Economic Highlights

New Delhi, 9 December 2011

Sliding Rupee

INDEPENDENT POLICY CRUCIAL

By Shivaji Sarkar

India today is resembling Brazil, which had a 30-year growth of 7.5 per cent but saw signs of economic stress, inflation, explosion of inequality, growing corruption, rising discontent, launching of various entitlement programmes (like MNREGA) and borrowing heavily to pay for these.

A harsh comparison, but it cannot be ignored. For one, the sliding rupee is playing havoc with the common man. It is a direct tax on the poor as it adds to inflation. Worse, it creates a psyche of a weak economy, weaker governance and the weakest move to take corrective steps.

The rupee has been falling sharply since April 2009 and has breached a critical level of Rs 52 to a dollar from around Rs 44-45. In 1996, it was at Rs 35 to a dollar. Indeed, it raises a fundamental question: whether the so-called era of economic reforms has done more harm or not to the country?

Some other indicators such as the number of poor and cost of industrial production have risen almost in tandem with the slide in rupee value. So also has the number of jobless, officially now stated at 9 per cent --– 12 crore people in addition to their dependents makes a modest 18 crore people the sufferers.

While the rupee may not be blamed for all of this, the policies that decide the rupee parity are a factor. A market-determined exchange rate has certainly contributed to the phenomenon of the sliding rupee and with it the economy.

A country with its demographic dividend, innovative entrepreneurs, large youth population, and an enterprising generation is getting into a moronic phase. Instead of productive policies and politics, it has got into a syndrome of unsuccessful experimentation – foreign direct investment, which is not coming; mopping up black money from across the world, which has not happened; increasing taxes to an extortionist level in the name of efforts to reduce it and higher borrowings.

The result of the appreciation of rupee from April 2009 to November 2011 has been a very sharp increase in our external deficits on trade and current accounts. Exports have started shrinking and import costs have grown. It seems that we are repeatedly falling into the trap of the arguments of the US and Europe orchestrated through the World Bank and the International Monetary Fund. It pressurised India to devalue a stable rupee in 1966 creating a myth that it would reduce poverty in the country and lead to fast-paced development. In 1966, one dollar could be purchased for Rs 4.50 and a British pound for Rs 13.50.

However, it did just the opposite. The country slid into the syndrome of 13 per cent inflation for a number of years, there was high unemployment and it had to import rotten wheat from the US and Australia to feed its people. It further impoverished the country, which internationally came to be known as the PL 480 (US law that allowed wheat exports) or popularly as an ever-hungry country.

A radical political move by Late Prime Minister Indira Gandhi of championing garibi hatao and the green revolution brought a change and gave a boost to the people’s morale. The green revolution was undoubtedly a positive economic development which helped increase factory production, agriculture yield and jobs.

However, this was also the time when the country succumbed to another western machination. In 1971, when its economy started to change for the better and the rupee could have some better level, the US decided to delink the dollar from gold standard. New Delhi did not protest and instead agreed to the syndrome of linking the rupee to a basket of (western) currencies.

The myth this time was that the currencies should remain strong domestically but the international value should be determined by the market. A specious argument. Sadly, the Indian policy makers did not try to see through the game. The market was not controlled by India but was under the thumb of international policy prescribers.

This was soon followed with a spiral in petroleum prices, determined yet again by western oil giants. Top western leaders had high stakes in each of these oil companies. While their profits soared, India bled on two counts – high international prices and a poorer rupee. The weak rupee made oil more expensive for domestic consumers.

Since then our policy response to each of the western moves has never been in sync. The nation repeatedly succumbed to their myths that inflation is the result of higher money supply, which could be controlled through enhanced interest rates. The Reserve Bank religiously applied this prescription. It added to the investment costs and stoked inflation further. This happened through decades and is happening even now.

Succumbing to another myth that the rupee value should not be determined by strong RBI moves, it has virtually allowed the rupee to slide for the past five decades. Historically, whenever the country was gaining some kind of economic strength, the nation saw the rupee losing its value. In reality, the rupee was more stronger at the height of the 1990 crisis, when India had to pawn its gold to the Bank of England than five years after liberalisation of its economy in 1996.

Since 2009, the obsession has been to create new entitlements, MNREGA, unique identification numbers to determine the number of poor (Rs 1660 crore to be spent till March 2011) and drain Government funds for little tangible gain. While the MNREGA has benefitted the poor to a limited extent, it has led to a massive admission that economic liberalisation and “reforms” that created pot-bellied corporate have been massive failures.

This has suited western myths as despite the euphoric growth, the Indian economy has not being doing really well. So the rupee slid again. But it did not automatically go down. Instead, it started falling with the Lehman Brothers scam that had sucked up large world finances. Importantly, Indian corporate contribution to the western economies through various investments in industry and banking sector has been large post 2000 scenario.

A myth of a liberalised economy could not stop it. India forgot it could come out well when the Soviet Union collapsed because it had policy controls on outflow of its investment. Now in the wake of low, virtually zero, interest rates in the US, it is seeing more capital flight not only by the foreign institutional investors but even large domestic corporate. Coupled with it is the falling reserve in the Indian banks. Both combined take the rupee downhill.

A weak India suits western business interests as it could be exploited easily. India needs radical politics to strengthen its rupee back to the glorious 60s level and changes in economic tack (not euphemistic reforms) to counter western myths. The two put together could help India need come out of the shadows of the West. It’s time India has its own independent policy path. ---INFA