Economic Highlights
New Delhi, 12 July 2013
FM Hard Sells India
FALLING RUPEE NO INVESTMENT
By Shivaji Sarkar
‘Investment Destination’, is how
Finance Minister P Chidambaram is hard selling India to the outside world these
days in the backdrop of the rupee continuing to fall. But will it work?
Yes, the falling rupee could be an attraction.
It makes investment cheaper in dollar terms as one has to shell out fewer of
the notes to start a business in India. This is what Chidambaram has
been trying to tell the investors during his visit to the US early July.
Of course, he has also tried to convince them that growth would return despite
International Monetary Fund reducing it to 5.6 per cent from 5.8 per cent in
its latest update.
But realistically, does it actually matter
for the investor? Not really as it can be a great disincentive. A business would
have to make extra efforts and wait longer to convert it into dollars for
repatriation. So, while Chidambaram makes a ‘good’ move and even offers to roll
out the red carpet for setting up manufacturing units in India, the US businesses may not lap it up.
For them it is not just the dollar investment but the concern as to how they
would repatriate the dollars. A falling rupee would make mopping up dollars
difficult.
Chidambaram’s concern for making the
country a manufacturing hub is a welcome move. 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 reverse gear
may not make investors gain enough confidence. Except rhetoric, India is doing
little to really turn the economy around. Jobs, production and sales are
falling. Inflation remains uncontrolled.
Additionally, the rupee has thrown
another spanner. 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 having negative returns given the fact that inflation
is outstripping interest rates. The little gains are being undone by taxes on
deposits. Undeniably, both the bankers and depositors are in deep distress.
Sadly, the Government, driven by sectoral
interests of bureaucrats, refuses to apply political wisdom and think out of
the box. It is pining on the Reserve Bank (RBI) for firming up of the rupee.
The central bank has done intervention, given the limited capacity it has, by
selling scarce dollars from its stocks to give the rupee an edge of 60 paise. But
this is a drop in the ocean in the background that the rupee has fallen from Rs
49 in August 2011 to beyond Rs 61. Worse, it may even slip further to Rs
65 if strong measures are not taken and the Government does not curb its expenses.
Interestingly, the more India cosies up to the US, more the
rupee loses its sheen. The latest move is not restricted to the FM’s visit to
the US alone but also that
of Petroleum Minister Veerappa Moily’s sojourn to the US vassal state of Iraq.
Moily is happy that Iraq has offered three oilfields to India on
mutually agreed terms. A fourth one, which Saddam Hussein had given to ONGV
Videsh Limited (OVL), is under active reconsideration. Baghdad 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 us to participate in a refinery project in Iraq. For crude
oil, Iraq
is extending interest free credit for 30 days to 60 days and in 2012-13 it supplied 24.04 million tonnes of crude oil.
For the Government everything looks
favourable! However, in reality, India is compromising its sovereign
rights. For the deal with Iraq,
obviously under diplomatic pressure, New Delhi
has almost shown its willingness to give up its ties with Iran, which was
offering oil on rupee terms at a lower rate. In the end it is the US sanctions on Iran which add to the profits of
the American companies. The deal with Iraq is on hard currency terms and
wonder whether the Finance Ministry has actually worked out the real term cost
of it?
While oil is a necessity, is there
any need to compromise on sovereign rights? It is not a mere emotional issue. Rather,
it hits the health of the rupee and makes the dollar stronger and makes the
former increasingly subservient to the latter.
The FM must keep in mind that the nation
cannot care for the interest of a foreign currency, howsoever mighty a nation
it might be. It has to position itself internationally. Every loss of the rupee
is also becoming a gain of the Chinese yuan and Japanese yen.
This apart, export gains are not
being boosted by a weak rupee, which means that in dollar terms the country is
not earning much. The recent crisis of Infosys is an instance of the poor
performance of the IT industry, which has been losing out on international
business because of the slowdown. The US move to cut down on offshore
business to Infosys, Wipro, TCS and other companies is hitting them hard,
wherein it has become difficult for them to maintain the balance sheets.
While the Infosys revenue would rise
to six per cent in rupee terms, in dollar terms it would be one and two per
cent. Net profits are expected to remain flat as the wage bills and other
expenses rise. So is the case with other IT companies with minor difference.
Moreover, all others are facing
losses. Automobile companies, telecom imports, crude are facing the pinch. Even
jewellery re-exporters and other exporters are under great distress. As some of
them gain in rupee terms their buyers intend to renegotiate – meaning they want
to reduce prices in dollar terms. Effectively it would have a longer term
impact. Even if hypothetically the rupee gains, the losses of exporters would
be for much longer duration. Add to this that both energy and electricity
prices too are going through the skies.
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. It also raises the cost of overseas education,
international business deals and reduces margins of companies dependent on
imports. The current account deficits touching alarming proportions of almost 6
per cent could rise further.
All this would impact the Indian
economy. Food would become dearer and could cause political upheaval. Government
expenses are also going through the roof and fiscal deficit, but for cosmetic
treatment, could widen due to defence, crude and other purchases.
Indeed, Chidambaram needs to do more
than hard sell. He needs to rework the policy framework, certainly a difficult
task, but not insurmountable as the recent tough stand on gas pricing has
shown. The Government needs to lay special emphasis on increasing the
purchasing power of the rupee. And admit the crisis is because of internal
factors and not external as being made out to be. Time it stop fooling the
public. ---- INFA
(Copyright,
India News & Feature Alliance)
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