The falling rupee is a cause for serious concern for the country, but while the causes are many, falling current account deficit is one major culprit. It is imperative to bring in measures to contain it–even short term–and stop the rupee’s free fall
The pain of the falling rupee is not subsiding. It is adding to the cost of all our imports. The price of petroleum products which we import is now sky rocketing, firstly due to the rising price of crude oil in the international market and secondly due to the falling rupee. There are many reasons for this, and the majority of them are external reasons, but one glaring domestic reason is our widening Current Account Deficit (CAD). CAD is caused by the excess of out-going of foreign exchange over in-coming of foreign exchange. The value of the rupee falls if there is less in-coming of that foreign currency as compared to its out-going and that is mainly due to trade-deficit. These days, the rupee is falling primarily against the US dollar and this means that more dollars are going out than coming into India. This problem, if left uncontrolled, will eat into our reserves which we have built over the years, and thus harm the very strength of our economy.
The in-coming of the US dollar is due to the export of our goods and services. It also comes due to remittance into the country mainly from expatriates; investments through FDIs, FPIs and FIIs and loans in dollars. The outgoing dollar is due to our imports and also due to various current account payments like expenses on foreign travel, education outside the country, medical treatment and remittances which have recently increased under the liberalized remittance scheme (LRS). Under the amended LRS, a citizen can transfer up to 250,000 dollars annually. Spending by people on various miscellaneous items have gone up in the recent times, thus adding to the widening of CAD.
The Times of India has reported that our monthly expenditure on foreign travel has increased from less than a million dollars in July 2013 to 450 million dollars in July 2018. On an average, annual foreign travel expenditure has gone up 253 times from 16 million dollars in FY ’14 to 4 billion dollars in FY ’18. The increase in expenditure on studies abroad is also significant. It has risen from 159 million dollars in FY ’14 to two billion dollars in FY ’18 which is a 13-time increase. The outgoing of the dollar due to remittance was only one billion dollars in 2013-14 which has increased to a record 11.3 billion dollars in 2017-18.
The remittance out of the country in the first four months of the current fiscal year of 2018-19 is already 4.2 billion. The remittance figure noted here is just the tip of the iceberg as promoters of companies who are high net worth individuals transfer funds through the corporate route and not through LRS, as the rupee is fully convertible on current account. Our many high net worth citizens buy properties outside India through this corporate route. In essence, there is a huge outgoing of our precious foreign exchange in dollars, in addition to the outgoing of imports.
Import is a major route for outgoing of foreign exchange but then it is also a must for the development of our economy. But the disturbing fact is that some of our imports are not essential items. Our three big imports include gold, electronic items and crude oil. We also spend a huge amount of foreign exchange on the import of luxury items which mostly cater to the needs of the super rich. The question which arises is that when CAD is increasing, is it not prudent to reduce the import of non essential items, including luxury items?
The government can decide on this issue. The government can also restrict LRS and reduce the amount of remittance as a short time measure till the falling rupee gains strength. It is good to have current account convertibility of the rupee, but again as a temporary measure there should be a ban on the purchase of non-business or non essential assets abroad through corporate routes. The import of crude oil should also be temporarily reduced and inventory period of crude reduced to 15 days from the current period of a month. If need be, there can be a discussion on the rationing of petrol and diesel. The reduced import bill of crude will help the falling rupee to a large extent. The rationing of petrol and diesel should be monitored on a daily basis, and with the rupee gaining strength, it can be liberalized.
Recently, there was a high powered meeting of the Prime Minister with the Finance Minister, the RBI Governor, and Secretaries. The issue of taking measures to contain the falling rupee were discussed. On consensus, five short term measures were taken. The measures included action to attract dollars faster and to stop the unnecessary outgo of the same. The high-powered meeting took a very serious note of the fact that CAD has risen to 2.4% of GDP in the current year as compared to 1.9% of GDP in the last quarter of the preceding year. It was decided that mandatory ECB hedging conditions will be raised to make the taking of loans more comfortable. The decision was also taken to permit manufacturing companies to avail of ECB up to $ 50 million with a minimum maturity period of one year. Decisions also included removing 20% exposure limit of FPI bond portfolio to a simple corporate group and providing exception to masala bonds from withholding tax up to March 2019. The high-powered group also considered revisiting imports of various luxury items.
It is commonly said, ‘export or perish’, and this aptly applies to our CAD problems today, for which long term policy decisions have to be taken. It is true that our economy is based mainly on domestic demand and consumption, but the role of exports cannot be belittled if we want to strengthen our rupee, or if we want to become an economic super power like China. In the last four years we have done very badly on the export front as our goods have not been competitive. We were mainly banking on our software exports and related services, but even here now we are getting competition from other emerging economies. We require to study minutely the emerging trade war between the US and China and take advantage from the situation. The Chinese market is seen to be going to smaller countries like Vietnam and other Asian countries. We have to do our best to grab new opportunities.
"The disturbing fact is that some of our imports are not essential items. Our three big imports include gold, electronic items and crude oil. We also spend a huge amount of foreign exchange on the import of luxury items which mostly cater to the needs of the super-rich”
It is important to ponder as to how different strata of our people participate in the widening of CAD and the consequent after effect of the weakening of the rupee. India is a country of about 135 crore people, out of which almost 30 crore people are very poor, being below the poverty line. It is true that the number of people below the poverty line has fallen in the last 10 years but the uncomfortable fact is that we are still a country of maximum poor people. As per statistics, in the years 2015-17 the number of undernourished people in India was 195.9 million, which is the maximum in the world. These really poor people hardly use any imported product and hence their contribution in the widening of CAD is nil. Then comes a big chunk of the lower middle class which hardly uses any imported item except petroleum products and thus their contribution to the widening of CAD is very limited. Imported products are used and expenditure in foreign exchange is done by the middle class, the upper middle class and the rich and this section which will not be more than 30% of the population who contribute to the widening of CAD. In this category too, it is the super rich people who spend more on foreign travel, for holidays and buying properties abroad and their contribution in widening of CAD is the maximum. As per a recent Oxfam report, India’s top 1% bag 73% of the country’s wealth when 67 crore citizens comprising the country’s poorest saw the wealth increase by just 1%. The net result is that the majority of our population are helpless onlookers of the widening CAD and bear the brunt of the after- effects of the falling rupee when it is a smaller section of people who are the active participants of the widening CAD.
Another disturbing related issue is that the rightful dollar income earned by the country is not fully received, thus aggravating the imbalance of CAD. There are dishonest people in large numbers who try to route the rightful income of the country to tax havens so as to minimize their tax liability. This is achieved by various devious mechanisms like hawala , use of shell companies, under and over invoicing of imports and exports, round tripping of income, etc. There is also a set of people like Nirav Modi and Mehul Choksi who transfer the foreign exchange of the country through fraudulent instruments which eats into our saved foreign exchange and also adds to CAD. Such people spend on foreign travel and holidays abroad as well. They transfer funds by the legal route also and buy properties abroad so as to give an impression of honest business conduct in international trade. It is not only dishonest businessmen, even some distinguished multinational companies indulge in nefarious acts of transfer of income from our country to low tax countries. A recent Oxfam report has named some leading pharma companies of the world which have been doing this. Our rightful dollar income is not fully accounted because of unlawful profit splitting.
The solution to the problem lies both with us and the government, while we have to increase our exports and reduce unnecessary imports, we have to also be vigilant about the leakages. The government should make biting laws to stop the nefarious acts of our dishonest people and companies. In a short span of time, till the rupee recovers, we should consider reducing our foreign exchange expenditure and also limit petroleum consumption.
by S K Jha
