There is something moronic about the utterances of economists who they see in the current rupee-dollar exchange rate crisis a silver lining. They aver it would spur the nation to export more.
If only it was so simple! China, the world’s largest exporter, has about 50 per cent of its GDP coming from exports with the comparable figure for us being less than 15 per cent, which does not place us in the category of leading exporters.
Indeed, we are not. In the rough and tumble of the export market, there are no quick fixes or shortcuts. There are both endogenous and exogenous factors that operate in determining the strength of a country’s currency, with exogenous factors often exerting greater influence.
All floating currencies of the world have perforce to yield to the US dollar, which was foisted as the global currency by the US in 1944 through a combination of trickery, audacity and technological and military supremacy.
Indeed, the US dollar defies all theories and truisms.
A country suffering from perennial Current Account Deficit (CAD) would willy-nilly have to live with a weak domestic currency.
This, however, does not apply to the US. Despite leading the pack in having the highest CAD, it has a fairly strong currency.
Policy Paralysis
It is not as if we have been done in by the external environment alone. The rot could have been stemmed through several policy initiatives, such as:
The only area we reined supreme for a while was IT and IT-related exports but somewhere down the line we allowed that advantage to slip through, though the world-wide recession admittedly was also responsible.
Countries like Vietnam and Philippines were snapping at our heels through furious cost-cutting and catching up on English language skills but we buried our heads in the sand, ostrich-like.
Our IT companies, instead of preserving our advantages, set up shop in these countries in the sobering realisation that if you cannot beat them, better join them.
We were once upon a time a leading cotton garments exporter. But the Johnny-come-lately, Bangladesh, has not only stolen a march over us but has been giving the more dogged Chinese a taste of their own bitter medicine — furious under-cutting of price. What the government must do immediately, now that India grows cotton in enormous quantities, is to throw open the garment industry to the large-scale sector.
Huge economies of scale and the much-needed resilience to cope up with the ever-changing fashions are attributes uniquely present only with the large companies, which have the resources to import the most modern machines.
Reviving the cotton textile industry should be the government’s priority that would give fillip to the downstream garments sector.
Employment opportunities would get a leg-up.
This, however, does not mean the rupee would turn the tide, immediately because there would always be a lag between investments and exports.
Export markets are notoriously difficult to prise open especially when faced with under-cutting of quotations and devaluation of currency, adopted by China.
Our captains of industry were itching to invest abroad. It is one thing for students to itch to study abroad but quite another for industries to invest abroad. Of course, they were not entirely to blame.
The government drove them to take this extreme step when back home investment was becoming a tough proposition — the ‘economy versus ecology’ dichotomy, among others, was making investments difficult. And the government played ball with them in facilitating the exodus, whereas it should have restrained them through tough norms.
The rather easy norms for outbound foreign investments have depleted our precious forex reserves; besides, Indian ended up buying a pig in a poke. Yes, many of the outbound investments have gone sour for two reasons — the recession there and winners’ curse of paying an excessive price for acquisitions abroad in the anxiety to prevent competitors from stealing a march. Domestic investments, by contrast, have a multiplier effect like creation of employment opportunities, greater revenue for governments and better infrastructure.
Making External Commercial Borrowings (ECB) laughably simple through the automatic route through which a company can borrow as much as the equivalent of $700 million in a financial year was suicidal even without the benefit of hindsight. The economy is paying through its nose now that the rupee has dropped steeply from what the dollar fetched at the time of borrowings.
Huge redemption losses stare the borrowing companies in particular, and the economy, in general. Mercifully, the RBI put its foot down on borrowings from abroad for less than three years.
Revolving door mechanism extended to FIIs. FIIs bring hot money and are fair weather friends. They must be reined in. We need to take steps that would make us a manufacturing nation, so that we have an export surplus.
Right now, our exports have a huge import content, be they petroleum products or gems and diamonds. The government is now giving a pep talk to the industry, exhorting it to increase steel production. But it has to walk the talk.
(The author is a New Delhi-based chartered accountant.)