India is on a treadmill, financing a good part of its imports with inflows of borrowings and capital. This is fraught with danger.

There is an opinion that the current situation is not quite like the Asian crisis of 1997-98, and I tend to agree with this view.

The main reason the Asian crisis unfolded was the excessive external borrowing resorted to by countries such as Thailand, Indonesia and South Korea for several years prior to it. Everything looked good in the early 1997 in these countries. Things unravelled rapidly from June onward, and many economies simply collapsed over the following 12 months.

At its heart, the Asian crisis was a crisis of foreign exchange that hammered the value of the local currencies, caused defaults in repayments of external borrowings and invited drastic dictates from the IMF that shrank the economies.

To cite just one example: Indonesia was the worst affected. Its currency, the rupiah, declined 80 per cent in value from 2,600 in June 1997 to 14,000 to the dollar a year later. GDP declined by 14 per cent, there were riots all over the country, and the 32-year-long Suharto regime was toppled. People suffered immensely.

To avert such a situation, India must get its current account deficit under control, reduce dependence on overseas borrowings and capital inflows, and get the rupee to appreciate in value by 15 to 20 per cent, to under Rs 50 to the dollar, within 12 months. It is foolish not to have a target value of the rupee, and manage this value. In this regard we must learn from the Chinese who have been managing their currency for years.

Change the mindset

We have to shed the ideology of Western Anglo-Saxon thinking and put our nation’s interest first, and that means protecting the value of the rupee.

To say that this will be subject to external forces, and that India can do little, is not acceptable. To say the market will determine the value is not acceptable either, since speculation is rampant and speculators strike when the currency is vulnerable.

The cracks in the Western Anglo-Saxon model, of a free market with no capital controls, have shown up spectacularly in recent times. We must believe in ourselves and find our own way.

We have a huge opportunity to provide a major stimulus to the economy by means of an appreciating rupee. The dollar value of our net annual oil imports alone is $110 billion. Every 1 per cent appreciation in rupee value means a saving in forex of $1.1 billion, or over Rs 6,600 crore at current value. A 5 per cent appreciation would mean savings of over Rs 33,000 crore annually; a 15 per cent appreciation will free up Rs 100,000 crore. This money coming out of the collective Indian pocket, which we are shipping out to the likes of Saudi Arabia, UAE, Iraq and Kuwait, can be saved and put back into the Indian economy. This will be a continuous stimulus, year on year, achieved by retaining more of what we earn.

Declare intentions

The authorities have started doing good things, like the proposed $50 billion swap facility with Japan and enabling dollar bond floatation, that are showing results.

They should make their intentions clear to the world, that we are ready to flex our muscle to enhance the value of the rupee through legitimate measures. The steps outlined below (many under discussion) should be taken all at once, not piecemeal, for maximum impact.

Attack the oil import bill by purchasing more oil from Iran on a partial rupee trade basis, as proposed by the Oil Ministry. Bowing to US pressure, India has been buying less oil from Iran.

With Barack Obama reaching out to and speaking to Iran’s President Hassan Rouhani recently, the US-Iran relations are thawing. The time is right to purchase more oil from that country. Forex savings to India in a full year could be upwards of $5 billion.

Ensure that capital goods orders and major project orders from PSUs are given to Indian companies. Most government contracts across the world are given to national companies. This will mean savings of billions of dollars annually.

Eliminate wasteful merchandise imports into the country, too numerous to enumerate. We can be on the right side of the WTO and still accomplish this. It is easy to reduce billions from our imports bill, and it will hugely help the internal manufacturing sector.

A good example of non-tariff restraints on imports comes from France. When that country wanted to reduce imports of Japanese automobiles in the nineties, it issued a guideline that such imports could happen only through a specific small port of the country that did not have the infrastructure. There was an immediate slowdown in imports. Most countries freely resort to non-tariff barriers.

Enhance exports, particularly of those commodities that can make an immediate impact. Iron ore exports, which had peaked at $6 billion in 2009-10, have dropped to less than $2 billion in 2012-13 due to the scam and subsequent restraints.

This matter should be sorted out and exports scaled back to bring in an additional $4-5 billion. (We need a broader, longer term exports strategy which is a subject in itself.)

Implement a series of bond issues targeting NRIs. The last issued India Millenium Bonds in the year 2000 raised $5.5 billion. India should announce two such issues every year for the next few years, targeting an inflow of $10 billion a year. The State Bank of India has the muscle to get this done.

Controversial suggestion

This last suggestion is somewhat controversial. Although the quantum is unknown, reports suggest that Indians are the largest holders of offshore wealth, with estimates as high as $500 billion.

Despite the moral hazard, India should announce an amnesty scheme for this money to be brought in. It is not helping the nation by sitting in Swiss banks. India should announce the scheme and keep a short window open.

Considerable money will pour in, particularly if it is felt that the rupee is due to appreciate in value.

All these suggestions can add up to an inflow/savings of anything from $30 billion to $50 billion in the next 12 months. As I said before, these steps should all be announced at once.

The impact will be felt immediately as speculators run for cover and rush the other way, betting that the rupee will appreciate. This will be a good way to use the market forces to help the Indian cause.

A marked appreciation in the rupee value will make the country feel confident, help repay the short-term debt without difficulty, and provide the boost that the economy needs. It is the magic bullet. The initiative is ours to seize.

(Concluded)

(The author is Group CEO, R. K. Swamy Hansa and Visiting Faculty, Northwestern University, USA. The views are personal.)

Related Topics