Illusion and Reality
A B writes
The almost unthinkable
fall in the value of the rupee
in relation to the dollar has sent tremors through the share market and also worried the Government of India. Yet there are those who nurse the illusion that the fall in the value of the rupee should raise make Indian export goods more comfortable in the international market. This was precisely the argument given in favour of the devaluation of the rupee in the early nineties of the last century. But over the last two decades, India has remained a trade-deficit country, her imports always exceeding her exports.
Compared with her ancient and traditional neighbour, China, India's links with the global economy are largely different. The Chinese were large exporters of goods and she had large export surpluses with the outside world, particularly with the USA. India's links on the other hand consisted in the inflow of Foreign Institutional Investment (FII), i.e. investment in shares by foreigners.
It is clear that the decline in the value of the rupee is largely due to the greater reliance on imports. This reliance, on the other hand, is fuelled by the phenomenal rise in the consumption of the affluent. This large rise is one of the factors sustaining the growth process initiated by the economic reforms started by Manmohan Singh when he was the finance minister in the Narashima Rao government. The consumption of the affluent has in turn been sustained by loans from the money market.
On the other hand, India's exports are mainly service oriented, exports of the IT sector or the financial sector that have only limited employment potential. With such an export sector, the so-called 'outward-looking policy' was bound to stumble. The rapid growth of the GDP over the eighteen years or so since the start of the reform process has fuelled the demand for imports, and the foremost item on the import list is petroleum.
The impact of the fail in the value of the rupee has been twofold. The first is the crisis of confidence in the minds of foreign institutional investors, who have begun to consider it unprofitable to invest in India. So, there has started an outflow of such finance from India, along with its adverse impact on the market of real properties as well as the consumption expenditure of the affluent. The second impact is inflationary. The rise in the prices of imported goods and services has direct and indirect impacts on the general price level.
For example, petroleum is an essential commodity in almost all spheres of the market economy because it is necessary for transporting goods and human beings at the inter-regional, intra-regional, inter-local and even intra-local levels, and hence a rise in petrol and diesel prices is bound to raise the costs of living.
Those who are nursing the hope that a fall in the value of the rupee will increase India's export prospects are obviously living in a fool's paradise. First of all, the conditions of the buyers of India's exports are not too encouraging and secondly, the potential competitiveness of India's exports has largely been eroded owing to the cost-inflation in the domestic economy. So, the prospects are not bright in this sphere. The policy prescription announced by the Reserve Rank of India is foolish as well. The principal item in the package of reforms declared with the intention of wooing international investors is further liberalization in the capital account. This will make it easier for these investors to hold the economy to ransom.
The only effective way out of this labyrinth is to drastically reorient the pattern of distribution of consumption, to raise the capability of the broad masses and to expand the market and not to rely on the growth process dependent on the consumption of the wealthy. But the gnomes of New Delhi are not possibly capable of this.
Vol. 46, No. 19, Nov 17 - 23, 2013
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