Economic Highlights

New Delhi, 18 May 2012

Plunging Rupee

CUT RELIANCE ON WEST

By Shivaji Sarkar

Tiny Greece sneezes and the Indian economy tumbles. The rupee goes haywire increasing crude purchase value despite global fall in oil prices. Tragically, this is the price India is paying for integrating with the world, a warning which many wise men had given in 1991.

Commodity prices have increased by over 30 per cent in about two years, millions of tonnes of food grains are rotting in warehouses helping further increase in food prices. Taxes are being increased in the most exploitative manner and rules on retrospective taxation are throwing business out of gear. There are many other idiosyncrasies that are robbing the Indian economy of its flexibility and freedom to function.

Indeed, the Indian economy is paying the price of over bureaucratisation of the system. The political class has allowed itself to be blindly guided by the bureaucracy in key decision-making provisions. It has affected functioning in all aspects of administration and economic management. Galloping prices, falling industrial production, vanishing bank deposits and eroding foreign exchange have added to the crisis that could have been avoided if the Government desired.  

If today the rupee is plunging, it is not so much because of the Euro factor. Yes, India needs to reconsider relations with the European Union. It is a shaky system, the Euro virtually lacking sovereign guarantee is overpriced and Eurozone countries do not know how to manage their economies. The entire Eurozone is thriving on high unaffordable debt. In the process it is trying to gain strength from the economies of developing countries by manipulating prices of their currencies.

Europe treats the rest of the world as its colony and continues to sustain itself at its cost. The Greek crisis and its impending exit from the Eurozone should be Europe’s own affair. But intelligently they have projected it as a global crisis. It helps them gain strength as on speculation alone many currency value plummets. It makes redeeming their debt bonds difficult or expensive, which help the exploitative and not so honest economies of EU.

It is the weakness of the Indian political system that it has always succumbed to the arm twisting moves of the Eurozone and the US and allowed its currency to be muzzled by it right from the first devaluation in mid-sixties. As the dollar and Euro are losing their value in own areas, these currencies should have become cheaper in India as well.

It is an irony that as the Euro and dollar crash, it sends the rupee into a tailspin. It is the weakness of the internal system which is responsible. India should have led the world in disintegrating from the dollar and Euro-based currencies.  Clearly, New Delhi needs to raise its voice against the marauding effect linking basket of currencies to the dollar.

But India succumbs to the pressures. Else it should not have even partially suspended oil imports from Iran, which has stood by it even in difficult times. US Secretary of State Hillary Clinton has problems with Iran because it remains an island in the region that has withstood irrational American pressures. Clinton has problems because US giants are not allowed to trade in Iran oil. They fear an independent Iran might break the strength of the oil cartel and send their profits crashing.

India should have strongly rejected the US pressure, for its own energy security apart Iran is even prepared for a rupee-based trade. It is not in India’s interest to buy oil only in dollar terms. The US fears that if the rupee-based trade increases it would have problems the world over. The rupee, in its view, has the credibility, unlike the Chinese yuan, to attract global traders.

As the Soviet Union collapsed, the Indian economy was least hit because trading with the bloc was in rupee. The US sees that as a potential threat to its global economic power. India instead of succumbing to such machinations should increase the area of rupee-based trade to reduce not only its own dependence but also of other developing economies on dollar.

As long as the rupee remains wedded to dollars, the forex crisis would continue to grip it. Chief Economic Advisor Kaushik  Basu says that the Government could not do much to strengthen the rupee. He is referring to the capacity of the Reserve Bank interventions. India would not need those dollars, pounds and Euros to hedge its forex requirements to pay for imports – mainly oil.

True, it cannot happen overnight. Nobody, however, is even seeing the possibility of a long term strategy in this area. The Indian economy has its internal weaknesses – high prices, fiscal deficit, low purchasing power among many others. But if it continues to be under external pressure that manipulates its economy, it would not be easy to have an independent foreign trade and foreign exchange policy. Corrective measures would be difficult without a tough and independent approach to deny the undue advantages to the western currencies.

There may be many problems but nobody can prevent the sovereign Indian nation to chart an independent course for itself. If it does so in five years, it would be not only be a thriving economy but also shall lead the world for charting a new order. Greece is too tiny to hit India. But if India does not chart a new course it might be engulfed by the problems of not only Western Europe but also the Eastern counterparts.

The East European countries, including Russia, Ukraine and Latvia are also in the throes of one of the worst crisis having taken huge debt from West Europe. Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. Europeans account for an astonishing 74 per cent of the entire $4.9 trillion portfolio of loans to emerging markets.

Indian debt as of now is more internal. A prudent policy shift can not only shield itself from the Euro crisis but can also open up new avenues of growth. This is possible. It only requires a vision and a strong political to do it. It would bring back the rupee to the level of Rs 40 to a dollar in a short period. Why waste precious time. ----INFA

(Copyright, India News and Feature Alliance)