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I agree with Chidambaram that the falling Rupee is not such a bad thing


The former Indian Finance Minister’s analysis of the weaker Rupee giving a much-needed boost to domestic industries is a sound one, writes India Inc. Founder & CEO Manoj Ladwa.

Nursery rhymes, though meant for little children, often hide larger truths behind the small rhymes. Seeing emerging market currencies, including the Indian Rupee, fall on the back of rising crude prices, tension in the Middle East over Iran and Syria, sanctions on Russia and a worsening macro-economic outlook all around, I am reminded of that nursery rhyme that is still recited by toddlers all over the English-speaking world:

Humpty Dumpty sat on a wall/ Humpty Dumpty had a great fall…

Many an Opposition leader in India, especially Congress President Rahul Gandhi, are rubbing their hands in glee at the perceived discomfort of the Narendra Modi government over the falling value of the Indian Rupee, which breached the 72.50 per US Dollar level recently, before recovering marginally to trade at 71.75 levels today.

This, they are screaming, is proof that the Modi government has been mismanaging the economy. How true is this charge? And why is the Rupee falling?

Following in Humpty Dumpty’s footsteps

Let us look at some of India’s global peers to see how other emerging market currencies have been doing recently.

Over the last five years, the Argentinian Peso has lost 546 per cent in value, the Turkish Lira is down 221 per cent, the Brazilian Real has fallen 84 per cent, the South African Rand 51 per cent, the Mexican Peso 47 per cent, the Indonesian Rupiah 28 per cent and the Malaysian Ringitt 27 per cent.

The Indian Rupee, in comparison, has lost a far more manageable 16 per cent. Among emerging markets, only the Chinese Yuan has performed marginally better than the Indian currency, falling 12 per cent.

Just to put things in perspective, even the mighty US Dollar has lost 18 per cent during this period.

Global contagion

The main culprits for the falling value of emerging market currencies are the Turkish Lira and Russian Ruble.

The Turkish economy is on the brink, with rising foreign debt, an annual inflation rate of about 18 per cent and a diplomatic spat with the US all exacerbating situation. Then, the US and European sanctions against Moscow have made matters worse for the beleaguered Russian economy with the Ruble following the Turkish Lira into a downward spiral, as international investors, fearing an emerging markets contagion, remove their funds to safe heaven currencies of the US and western Europe.

India stands out for macro-stability

Once you set the context, the fall of the Indian Rupee doesn’t look very bad… in fact, the government deserves credit for managing to limit the currency fall to less than 16 per cent at a time when its emerging market peers have seen their currencies go into a free fall.

The reasons for this are prudent management of the macro indicators and pursuing policies that are generating an extremely high (and enviable) growth rate.

Since coming to power in 2014, the Modi government, and Finance Minister Arun Jaitley, in particular, have shunned populism and politically motivated giveaways in order to nurture the broken economy they had inherited back to shape.

Four years of patient hard work is now bearing fruit. The Indian economy recorded an 8.2 per cent growth rate in the first quarter (April-June 2018) of the current financial year. And though almost all institutions, such as the World Bank, the IMFand the Reserve Bank of India (RBI), are projecting an annual growth rate of about 7.4 per cent, I expect this figure to be closer to, if not higher than, 8 per cent for the full year.

Then, the inflation rate is also relatively moderate, at 4.17 per cent in July, despite runaway oil prices. Though this rate is expected to rise to 4.8 per cent in the second half of the year, it will still remain within RBI’s comfort zone.

The two other very important macro indicators, the fiscal and current account deficits, are also modest and within the acceptable range, though CAD could rise to 2.5 per cent and beyond if global oil prices don’t cool in the coming months.

Oil and the renewables thrust

India remains the world’s third-largest oil importer. Consider this: every $1 increase in the price of India’s crude basket raises India’s import bill by $1 billion. This is one of the reasons behind the Modi government’s massive renewable energy push.

A switch from hydrocarbons (and other environmentally harmful fuels like coal) to renewable energy (RE) will not only save India billions in import dollars, it will also improve India’s carbon footprint and help us leave a cleaner world for future generations.

There have been numerous reports in Indian newspapers as well as by foreign agencies such as Bloomberg, Reuters and others that the Modi government’s ambitious target adding generation capacity of 160 GW of solar, wind and biomass energy by 2022 is on track. This rush to add new capacity is also generating thousands of jobs across the board for Indians.

Why cutting duties to ease oil prices is not a good idea

There has been a persistent Opposition demand to cut duties on the retail prices of petrol and diesel to ease the burden on the middle class. I am sorry to say but this demand is just a throwback to the kind of populist economic management that has got India into trouble in the past.

Cutting duties will widen the fiscal deficit and leave less money for various government programmes, which have been driving the economy in the absence of robust private investment. But I am pleased to note that capacity utilisation in most industries is at a two-year high, according to a recent report in the ‘Economic Times’, the threshold at which industry starts investing in fresh capacities.

Pulling back public investment at this juncture, just when the economy has reached a take-off platform after more than five years will be a recipe for disaster.

Then, a rising fiscal deficit will spook foreign investors who may then begin pulling out their investments, leading to a flight of dollars, further depreciating the value of the rupee. The resulting panic may well roil the Indian economy and lead to a replay of the 2013 run on the rupee, which was a result of the previous UPA-led government’s mismanagement of the economy.

Then, if you remember, the Rupee depreciated almost 25 per cent from 55/Dollar to 68/Dollar and it was only then RBI Governor Raghuram Rajan’s fire-fighting skills that staved off a further deepening of the crisis.

Let’s shed the macho approach

Most economists and sober analysts agree that a strong currency is only good for the egos of a few leaders but is not always good for an economy, especially a growing one.

You don’t have to take my word for it. Let me quote former Indian Finance Minister and Opposition Congress party leader P. Chidambaram, who has written a column recently in the ‘Indian Express’ newspaper titled ‘Why India Should let the Rupee Fall’.

He wrote: “A weaker currency helps export growth, which has been weak in recent years… A weaker Rupee could also offset competition of cheap imports from countries like China, which could give domestic industries a much-needed boost.

“The RBI and India’s government, at present, are calm. This is a strong posture that must withstand the daily news, media pressure, lobbying and political taunting. In 2016, the RBI had been given a new mandate to meet its inflation target and maintain growth. Defending the currency at all costs isn’t part of the brief. This latest weakness will test its resolve.”
It is rare in India’s polarised political atmosphere for a senior Opposition leader to publicly support a tough but very necessary move by the government, more so when that leader’s own party president has been going hammer and tongs about the same issue.

For once, I must say I agree wholeheartedly with Mr Chidambaram.