Govt must cash in on falling rupee

The depreciating rupee is usually a double-edged weapon. It helps exports, which is none too encouraging as its growth is still recovering. But at the same time, it makes imports more expensive. The steepest fall in 15 months last week, with the rupee breaching the 68 mark, has come at a wrong time when India’s trade deficit is widening. The uncertainty after the Karnataka Assembly elections results has only worsened the situation. The sliding rupee worsens the current account situation, making India’s external situation vulnerable. Adding to the woes is the rising crude oil prices with the Indian basket being well beyond $70 a barrel, and surging. As it is, India’s oil imports are expected to rise by 25% this year, making it a double whammy to India’s balance of payment situation.

Domestic prices of petrol and diesel are high because of the government’s decision not to reduce high taxes on petroleum products. This situation will only lead to spiraling inflation, which is not good. The economy is witnessing some green shoots with corporates showing signs of fresh investment, which will get dampened with interest rates moving up because of inflationary pressure. A weaker currency will lead to a further outflow of Foreign Institutional Investments. With the rupee surging towards Rs 70 to a dollar, there is likely to be more outflows. With the United States raising its interest rates, further FII outflow could be expected towards US bond market. India’s foreign exchange reserves, depleted by $2.5 billion last week due to a heavy purchase of dollar by the Reserve Bank of India to stem the falling rupee, will worsen further. The rupee, one of the best performing currencies in Asia until recently, is now in doldrums and the reason being that the dollar is gaining strength due to strong economic recovery in the US.

So, the question is what is the way out? India can turn this challenge into an opportunity. As the falling rupee will help exports, the government should initiate big-ticket export reforms to cash-in on the vibrant US economy. India’s merchandise exports, which were clocking negative growth until recently, have just started picking up. There is a huge opportunity in farm and engineering goods exports, together, which have the potential to grow rapidly. Just as the Make in India campaign, the Centre should embark upon “services from India” campaign to promote services exports. So far, India has been concentrating only on IT exports. There are other services like tourism and shipping, which have a huge untapped potential. More actions on ease of doing business along with exports reforms in the next few months will help in promoting export-led growth like that of China, thereby, stabilising the rupee. This is essential for sustainable growth at a time when the world economy is looking up.