Ailing Economy, Wailing India
An Interview with Prof Charan Singh, RBI Chair
The rupee slid to Rs 65/$ on Thursday and Deutsche Bank issued a statement that it will hit Rs 70/$ soon. What are your thoughts?
At the outset, I would not call it a slide but a genuine correction, it was being held back for a long time. It had to happen. Now, the correction should be allowed to take place without noise and disturbance as the rupee is finding its normal level.
Dr. S. S. Tarapore, an expert external sector economist and former Deputy Governor, RBI, had observed that Rs 70 is the appropriate level, a couple of months ago. I have argued on the basis of some facts, in the recent past, that there is scope for a substantial adjustment.
There are many factors that play a role in exchange rate determination between two countries - illustratively, growth rates, interest rates, and inflation rates. The Indian economy is sliding seamlessly into lower growth rate while the US economy is beginning to strengthen. The inflation differential between the US and India has persistently been high. There has been an average annual gap of 3.6 per cent in inflation rate for the last two decades. If you look at the exchange rate in 1993-94 and adjust it with the differential, the exchange rate would be greater than Rs.70 to a US Dollar. This does not mean the Rupee will go beyond Rs. 70 - the inflation differential is not the only factor but a very important one. I don't agree that the Rs. 59-60 range, which most newspapers are quoting, is the right rate for the rupee to be at.
Incidentally, why are we shy of allowing the Rupee to be at a genuine level - it will help our exports and discourage imports. It is amazing that our neighbor, China, prefers to have a highly depreciated currency and we prefer to have an over-valued currency. An over- valued currency could also be a cause of our high CAD. There is a commonly known economic phrase, beggar-thy-neighbor policy which implies competitive depreciation to grab larger share of global exports. But India, by insisting on overvalued exchange rate, seems to follow enrich-thy-neighbor policy by competing itself out of export markets. Why should Indian toys and garments not be sold in all shopping malls of the US and Europe? Instead, Chinese toys and electronics are being sold in Indian stores!
This exchange rate adjustment should not be used as a weakness of the economy or a sign of letdown. There is a global slowdown and India, a sufficiently open economy, cannot be insulated by it. I would interpret, maintaining a Rupee at an appreciated level where it does not belong, as false pride, which is never beneficial for economic growth and progress.
Can the RBI do anything significant about the slide? IMF has said it's a worldwide trend not specific to India.
First, in my personal view, I don't think, it is a slide and I would prefer to call it a long pending adjustment. Second, the RBI is a very powerful institution and has various instruments at its disposal but, according to my understanding, should not do anything in this case. Central banks should manage exchange rate volatility as it is a genuine concern for exporters and importers. The current movement does not seem to be volatility to me based on publicly available information; it's a fundamental correction following a text book economic theory as argued earlier, and a long delayed adjustment. It was not allowed to happen because of a blockade, even if only psychological, on the rate around Rs.55-56. It is a pent-up adjustment pressure which is finding expression now. Now, having gone so far, the Rupee should be allowed to settle at its natural level, a new level. The foreign exchange reserves of around USD 300 billion, relative to other external sector indicators, are not too many and should only be used for difficult times and better things, like for example to service short term debt, if need arises. International reserves are like family silver, generally meant to be in a showcase, which are carefully watched by global investors and rating agencies, and therefore should be regularly built and preserved.
The RBI, in its recent Macroeconomic publication released on July 29, 2013 had observed that ratio of short-term debt (residual maturity) to reserves is 59% at end March 2013 compared to 42 percent at end March 2011 - does not reflect a very happy situation. India had a comfortable level of forex reserves like more than 12 months of import cover in some years but currently reserves are 7-month import cover. The adjustment of the Rupee is a long-pending adjustment, and the RBI should not intervene, is my personal view.
What are your thoughts on Current Account Deficit?
CAD is at record high. Dr. C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister, about two decades ago as Chairman of a High Level Committee on BOP, had prescribed a 2% maximum for the CAD and this somehow was revised to 2-2.5% over the years. The CAD went to 6.7% in last quarter in 2012 and is currently just lower than 5% which is still very high. In 1991, it rose to 3% and India had a major BOP problem. How are we tolerating CAD of 6.7% or about 5 percent, now? Other Emerging markets might have high CAD, but vulnerability of the Indian CAD, given our size and economic context, is a matter of concern. FIIs, NRIs and Equity markets are very sensitive birds and will exit quickly, leaving very few options to finance the CAD, if corrective measures are not initiated. The high CAD has been attributed to factors such as gold imports and fuel/energy imports. But, in my view, it is at such a high level because the exchange rate was over-valued, resulting in an unnatural imbalance between exports and imports. Majority of the gold consumption, almost 75%, is in the rural areas. This could be due to historical, sociological and religious reasons, but the current spike in gold buying is mainly due to the uncertainty and lack of other financial instruments in the rural markets. The Government should consider offering Inflation index bond which is genuinely linked to inflation (not to the WPI but to the CPI) and should distribute the same via rural branches of banks and the 140,000+ post offices in the rural areas. Banning gold imports or raising import duty will only result in higher smuggling, as was the historical fact before 1992. One more way of addressing the CAD is to encourage and incentivise exports.
The lesson to be learnt is that economic fundamentals, like laws of gravity, should be respected and allowed to operate. In my interaction with few and select industrialists, and markets, it is apparent that it is not the regular adjustment in the exchange rate but the uncertainty that negatively impacts investment decisions. Regular movements in the exchange rates are factored in by decision makers and investors, it is the uncertainty in intervention and the intervened rate, that is difficult to factor in.
Is the slide because of government policy failure or more because of reasons beyond India's control? Suggestions?
India has the best economists in the world, even though, some of them are argumentative. The Chief Economist of the World Bank is an Indian as was the Chief Economist of the IMF, and now Governor-designate of the RBI. Dr. C. Rangarajan, again, is amongst the most towering and respected economists of the world and a light-house for many economists in this country and beyond. I believe, that Planets don't decide your destiny but appropriate measures at the right time do.
Populist schemes, probably, have resulted in economic factors being ignored. I believe that the Parliament should not ignore economic realities, as in the modern world, economic strength and political power goes hand in hand. That, in fact, is the modern history of human race.
In the critical period that the global economy is passing through, economic factors seem to have been neglected in our country, either we had become too complacent with our short-lived achievements or were overconfident that we would never leave the higher orbits of growth. Otherwise, how can one justify the delay in approval of crucial projects and next generation of much-needed reforms. Another illustration is the seriousness with which economic advice by the Pundits is considered and this pertains to Food Security Bill which can not only raise the gross fiscal deficit but convey to the rating agencies, global investors and India-watchers that we are not serious on economic factors.
The Government has many resources and resourceful ideas but in my view, it would be helpful to identify productive sectors in the economy and specific industries which are suffering because of high interest rates and provide concessional or interest free loans to the same. Housing, for example, affects 300+ industries. There is a shortage of 18 million houses and stimulus to the housing sector could have triggered growth. When subsidies are high, given the limited resources, capital expenditure suffers and - in turn - future growth suffers. If Government resorts to market borrowings, future interest payments and are bound to increase. Large market borrowing by the government would also raise interest rates in the economy and crowd out private sector.
There is enough money floating in India, especially in the rural areas. If the rural areas can buy up to 75% of the gold sold in India, the Government needs to tap that money and invest in infrastructure via rural infra bonds. The need is to think out of the box, as did the US and Europe in the last few years. To tap rural savings and divert its attention from gold to financial instruments, Government should consider projects that rural folks will benefit. Illustratively, policy makers can conceive of regional trade centers, midway between the city and the village, which can trigger a whole range of infrastructure projects along the rural belt. Second, instead of worrying about excessive urbanization, the focus should shift to reverse urbanization. If the government provides jobs, better educational and medical facilities and better sanitation in the rural areas both populist and economic issues will be taken care. Infrastructure will be built, hidden money will emerge in the open, more employment and commerce will result.
The Government needs to think out of the box and put on a confident face instead of expressing helplessness by saying that other countries are also passing through the same recessionary phase. India's contextual economic situation is different. I am reminded of late PM, Smt Indira Gandhi, who did not like the comparison between India and Singapore. Now, we should not resort to comparison with other countries as it looks like an excuse because not only the person who is left unemployed even for a year, suffers innumerable challenges but the whole family is devastated, sometimes, irrecoverably. In India, we need to take care of that aspect, given that we don't have social security measures like many other countries have.
Therefore, to me, nothing is beyond the control of the government and the Parliament. In fact, given our size and diversity, and different income levels, we don't have to look too much outside but just our backyard, which is full of potential. We only need to direct and tap that rich potential. I would think this challenge to be an opportunity similar to the one, which our able Prime Minister had successfully exploited in 1991.
Interviewed by Kavitha Kumar & Srinivas Rowjee.
Ailing Economy, Wailing India
An Interview with Prof Charan Singh, RBI Chair
The rupee slid to Rs 65/$ on Thursday and Deutsche Bank issued a statement that it will hit Rs 70/$ soon. What are your thoughts?
At the outset, I would not call it a slide but a genuine correction, it was being held back for a long time. It had to happen. Now, the correction should be allowed to take place without noise and disturbance as the rupee is finding its normal level.
Dr. S. S. Tarapore, an expert external sector economist and former Deputy Governor, RBI, had observed that Rs 70 is the appropriate level, a couple of months ago. I have argued on the basis of some facts, in the recent past, that there is scope for a substantial adjustment.
There are many factors that play a role in exchange rate determination between two countries - illustratively, growth rates, interest rates, and inflation rates. The Indian economy is sliding seamlessly into lower growth rate while the US economy is beginning to strengthen. The inflation differential between the US and India has persistently been high. There has been an average annual gap of 3.6 per cent in inflation rate for the last two decades. If you look at the exchange rate in 1993-94 and adjust it with the differential, the exchange rate would be greater than Rs.70 to a US Dollar. This does not mean the Rupee will go beyond Rs. 70 - the inflation differential is not the only factor but a very important one. I don't agree that the Rs. 59-60 range, which most newspapers are quoting, is the right rate for the rupee to be at.
Incidentally, why are we shy of allowing the Rupee to be at a genuine level - it will help our exports and discourage imports. It is amazing that our neighbor, China, prefers to have a highly depreciated currency and we prefer to have an over-valued currency. An over- valued currency could also be a cause of our high CAD. There is a commonly known economic phrase, beggar-thy-neighbor policy which implies competitive depreciation to grab larger share of global exports. But India, by insisting on overvalued exchange rate, seems to follow enrich-thy-neighbor policy by competing itself out of export markets. Why should Indian toys and garments not be sold in all shopping malls of the US and Europe? Instead, Chinese toys and electronics are being sold in Indian stores!
This exchange rate adjustment should not be used as a weakness of the economy or a sign of letdown. There is a global slowdown and India, a sufficiently open economy, cannot be insulated by it. I would interpret, maintaining a Rupee at an appreciated level where it does not belong, as false pride, which is never beneficial for economic growth and progress.
Can the RBI do anything significant about the slide? IMF has said it's a worldwide trend not specific to India.
First, in my personal view, I don't think, it is a slide and I would prefer to call it a long pending adjustment. Second, the RBI is a very powerful institution and has various instruments at its disposal but, according to my understanding, should not do anything in this case. Central banks should manage exchange rate volatility as it is a genuine concern for exporters and importers. The current movement does not seem to be volatility to me based on publicly available information; it's a fundamental correction following a text book economic theory as argued earlier, and a long delayed adjustment. It was not allowed to happen because of a blockade, even if only psychological, on the rate around Rs.55-56. It is a pent-up adjustment pressure which is finding expression now. Now, having gone so far, the Rupee should be allowed to settle at its natural level, a new level. The foreign exchange reserves of around USD 300 billion, relative to other external sector indicators, are not too many and should only be used for difficult times and better things, like for example to service short term debt, if need arises. International reserves are like family silver, generally meant to be in a showcase, which are carefully watched by global investors and rating agencies, and therefore should be regularly built and preserved.
The RBI, in its recent Macroeconomic publication released on July 29, 2013 had observed that ratio of short-term debt (residual maturity) to reserves is 59% at end March 2013 compared to 42 percent at end March 2011 - does not reflect a very happy situation. India had a comfortable level of forex reserves like more than 12 months of import cover in some years but currently reserves are 7-month import cover. The adjustment of the Rupee is a long-pending adjustment, and the RBI should not intervene, is my personal view.
What are your thoughts on Current Account Deficit?
CAD is at record high. Dr. C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister, about two decades ago as Chairman of a High Level Committee on BOP, had prescribed a 2% maximum for the CAD and this somehow was revised to 2-2.5% over the years. The CAD went to 6.7% in last quarter in 2012 and is currently just lower than 5% which is still very high. In 1991, it rose to 3% and India had a major BOP problem. How are we tolerating CAD of 6.7% or about 5 percent, now? Other Emerging markets might have high CAD, but vulnerability of the Indian CAD, given our size and economic context, is a matter of concern. FIIs, NRIs and Equity markets are very sensitive birds and will exit quickly, leaving very few options to finance the CAD, if corrective measures are not initiated. The high CAD has been attributed to factors such as gold imports and fuel/energy imports. But, in my view, it is at such a high level because the exchange rate was over-valued, resulting in an unnatural imbalance between exports and imports. Majority of the gold consumption, almost 75%, is in the rural areas. This could be due to historical, sociological and religious reasons, but the current spike in gold buying is mainly due to the uncertainty and lack of other financial instruments in the rural markets. The Government should consider offering Inflation index bond which is genuinely linked to inflation (not to the WPI but to the CPI) and should distribute the same via rural branches of banks and the 140,000+ post offices in the rural areas. Banning gold imports or raising import duty will only result in higher smuggling, as was the historical fact before 1992. One more way of addressing the CAD is to encourage and incentivise exports.
The lesson to be learnt is that economic fundamentals, like laws of gravity, should be respected and allowed to operate. In my interaction with few and select industrialists, and markets, it is apparent that it is not the regular adjustment in the exchange rate but the uncertainty that negatively impacts investment decisions. Regular movements in the exchange rates are factored in by decision makers and investors, it is the uncertainty in intervention and the intervened rate, that is difficult to factor in.
Is the slide because of government policy failure or more because of reasons beyond India's control? Suggestions?
India has the best economists in the world, even though, some of them are argumentative. The Chief Economist of the World Bank is an Indian as was the Chief Economist of the IMF, and now Governor-designate of the RBI. Dr. C. Rangarajan, again, is amongst the most towering and respected economists of the world and a light-house for many economists in this country and beyond. I believe, that Planets don't decide your destiny but appropriate measures at the right time do.
Populist schemes, probably, have resulted in economic factors being ignored. I believe that the Parliament should not ignore economic realities, as in the modern world, economic strength and political power goes hand in hand. That, in fact, is the modern history of human race.
In the critical period that the global economy is passing through, economic factors seem to have been neglected in our country, either we had become too complacent with our short-lived achievements or were overconfident that we would never leave the higher orbits of growth. Otherwise, how can one justify the delay in approval of crucial projects and next generation of much-needed reforms. Another illustration is the seriousness with which economic advice by the Pundits is considered and this pertains to Food Security Bill which can not only raise the gross fiscal deficit but convey to the rating agencies, global investors and India-watchers that we are not serious on economic factors.
The Government has many resources and resourceful ideas but in my view, it would be helpful to identify productive sectors in the economy and specific industries which are suffering because of high interest rates and provide concessional or interest free loans to the same. Housing, for example, affects 300+ industries. There is a shortage of 18 million houses and stimulus to the housing sector could have triggered growth. When subsidies are high, given the limited resources, capital expenditure suffers and - in turn - future growth suffers. If Government resorts to market borrowings, future interest payments and are bound to increase. Large market borrowing by the government would also raise interest rates in the economy and crowd out private sector.
There is enough money floating in India, especially in the rural areas. If the rural areas can buy up to 75% of the gold sold in India, the Government needs to tap that money and invest in infrastructure via rural infra bonds. The need is to think out of the box, as did the US and Europe in the last few years. To tap rural savings and divert its attention from gold to financial instruments, Government should consider projects that rural folks will benefit. Illustratively, policy makers can conceive of regional trade centers, midway between the city and the village, which can trigger a whole range of infrastructure projects along the rural belt. Second, instead of worrying about excessive urbanization, the focus should shift to reverse urbanization. If the government provides jobs, better educational and medical facilities and better sanitation in the rural areas both populist and economic issues will be taken care. Infrastructure will be built, hidden money will emerge in the open, more employment and commerce will result.
The Government needs to think out of the box and put on a confident face instead of expressing helplessness by saying that other countries are also passing through the same recessionary phase. India's contextual economic situation is different. I am reminded of late PM, Smt Indira Gandhi, who did not like the comparison between India and Singapore. Now, we should not resort to comparison with other countries as it looks like an excuse because not only the person who is left unemployed even for a year, suffers innumerable challenges but the whole family is devastated, sometimes, irrecoverably. In India, we need to take care of that aspect, given that we don't have social security measures like many other countries have.
Therefore, to me, nothing is beyond the control of the government and the Parliament. In fact, given our size and diversity, and different income levels, we don't have to look too much outside but just our backyard, which is full of potential. We only need to direct and tap that rich potential. I would think this challenge to be an opportunity similar to the one, which our able Prime Minister had successfully exploited in 1991.
Interviewed by Kavitha Kumar & Srinivas Rowjee.