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FM Hard Sells India: FALLING RUPEE NO INVESTMENT, By Shivaji Sarkar, 12 July, 2013 Print E-mail

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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