The falling Indian rupee poses major challenges, but these can be taken as an opportunity to buoy it up and boost our economy. We have all the indications of a strong economy, we have to take a grip on them and take due measures
The good news is that India is a fast growing major economy but the bad news is that the Indian rupee is falling. The rupee was at its lowest against the US Dollar recently and it is still in the critical zone. This is really disappointing as it will have a serious impact on our national economy.
Why this sudden fall of the rupee?
The reasons are many, and many of them are external, though we cannot say that we are not at fault. First, it is the spiraling hike in the price of crude oil in the international market where 70% of our oil requirement is met from imports. The oil companies want more of the US dollar to finance imports and this creates a situation of more demand for it than its availability. This leads to price rise of the US currency as against the value of the Indian rupee.
Second, the sanctions against Iran by US will mean that we cannot import oil from friendly Iran at a softer agreed rate. The US declared that no country should import oil from Iran and that the import from Iran should be just zero by November 2018, or else the importing country will have to face adverse consequences. In this situation, India will face a serious problem as Iran meets one third of our oil imports. We will have to go to the open market and also contact other countries at short notice and this may mean that our purchase of oil will be at a higher price. We will need more US dollars than what we had planned to have in advance for the oil purchase and thus create an increased demand, affecting the value of our rupee.
Third, the trade war between the US and China is engulfing the entire world. There is a lot of uncertainty and fear in the world trade and the same affects the currencies of countries. The US and China have already started the war with each announcing increased import tariffs .The US has threatened that gradually the entire Chinese export to US which is US$500 billion will be covered if the situation of adverse trade balance with China is not settled.
Fourth, there is a sharp decline in Foreign Portfolio Investment (FPI), while on the contrary there is a quick selling and exodus of FPI funds from India. This sudden change of attitude of FPI is creating pressure on the Indian rupee, as more foreign currencies are going out, particularly the dollar.
Fifth, in recent times, we have not been doing very good on our exports front. Our balance of trade is deeply adverse. Our huge import bill is understandable due to the huge oil import, but exports have to be at least close to imports, if not exceeding it. This means that more foreign exchange is going out than coming in. In recent days, due to the American policy, our software export, which is our flag-bearer, has been suffering. There has also been some gradual decline in job offers from outside the country due to changing policies in many countries, particularly the Middle East, thus slowing the pace of inward foreign remittance.
Sixth, the recent RBI policy to increase the repo-rate has also affected the situation. Many foreign investors have taken out their money which has impacted our money market.
What is the effect of the fall in the value of the rupee?
The effect is bad for the economy but at the same time something good is also involved. Starting first, with the bad impact, this will make our imports more expensive. We have to give more foreign exchange now for our purchase. Our foreign exchange saving will thus be affected. Since our imports are more than our exports, the net result will be a serious impact on our economy.
‘India is a bright spot in the world. It is the fastest growing major economy. The temporary spell of the falling Indian Rupee should not dishearten us as our country has a very bright future. The challenge of the falling Indian rupee may be taken as an opportunity to further strengthen our economy’
Secondly, the imported goods will become costlier for both manufacturers and consumers. The common people will be hard hit as this will increase the selling price of petroleum products. Rising price of crude oil coupled with the falling value of the rupee will transform into a double-edged sword for our people.
Third, the resulting outcome from the situation will be higher inflation which will be cancerous for our economy as a whole, and growth in particular. Revenue deficit and fiscal deficit may increase. Because of the inflationary situation there will be a delay in investment in our infrastructure and in the expansion of the existing manufacturing units, thus affecting job creation.
Fourth, students going abroad will have to spend more. Foreign travel for any purpose like going for medical treatment or holiday or even for business will become more expensive.
Fifth, foreign investors will not like to invest in India considering it as a country with unstable currency and the world rating agencies may reduce our ranking. Even domestic entrepreneurs may take their investment to more financially stable countries.
Summing up, the falling Indian rupee will have an adverse cascading effect on our economy as it will have a vicious triggering effect for free fall. The silver lining will be our export sector. The export market will get a boost as our goods and services will be more competitive in the international market. However, the net result will be bad as our imports are much higher than exports.
Can the problem of the falling value of the rupee be solved?
The answer is both yes and no. Starting with ‘no’, first. Since the main reasons like rising crude oil price internationally and the trade war between US and China are external, we may not have much to deal with to resolve the issue. Yet we can do a lot to help the worsening situation. First, as a stop-gap measure, the RBI can intervene and start controlling the situation by selling the dollar for a limited period when the problem is at the peak. We have a robust reserve of US dollars, 406 billion as of today and we can take a small liberty in this respect without hurting us much.
Second step, if the steep fall of the rupee is not controlled, then the RBI can go for issuing NRI Bonds. This has been done with success in the past and we can do it again. The success of NRI Bonds will mean collection of dollars for our kitty and this swelling kitty will stop the rupee from falling. As a long-term measure, we have to promote the ease of doing business in our country so that more foreign investment comes into the country. The problem can be solved only when we have a good flow of incoming foreign exchange to kill the pain from outgoing foreign exchange. We also have to give incentives to our domestic industry so as to show the world that we have a thriving economy and not an unstable one. A good showcasing is a must to attract more foreign capital. This may also stop capital from flying away from India as our domestic entrepreneurs will then be encouraged to do business in India.
Our capital market should be nurtured so as to attract more FPI. As a long term measure, the concept of 'Make in India' is very good. The policy of the government should be such that big international players come to our country for mutual benefit. We can easily do that as we have cheaper labor and a huge domestic market, a democratic set-up and a robust judicial system. The opening of the world’s biggest factory of smartphones by Samsung recently at Noida is just one good example in this direction. We have to go on pursuing more such ventures.
‘The falling Indian rupee will have an adverse cascading effect on our economy as it will have a vicious triggering effect for free fall. The silver lining will be our export sector. The export market will get a boost as our goods and services will be more competitive in the international market. However, the net result will be bad as our imports are much higher than exports’
India is a bright spot in the world. It is the fastest- growing major economy. The temporary spell of the falling Indian rupee should not dishearten us as our country has a very bright future. The challenge of the falling Indian rupee may be taken as an opportunity to further strengthen our economy. All the indications of a strong economy are present. We have to just sharpen them. We are a big market ourselves and our production is mainly linked to our own consumption and hence external reasons can never deter us. The only disappointing thing is that we have to depend on others for our oil needs. There was a time after our 1998 nuclear test that sanctions were imposed against us by many countries including the US, but we not only survived but became stronger economically. Despite these sanctions, our GDP growth went beyond 8% in just a few years after 1998. We have the inherent strength.
The weakening of the Indian rupee is just an opportunity to boost our exports. Our objective should be to go for a positive balance of payments in the international trade arena. Our software engineers have made a name for themselves and our endeavor should be to capture the software market in new areas. We should try to promote our manpower export so that we keep on getting more inward foreign exchange remittances.
We should not mistake that the strengthening of the Indian rupee can only be done by the RBI or the central government. We all have to play our role. The fall is also caused by the world’s perception of us, in addition to the direct reasons discussed earlier. This perception is created by economic indicators and these indicators are the net result of how we are running our business and creating wealth in the country. Business is mainly in the private sector with only some in the public sector. We in the private sector should show to the world that we are doing business in the best possible manner. Government undertakings should have a healthy competition with the private sector to do more and for better results. The recent happenings of sizable bad loans at banks, particularly public sector banks, is a negative sign for the world. Indians settled abroad should work as patriotic Indians and serve as brand ambassadors of the rising new India. Our intelligentsia should contribute by writing columns about the good things of our economy so as to attract foreign money to India. We all have a stake in contributing to a healthier economy and we must play a positive role wherever we are.
by S K Jha
