First published on 20.08.2013
The world economy can be segregated into two parts: First, the interlinked market based economies of the countries/centres mostly following the US model of development, and, second, the islands of nations/regions delinked from the globalised world sustaining themselves on the basis of local resources and development. The Indian economy in the urban centres and the most of the rural centres is now linked to the world economy, but, still, the majority of centres in India are delinked from the globalised world, especially in the Naxal affected areas. For the last half decade or so, India has taken the brunt of the global meltdown, reflected best in the food inflation, which has not yet lessened or stopped — its ironical that, at the same time, the US has recovered and the Europe is recovering.
A small digression: The other day I was hearing one joker on the TV who said India is shutting its windows instead of calling the fire brigade; what he meant by the fire brigade, he only knows; but an interesting analogy here would be that of the US fire, which spread to the whole world because the US never shut down its windows and had the air enough to let the fire spread to the neighbors, and now, it seems, the rain has extinguished the fire in the US, but the world is burning; unfortunately India doesn’t have that kind of air.
So, the fact of the matter is that the globally linked centres of India have already butchered this country, and now only the delinked centres can save India; in other words, India needs to throw off all the gas and rely solely on the substance: It needs to make way for the outgoing foreign capital, which never belonged to India at the first place, and safeguard its domestic capital from pilferage, which is lying at present in the balance sheets of the domestic companies in the form of huge cash. The domestic capital can be safeguarded only if it is valued pragmatically, and no effort, whatsoever, is made to protect its inflated value; in other words, if the capital markets are falling, let them fall; if the rupee is depreciating, let it depreciate; interfere only when the value of domestic capital seems falling below its deemed value. A rough estimate makes me believe that true valuation of Indian capital markets reflected in the sensitive index shouldn’t be more than 13,000. The currency valuation is a tricky question, but I think any fall below 67 Rs to a dollar should be worrisome.
A message has to go to the domestic companies that the cash has to be immediately converted into plants and machinery, else get ready for confiscation through high taxes. Of course, the outflow of domestic money has to stop immediately, whether be it gold import, oil import or corporate investments — if Iran is ready to sell oil in rupees, then buy oil only from Iran; and learn to ride bicycles.
At the end of the day, the economies are run on day-to-day consumption, thus the people’s capacity to consume has to increase, whether in the form of higher disposable incomes or in the form of government subsidies/short-term expenditure. But, the consumption can kick start the economy only in the short term; if no investment is forthcoming from the private sector in the long term, and the multiplier effect has failed, the government needs to start spending in the long term capital formation as well, especially in infrastructure projects — levy taxes to generate funds. Let their be huge fiscal deficit but no revenue deficit because that’s gross!
Comment dt. 21.08.2013
In efficient markets, an event of currency depreciation is indicative of the weak fundamentals of the local economy, so, that way, the Indian economy should be in deep shit, but, we know well enough, no markets are perfect — there was never any reason for 100% depreciation of the Russian and the South East Asian currencies all of a sudden –so, obviously, most of the current Rupee depreciation is because of the inefficient currency markets; however, an attempt to control the currency markets is also futile because India doesn’t have that kind of wherewithal: it can’t expend all its foreign currency reserves in controlling the rupee depreciation. So, controlling capital outflow is the only answer.
Comments dt. 27.08.2013
Whatever little I heard of the Lok Sabha speech of the FM, and of the intervention of the opposition in the same, unless the players were playing to the corporate’s and the foreign investor’s galleries, India is in the hands of the crooks. Neither the government nor the opposition is thinking in the interest of India as a sovereign entity, which lies in tight capital controls and increased domestic investments. However, at the same time, I saw certain graphs being displayed on the media channels showing the current account surpluses in the cases of China and Russia; these surpluses are reflective of the independent sovereign statuses of the two countries, who have beneficial trade engagements with the West and also have enough domestic manufacturing/agriculture/services to fall back upon in case the situation changes.
The economists of this country are too concerned that the rupee depreciation will lead to high inflation, but, not really if the Indians started living within their domestic resources, not on imports. The economic theory which links the domestic markets with the international currency markets is based on the assumption of full capital convertibility, but, what’s the need to have it?
India has large CAD, but, how does it matter? The real question is whether you have generated enough foreign reserves to finance the CAD, which the FM today said that it will be done in the current fiscal year, meaning thereby that the year beginning foreign reserves will be maintained as it is; however, this will definitely not happen if the rupee depreciates at the rate it is depreciating, which is happening because of the currency market inefficiencies. So, the real question before the Finance Ministry is how to tackle these market inefficiencies, which is a purely tactical question. It’s like a party of dacoit has come to your house and taking all your cash, and your other property is not liquid enough to fund your day-to-day needs; how to stop the dacoits? If you have ever been robbed in this manner, you would know that the dacoits are kind enough to leave some diet money, but the currency markets don’t have emotions — and those who control it are even worse.
If the current rupee depreciation continues like this, India will have no other option but to make the rupee inflexible by fixing it to dollar or some other international currency, and to stop its trading altogether. I don’t know whether the situation has reached such a status, but, if it has, the earlier the rupee is fixed, the better it is because later on India may not have enough foreign reserves to manage the fixed rupee.
Comment dt. 28.08.2013
The way the rupee is falling, it is serious, and the govt needs to take some drastic measures: suspend trading in the rupee for an indefinite period, which is what is done in the volatile markets even in a normal course. There is no reason why the currency markets can’t be suspended in the case of bloodbath. The government will have a lot to answer if it doesn’t act now. Those who wan’t to leave and want to convert into the foreign currencies can be allowed to do so on the current value of the rupee in the meantime.
“Judgment will be taken at the appropriate time, but we need to add to the reserves.” This statement of the FM means we don’t have enough foreign reserves to take drastic and bold steps to safeguard the sovereignty of India; now I am scared; we need a white knight now.
©2013 Ankur Mutreja