The growing hiatus between ‘Shining’ and ‘Suffering’ India is manifesting itself in myriad ways. Agrarian distress continues to intensify, with the latest studies showing that, on an average, there have been 20,000 distress suicides among farmers every year over the last decade. Yet, the ruination of ‘Real’ India, even as ‘Shining’ India gets stronger, is taking place in yet another way: with the appreciation of the rupee. The dollar, that used to cost nearly Rs 50 in mid-2002, is now available at Rs 39.50, an appreciation of nearly 20 per cent. In fact, it has dramatically appreciated by 11 per cent since March 2007.
There is legitimate euphoria in India Inc. on the Sensex crossing the 20,000 mark. This has happened primarily because of a massive surge of FII funds in the Indian stock market. This year, so far, over $ 20 billion flowed into Dalal Street — more than double that of last year. More than India becoming an attractive investment destination due to the strengthening of its economic fundamentals, this is happening because there are no long-term capital gains taxes in India. There are no taxes here on profits earned on the stock market.Nearly $ 35 billion have additionally flowed in as remittances under ‘Invisibles’ in national accounts. Among others, this includes fund transfers by NRIs. This has contributed to the unprecedented foreign exchange reserves of over $ 260 billion.
It would be wrong to treat this as an expression of the ‘Dutch disease’. This is a term normally used to describe situations where large inflows of forex take place usually as a result of discoveries of natural resources or massive FDI. Neither is happening in India. The FII flows are mainly, if not entirely, speculative flows seeking handsome quick profits. In this sense, this is ‘hot money’ that cannot be used for any meaningful investment in India. Thus, our forex reserves will, for a large part, remain reserves only. Instead of being able to use this for productive investment, India is compelled to behave like a miser, content with counting coins.
Normally, the RBI buys up dollars from the market to protect the rupee and to keep the exchange rate stable. However, with such a huge scale of FII flows, even the RBI would not have been in a position to intervene in a significant way. Further, when the RBI buys dollars, the rupee supply in the economy naturally grows. This puts inflationary pressures on the economy. With the inflation rate reaching close to 7 per cent (March 2007) and threatening to escalate further, the RBI was apparently restrained from intervening to stabilise the rupee. Hence, the massive appreciation of the rupee since March 2007.
The appreciation of the rupee means that Indian exports become more expensive while imports become cheaper. This, naturally, widens the trade deficit. This deficit, which measures what the country actually gains from its exports and what it spends on its imports, grew by nearly 65 per cent compared to the same period last year — $ 32.5 billion as against $ 19.9 billion. This will have an impact on the current account deficit. According to the RBI, the shortfall in the current account was $ 4.69 billion in the three months ending June 30, 2007, as compared with a surplus of $ 2.56 billion in the previous quarter. In other words, due to the strengthening of the rupee, the capital outflow has been rising significantly. This is bound to adversely affecting our economic fundamentals.
The rise in the cost of India’s exports is already adversely affecting the livelihood of lakhs of people. Most of India’s traditional exports — textiles, chemicals, IT services, traditional handicrafts, etc. — are labour-intensive. Further, more than two-thirds of India’s exports come from the small and medium enterprises (SMEs) that enjoy thin profit margins. According to estimates by the Federation of Indian Export Organisations (FIEO), around 35 lakh people have lost jobs in these sectors as a result of the rupee appreciation in recent months. India’s two top garment exporters have, in the last three months, cut between 5,000-6,000 jobs. Tirupur in Tamil Nadu, considered the hosiery capital of India, is bracing itself for a 60,000 job-cut by the end of this financial year.
Survey after survey conducted in the media is reporting a universal and significant decline in export-related employment. Thus, while a section gloats over the 20K Sensex, the consequences are resulting in India’s real trade earnings declining appreciably and, consequently, in the destruction of livelihood of lakhs of our people.
There is an additional adverse element in this scenario. Concerned with the rapid appreciation of the rupee and the alarming decline in exports, the Finance Ministry has announced various relief packages aggregating Rs 5,000-6,000 crore in this financial year so far. Notwithstanding this, it is now generally believed that the export target of $ 160 billion will not be achieved, while the import value targets will not be contained. In other words, if the rupee appreciation was contained and stabilised, such relief packages of Rs 5,000-6,000 crore could have been better utilised in schemes for improving people’s welfare and strengthening economic and social infrastructure.
Erroneously, it is argued that a stronger rupee will attract larger FDI to build India’s much-needed infrastructure. What is missed in this reasoning is that FDI flows in search of higher profits. This, in turn, is crucially dependent on existing levels of quality infrastructure — both economic and social. Experience tells us — from the US to China — that the State is the main provider of such infrastructure. Private capital can, at best, supplement this, but cannot be the primary vehicle.
This capacity of the Indian State is seriously eroded by the rupee’s appreciation, and the consequent fall in revenues. Yes, with an appreciating rupee, the takeover of foreign firms and resources would be cheaper for India Inc. The number of Indian billionaires will surely increase (and may their tribe increase!). But then, at what cost to Real India? Thus, on all counts, the strengthening of the rupee, apart from serving as an ego-booster, is resulting in a negative impact on our economy.
Once again, there is need for us to learn from China. Those who argue that our burgeoning forex reserves are causing this rupee appreciation must remember that the Chinese currency has remained stable at around 8 yuan per dollar for more than a decade. The Indian government must seriously consider a similar mechanism to prevent a sharp appreciation of the rupee. Remember again that China has a forex reserve of over $ 1.43 trillion, many times larger than our $ 260 billion.