By Nantoo Banerjee
Few will disagree that economic recession is better than splurging money and heading towards bankruptcy. A record current account deficit, a record public borrowing and a record trade gap are no way to sustain economic growth, leave alone to protect the value of a national currency. In fact, the combination could devastate any economy and ultimately lead to its bankruptcy. It is not that India had never experienced such a situation. Food and forex crisis in the 1960s and foreign debt repayment crisis in 1990-91 still stare in the face of Indian economy. If the power of currency serves as a mirror of a country’s economic health, India has every reason to be highly alarmed as the value of its Rupee has dropped by almost 27 per cent in the last 10 months. No Reserve Bank intervention can arrest Indian Rupee’s (INR) near-daily devaluation. It is because RBI simply does not have enough foreign currency reserves to protect the value of Rupee. If it had Rupee would not depreciate in the first place.
India’s current account deficit in 2012-13 is most certain to be around 3.6-3.9 per cent of the GDP, the same as the last year’s level, which is unsustainably high. In 2010-11, India’s trade gap was US$ 118 billion. The latest estimate of last year’s trade gap is close to $185 billion, representing almost 10 per cent of the GDP. Last year, India received the highest ever remittances, $63.7 billion, from its nationals working abroad. The figure may fall this year due to developments in West Asia and recession in the Euro zone. The country’s foreign exchange reserves at the end of last month were $295.36 billion, much of it in FII hot money. According to a study by the Associated Chambers of Commerce (Assocham), the trade deficit may shoot up to as high as $428 billion in 2015-16. That is simply scary. On top of all these, the country’s public debt is shown in CIA’s World Factbook as close to 56 per cent of its GDP.
Although the public debt is still manageable, the biggest concern is the current account deficit. Recently, the commerce ministry held petroleum and gold imports as ‘main catalysts’ behind the record trade deficit, last year. He was only being polite. In effect, they were the two biggest culprits.
Surprisingly, the government did little to curb the consumption of petroleum, especially petrol and high speed diesel oil. Many countries in Asia and Europe have imposed highly effective indirect restrictions on petroleum consumption. Unfortunately, India is yet to appreciate the need for such measures. This is despite the fact that India is 80 per cent dependent on imported petroleum, the annual domestic consumption of which is growing at the rate of eight per cent. Assocham has forecast that India’s oil import bill will jump to $243.7 billion at the end of 2015-16 from the level of $106.1 billion in 2010-11.
However, the single biggest culprit for India’s record current account deficit last year was a sudden 80 per cent spurt in gold import to $60 billion (over Rs. 3,00,000 crore), causing the second highest foreign exchange drain after petroleum. If the gold import was kept even at the 2010-11 level at $33.9 billion, the foreign exchange saving would have been $26.1 billion, which, in turn, would have eased a lot of pressure on Rupee. The gold import, mostly on private account, itself was very high in 2010-11. Massive Indian demands pushed up world gold prices to new highs in 2011-12. Are rich Indians smelling the possibility of a big local or global war? Gold demands and prices normally shoot up at times of war. No one is asking a question as to why India or a small percentage of Indians is being allowed to import such huge quantities of gold year after year. Isn’t it working as an incentive to ever speculative rich Indians to hide their ‘black money’?. Industry has projected the country’s gold import at $83.3 billion by 2015-15.
But, it would be wrong to blame gold imports alone for Rupee’s present misery. What about the wastage of massive forex in cricket’s IPL, imported cheer leaders, foreign event managers, Formula One racing, almost every 2nd film shooting in foreign locations, employing foreign stars and extras, and allowing employment of thousands of foreign workers and executives by MNCs in India in jobs, which can be performed by locals at least at one-third cost. A foreign car manufacturer in Chennai alone has some 3,000 expatriates on its role. All these cost huge foreign exchange. How is foreign exchange earned in India to pay for these luxuries? It is mostly out of the sweat of the community of poor Indian farmers.
This year, under the pressure of high trade deficit, the government has freed export of most agricultural products such as sugar, potato, onion, ginger, cereals, etc., meant for the common man’s consumption. The prices of these agricultural commodities are shooting up and so also the overall inflation rate. It is a pathetic situation. It would appear that a bunch of bullion merchants, traders in high-end luxury items and entertainment tsars are engineering the government’s import policy.
It is not the legal dollar hoarding by exporters which is weakening the Rupee. The total amount involved under the RBI scheme called Exchange Earner’s Foreign Currency (EEFC) Account is said to be only $ 5 billion. A 50 per cent surrender of foreign earnings for conversion into Rupee, as ordered by RBI, will make available only $2.5 billion additionally in the country’s forex kitty. It is hardly much and failed to protect INR. The country spent $ 485 billion in foreign exchange on imports in 2011-12 while the total export earning of only $ 300 billion. The government must act to drastically cut imports of non essentials to reduce its trade imbalance and stabilise its currency and economy, in the process.
Conspicuous consumption and corruption at both the state and federal levels, which have a direct bearing on the government revenue or the loss of it, need to be controlled with a heavy hand. Corruption and conspicuous consumption go hand in hand. One leads to the other. If a ridiculously high stamp duty rate on real estate sale induces a much lower disclosure of the sale price to evade tax and generate black income, the latter invariably invites conspicuous consumption, including bullions, in buying assets abroad through havala transactions and splurging dollars in gold purchase, entertainment and fashion. It weakens the domestic currency and economy. Before it’s too late, the government must act to correct the situation through fundamental policy changes with regard to foreign exchange earnings and expenditure. Some cosmetic changes by RBI will not arrest Rupee’s free fall. The country can’t sit tight and watch the steady devaluation of its currency. There is every reason to feel panicky about the current state of Rupee and economy. (IPA Service)