Rupee's free fall

Finally, it is heartening to see some public participation in the debate on the rupee’s exchange rate, which nosedived, once again, in the recent weeks. Rahul Bajaj, an influential figure in India’s businessdom, has questioned the government’s move to further rely on foreign investments to address the Current Account Deficit (CAD) which is at the root of the rupee’s travails.

There are at least two reasons why the statement of Bajaj is significant. Firstly, there has been little public debate or discussion on the vital issue of exchange rate management – something that affects nearly everyone in the country. Other than statements from the government (finance minister P Chidambaram and Raghuram Rajan, who is titled chief economic advisor in his ministry), the subject has not received attention from the non-government sector. An open discourse, outside the officialdom, is welcome.

Second and more importantly, official statements have tried to hide rather than educate the public on the issues plaguing the rupee. Chidambaram made statements about more “reforms,” implying that they are some magic wand the government can wave to make India’s fundamental and structural problems disappear. The reforms proffered now are no different from what has been offered for the last 20 years or more – inviting foreign capital inflows to meet current account deficits. In any case by now, most businesses are open to foreign investment. Showing desperation, Union commerce minister Anand Sharma has proposed that the cap of 26 per cent now applicable to FDI in defence be increased. This has been resisted by defence minister A K Anthony.

In this environment Rahul Bajaj, a conservative businessman, spoke common sense cautioning against increasing India’s reliance on capital inflows to fund revenue deficits. The longstanding deficit in India’s current account is a product of the country living beyond its means and using capital inflows, which are by definition repatriable, to finance the shortfall. The feeble and half-hearted efforts recently made by Chidambaram to discourage gold imports is almost the only sign of sensitivity in official circles to the reckless practices of the recent years which have contributed to the deficit. Financing it with capital inflows is inherently unsustainable. It is like selling one’s house and having a luxury foreign jaunt with the money.
The unsustainable nature of India’s external economic balances is evident from the fall in rupee’s value over the last 20 years of economic reforms. A dollar cost about 17.50 to the dollar in 1991. It had fallen to 45 rupees in 2004 when the Manmohan Singh government took charge in New Delhi. The dollar now costs over 60 rupees.

If we remember, the context of the economic reforms launched in 1991 and often attributed to Manmohan Singh, was the foreign exchange crisis of 1990-91. At that time, the Reserve Bank of India had to pledge its gold reserves to raise foreign currency loans. The major plank of the reform programme was the opening of India to foreign trade and investment, or globalisation.
Reforms era
Since independence, India consistently ran current account deficits and had to take periodic loans from the International Monetary Fund (IMF) to tide over crises. Deficits have continued during the reforms era also, and now foreign investments are courted for bridging the current account gaps. A more recent development is government encouraging External Commercial Borrowings (ECB) in the private sector, which can be destabilising both for the borrowers and the macro-economy. India’s external debt grew from $112 billion in 2003 to over $376 billion in 2012. There has been little public debate on these issues and the government has avoided conversations on the subject. Instead, there is ceaseless chatter about economic growth and efforts to induce false euphoria.

It is sad that India’s economic reforms tale of the last 20 years have not been successful in making any improvement on the external imbalances’ front and improving macro-economic stability. In contrast, as I have written earlier, China has made use of the globalisation to vastly strengthen its position and has built the largest foreign exchange reserves known in history. During the same period, India has been spendthrift and run up huge deficits which have left the country in a poorer position that when it joined the globalisation movement in the early 1990s.

The government of India still controls large parts of the economy, in particular international trade and investments. In other words, the government has overall responsibility for the economy. This extends to the issue of worsening of external economic situation, which in turn has a close bearing on macro-economic wellbeing. On one hand, there is little evidence of awareness among policymakers about the perilous and unsustainable path of the economy in recent years. On the other, public debate on the issue is also almost completely absent.
While presenting the 2013-14 budget, Chidambaram said that welcoming foreign investments is not an option, but an imperative. This ambiguous statement reveals India’s reckless spending habits and the failure of the government to provide appropriate guidance to the private actors in the economy, in performing its function as the controller of the economy. With such blindness to reality, it is futile to speak of taking appropriate corrective action.
What we do have are some vague promises about magical reforms that are supposed to take care of the problems. And the reforms, we can expect, will be more rhetoric about economic growth, in the hope that it inspires more capital inflows. The economic imbalances are one thing. More serious is the seeming blindness of the powers-that-be to the reality. There is a clear leadership deficit in the government and this makes a public discussion on economic issues important and urgent. Hopefully informed public debate can contribute to the development of saner policies.

(The writer is on the faculty of law at the University of Ottawa, Canada)