Backward looking

Measures announced by finance minister P Chidambaram to curb imports and to shore up exchange reserves are a continuation of the series of steps taken in recent weeks by the government and the RBI to deal with the interrelated problems of a weakening rupee and rising current account deficit .  While there is no perceptible improvement in the situation, incremental steps may have impact in some areas but may also cause collateral damage in others. A further  increase in the import duty on gold and silver is intended to curb their imports. But earlier duty hikes did not have any major impact as seen in the increase in gold  imports in June. There are also disquieting signs of an increase in smuggling. When the duty is raised there should also be steps to curb the inflow of gold through illegal routes. 

Curbing the import of “non-essential commodities” through duty hikes may seem at first to be a sensible move but it is essentially backward-looking. It indicates a return to the era of artificial restrictions where import decisions are taken on official discretion and not on the basis of the needs of the economy. It amounts to a protectionist policy and might, in the case of some items, lead to legal challenges arising from violation of international agreements and even retaliatory measures. Some segments of the economy might welcome it but others might call for similar protection against other “non-essential” imports. One aim of these curbs is to encourage manufacturing within the country. This is best done not by curbing imports but by fixing the problems that constrain the manufacturing sector. IIP figures for June, released on Monday,  which show 2.2 per cent fall from June 2012, present a bleak picture. The inflation level also is not in the comfort zone though there is some comfort on the export and trade deficit fronts.

The easing of external borrowing by corporates and permission to some government-owned institutions to raise quasi-government debt to finance long-term infrastructure projects are aimed at increasing the inflow of foreign currency. Raising money abroad is not an easy proposition in a shaky and uncertain global economic environment. If there is good response in the short term it might help. Therefore, in spite of the government coming out with more and more package measures, skepticism about immediate positive results in narrowing the current account deficit and stabilising the rupee will still continue.