around us like they did to invest in China. It will quickly reinstate the faith in ‘India story’. I am glad that measures are being taken to curb imports with increased import duties on gold and consumer durables and raising short-term interest rates to shoo away the currency speculators. Elections are still more than a year away. So let’s not worry about electoral prospects. Every sane Indian would want great thrust on quick build-up of exports. We should be glad that the current situation will encourage exports and discourage imports. When rupee was falling over the last two years from 45 to 60 till three months ago, we lost time and did nothing to help exporters and encourage them with all sorts of incentives as in China. Instead will allowed inflation to go sky high and perpetuate discouraging business climate when businessmen used BJP to make the government nervous. We must note that in that period, in spite of no special efforts, our exports grew! Reflection of the fall of rupee was seen in export growth! Any procrastination in providing extra ordinary thrust on export will be the biggest folly. Such a dys-functioning in the Indian economy will strangle any incipient export boom at birth. GDP growth has slowed to 4.4 percent this quarter after racing along at 8.5 percent for a decade. Main reason is our failure to support Indian value addition by processing of imported material into finished goods. Chidambaram replaced Pranab Mukherji before he could damage the economy any further. He cut the fiscal deficit from 5.8 percent of GDP to 4.9 percent, and promised a further reduction this year. He tried to initiate reforms like the global retail giants like Wal-Mart Stores. I believe that push to export reforms and imposition of fiscal discipline would revive spirits of bull and give a fresh spurt to our economy. Let us not defend and argue about rupee at 66 is irrational. We have to explore all the alternatives including push to export. One way is to curb the consumption of luxury goods with higher level of state and central taxes. I am sure that the devaluation of rupee will have a positive effect on foreign investment in many of India’s manufacturing areas. It has happen in China. Remember that today India is now one of the cheapest sourcing destinations in the automotive industry, clothing, jewellery, tea etc pushing out global rivals. Globally focused manufacturers in these sectors will mean a great boon. As it is many automobile companies are saying that India is now one of the cheapest places to source auto-parts and cars from because the Chinese Yuan is getting stronger. Thanks to our past follies electronics is out, Chinese are too far ahead. Automobiles, pharmaceuticals, jewellery, tea and many other products provide us an opportunity to export. As it is we are exporting vehicles from India to UK and the weakened rupee will open many other markets in the world. I am sure that weak rupee will have a positive effect on FDI into India if we act like China did in early 90s. Let us give incentives like tax relief, quick response at the entry points for import of raw materials by exporters and speedy product export clearances which help making our exports more competitive on the global market. We need to give preference to exporters over importers. Indian bureaucracy has to join in too. If the Rupee can remain relatively stable at the current rate of 65, we have a lot to gain. The demand and supply of foreign exchange are determined both by the current account and the capital account working together. But the exchange rates don’t necessarily work in this way, because of the capital account. When the rupee depreciates, Indian exports of goods and services become more competitive. US imports become less competitive. Thus the current account deficit will reduce. The most important need is to recognize there are severe supply-constraints plaguing Indian manufacturing and until these are eased, there is no guarantee this rupee depreciation will help. The critical point is not US-rupee exchange rates, but rupee depreciation vis-à-vis India’s competitors. Happily the rupee has depreciated vis-à-vis our competitors; especially China. While exports become more competitive, imports become more expensive too. So we need to focus on exports that have less import content. I think it is time to curb local consumption of the goodies the rich classes need. Let people drink coffee and allow all the Darjeeling tea to be sold abroad. For a few Darjeeling varieties, overseas buyers have shelled out Rs 9,000 per kg and there is no dearth of export orders. The recent entrant in the market for Darjeeling tea is the US, which is ready to pay a premium for quality Darjeeling tea. Government will be well advised to take emergency innovative steps to push exports. We need to concentrate on converting cleared projects into physical investment and on converting the cheaper rupee into an export boom. This will help exports surge and increase business confidence. Mumbai; September 1, 2013
Posted on: Sun, 01 Sep 2013 11:23:14 +0000
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