Rupee free fall: Merely blaming external factors for Indian currency depreciation won’t do; govt should think out-of-the-box

The Indian rupee has crashed past the 72-mark against US dollar and continues to be on a roller coaster ride. The sudden fall has caught the government and off central bank off-guard. High volatility in global crude oil prices and ballooning current account deficit figures back home have been blamed for Rupee’s free fall. Does rupee at 72 rings alarm bells to the Indian economy or is there an opportunity in the currency crisis as Narendra Modi government claims? This is the seventh part in a series in Firstpost where experts examine the economic impact of the Rupee’s fall.

Finance minister Arun Jaitley has shrugged off the relentless depreciation in the value of the Indian rupee vis-à-vis the US dollar as a fallout of external factors on which India has very little control.

At first blush, he appears to be correct with US dollar being the only true international currency accounting for as much as 80 percent of international trade and investment and India having very little say in determining its market value.

Furthermore, the rupee is not a floating currency freely traded in international currency exchanges. So much so, its true value against major hard currencies of the world is never known except indirectly through the medium of the greenback.

But if the rupee were to be floated, Jaitley’s glib assertion would be tested immediately. And the result would not bear him out.

When Indian residents themselves prefer holding their wealth in US dollars in such a liberalised milieu, the rupee would collapse like a house of cards. Be that as it may.

It is common knowledge that India imports as much as 80 percent of its fuel. And the fuel prices are unfortunately designated in US dollars by and large with the Euro failing to wean away oil market from the US dollar.

OPEC members who own petrodollars that form a sizeable part of the world dollar reserves and built assiduously right from 1971 when the first oil shock assailed the world by the Arab world would not commit hara-kiri by disowning the greenback.

The point is it is a gridlock for India—oil it has to import and to import oil it has to find US dollars. It is a double whammy, with each feeding on the other.

An option worth exploring is rupee trade with oil exporting nations catering to Indian needs. Come November 2018, it would become a necessity with Iran with US sanctions against that country kicking in. India should use the US threat directed at Iran as an opportunity.

India’s trade deficit with Iran narrowed from $11.4 billion in the financial year 2011/12 to about $3.6 billion in 2015/16, when the previous rupee payment mechanism was in place. Since then, it widened to about $8.5 billion in 2017/18, commerce ministry figures show.But then it cannot be thrust on Iran or for that matter on Russia with which too we have had in the past rupee trading agreement.

While it is worthwhile for India to make rupee payment, it should be equally worthwhile for Iran to import goods and services from India. It takes two to tango. Therefore the Indian government must make it worthwhile for Iran to import Indian goods and services if required on special terms if only to wean away the nation from dollar dependency.

To put it more bluntly, the Indian government may have to subsidise Indian exports to nations like Iran that agree to accept rupee for oil.

Jaitley can also ask the market regulator Securities and Exchange Board of India (SEBI) to hold its horses. SEBI is earnestly cracking the whip against foreign portfolio investors (FPI) to know the true identify of investors lurking behind them. This is not something new.

For long it has been suspected that a good sliver of GDR, as well as FPI, is round-tripping with black money stashed away abroad finding its way back into the Indian capital market. There is a time for stentorian measures but this is not the most propitious time when US dollar is deserting India.

It is not as if Jaitley is entirely wrong. The US-Sino trade war has caught India in the crossfires just the US beef against Turkey damaged the Indian rupee a month ago.  But then managing both the internal and external environment is what efficient governments are all about.

There is no point in wringing hands helplessly or fatalistically resigning to external forces. On the domestic front, fuel prices can be tamed by bringing petroleum products under GST, period.

It is pure bunkum to say that if petrol taxes go down, the government’s welfare spends would take a hit. For transfer of wealth from rich to poor, as it were, it is imprudent to tax the poor first and transfer the resultant money thus collected back to them which is the case with the mindless tax on petroleum products which hits the poor more than the rich.

On the contrary, the rich should be taxed with a slew of direct taxes like wealth tax, gift tax and estate duty. That would be a true transfer of wealth from the rich to the poor.

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