Headlines say that the Rupee has been weak. What is it weak against? Foreign currencies, notably the US Dollar, the British Pound and Euro. Why is the rupee weak and the weakness getting more pronounced? It is just a reflection of the underline fact – our fundamentals as an economy have worsened and the value of the rupee against the foreign currencies is just a reflection of that reality. And this is not a recent phenomenon – The exchange rate was 6 rupees to a dollar when we gained independence against 65 now – seems this has been an old problem that comes back to haunt us every 10 years.
Let us look at the reality – we have always imported a lot more than we exported. This leads to a negative trade balance. When we import, we have to pay foreign currency, as people who export to us will not (generally) accept the Indian Rupee as a mode of payment. This means that each year we are short of foreign exchange. Why do we import so much? Because almost all our petroleum products and precious metals demand is met through imports as we produce very little of these. Last year we imported almost 500 Billion dollars worth of goods and exported almost 340 billion dollars – leaving a gap of 160 bilion dollars to be funded.
How is this gap funded? Through invisibles – export of service (software/IT) and remittances of Indians working overseas/NRI’s and the flow of foreign money into India in financial instruments, to buy Indian assets or to start companies here. But for the last few years even this has not been enough, mainly due to the surge in the value of gold imports (covered in my earlier blog) and the faulty policies of UPA II leading to a surge in imports of other items.
What can be done? There are three measures that need to be taken in combination – encourage exports, discourage/substitute imports and make the country more competitive. We will look at them in detail below -
Short Term Measures -
Coal Imports -
We have the world’s largest reserves of coal, still we imported 16 billion dollars worth of coal last year. Most of our electricity is produced by power plants which run on coal. The mining of coal is a government monopoly through a company called Coal India and like all government run enterprises, they are lethargic and inefficient. Private miners have to use coal for their own consumption and cannot sell in the open market. Those power producers who don’t have mines find it easier to import coal than to source it locally.
Solution – Ban all coal imports, allow private producers to sell in the market and give Coal India 6 months to either double production or broken up and privatised. In short, introduce competition in the sector.
Iron Ore Imports –
We used to be an exporter of Iron Ore. After the (justifiable) ban on imports in the states of Karnataka and Goa we have started importing the same.
Solution – Lift the blanket ban, start the mines which have been compliant and auction the licences of the non compliant ones to fresh bidders. Have a clear time line for the start of mining leases – awardees should not be allowed to sit on the mines without production.
Crude imports from Iran
Our Oil import bill is about 170 billion dollars. The western governments have imposed sanctions on Iran as they believe that the Iranian government has been running a secret nuclear weapons programme. Like all middle eastern countries, their main output is crude oil that they can’t export to a lot of countries of the world because of the sanctions.
Solution – Iran is willing to accept Indian food grains, medicines and other items in exchange for the crude oil that they will send to us. The Indian government can take a special approval of the West and import about 10 billion dollars of crude annually from Iran, saving precious dollars.
Import restrictions on luxury items
Luxury cars, yatchs, perfumes, fashion accessories, cosmetics, wines and alcohol, bath equipments, furniture, fixtures and fittings – practically everything luxurious is being imported. The duties on these items should be so high so as to discourage their imports and make them in India.
Import ban on non essential items
Every Diwali we use Chinese made electrical equipment to light up our homes. Similarly there are a lot of non essential items that are imported instead of being made locally. All these should be immediately addressed.
Last year we imported electronic goods worth 30 billion dollars – TV’s, mobile phones, laptops and computers. Why cant they be manufactured in India? All these items which are being sold here should be manufactured here or part payments made in rupees to these manufacturers.
Long Term Measures -
We import a lot of crude oil and will keep importing the same since we hardly produce it in the country. However we need to seriously start thinking about curbing the wasteful usage of petroleum products. There is no reason why more and more Indians should drive SUV’s on subsidised diesel. Fuel prices need to be decontrolled immediately and the government needs to seriously think about creating world class public transport infrastructure – more rails, buses, water transport which people can use to commute. Increasing the use of private vehicles is not the solution. Encourage innovation in usage of solar/hydrogen powered vehicles. We are an import dependent and fuel starved economy and sincere steps are required to be taken to correct this imbalance.
There are few sectors where we are world beating – Textiles, chemicals, IT, auto and auto components, pharmaceuticals – the government should sit with these industry bodies and chart out a mechanism to help the companies in these sectors to become more competitive and gain export market share.
One in every 5 persons in this world is an Indian. We are settled all over the world and are successful due to our qualities of hard work, common sense and the attitude to save and invest. The government should encourage these people to send more money to the country – it’s a good solution for both the expatriates and the country.
Defence/Capital Goods/Telecom equipment spending
Most of our defence equipment is imported. Same is true for capital goods for power and nuclear plants and telecom equipment like servers. The companies bidding for these should be made to adhere to a clause – either source 50% of the order value from India or invest 30% of the order value in India or take 50% of the payment in Rupees – generally these orders are so large in value that global giants line up and lobby with our government to supply these and meeting these conditions should not be a problem for them at all.
More competitive India
Encourage entrepreneurship. Make it easier to start and close factories and hire and fire workers. Create stable policies. Provide the basis like good roads and continuous electricity. Reward people who create employment and bring foreign exchange. Let the government get out of all businesses and only run the utilities. Create and encourage competition.
We must understand that we will always remain a foreign exchange scarce country and hence the same should be treated like ill things which are scarce are treated – with utmost care.
Also wishing all readers a very happy Ganesh Chaturthi. May the vighanharta take away the many troubles that face our country.
Next week – Many problems? One solution (I will not be talking about Garnier Naturals J)