On August 31, Dollar-Rupee and Pound- Rupee parity were 66.6 and 103.3 respectively. In between the rupee reached 68.85 against the dollar necessitating RBI intervention. Since May 22 when the US hinted at tightening liquidity, the rupee has depreciated against the dollar by about 18% and in August by 8.1%, perhaps the highest among the emerging economies.
This, however, is good news for export growth. Eleven companies that have nearly 45% weightage in the BSE Sensex -- ITC, Infosys, Tata Motors, Mahindra & Mahindra, Dr Reddy's Laboratories, Tata Consultancy Services, Sun Pharmaceuticals, Wipro, Bajaj Auto , Cipla and BHEL -- benefit from a weakening rupee, according to numbers crunched by the Economic Times. The reason is simple: the total foreign exchange earnings of these firms are far greater than their forex spends. The more the rupee falls, the more these companies gain, other things remaining constant.
That's not all. Even Mukesh Ambani’s Reliance Industries, the country's largest exporter, gains from a weak rupee. While its forex outgo is more than its forex earnings, a significant part of its rupee earnings are pegged to the dollar. Therefore, a weakening rupee adds to Reliance's margins and profits. And, most analysts cite an 'appreciating rupee' as a risk factor for the company. Further, the lower cost is especially helping traditional labour-intensive sectors like textile, leather, handicrafts or tea which are riding on the rupee fall and witnessing a sudden rise in order-book size.
On the other hand, it is pretty bad on the import side. Out of a total import bill of $160 billion, petroleum accounts for $73.7 billion, capital goods $46.5 billion, chemicals $9.3 billion, iron & steel $5.5 billion and fertilizer $4.1 billion, wherein there is little scope for reduction. So trade deficit of $19.6 billion is expected to increase much further. Current account deficit (CAD) at 5% is already $85 billion. India’s external debt has gone up to $390 billion in 2013. Further, India’s short term debt (repayable by March 2014) has gone up to $172 billion; a large part is corporate debt and 25% of them are reportedly unable to meet even the interest obligation. The government’s consumption expenditure is increasing whereas investment is falling. Budget deficit is around 10%. GDP growth in the quarter ended June 30 is only 4.4%, the lowest since March 31, 2009. So the situation is grim and calls for urgent remedial measures.
The government is expected to utilise its comfortable forex reserve to adequately intervene to try to stabilise the rupee-dollar parity within 65. But it must simultaneously initiate appropriate measures to increase revenue and contain expenditure as high CAD is the basic ailment. Of course, inflation management would be the other priority. The following further remedies are suggested for the government to consider:
• Curtailing import bill: Value of import of gold, silver, pearls and stones is $45.25 billion and consumption goods import is $ 5.7 billion. Here lies the scope of curtailment. The government has raised gold import duty to 10 percent and more than doubled duty on raw gold to 5 percent. It may further impose value and quantity restrictions and transaction tax.
• Curtailing government operational expenditure: I give now some examples of recent operational expenditure. A sum of over Rs 642 crore has been incurred on prime minister Manmohan Singh’s air travels abroad in the last nine years. Dr. Singh undertook 67 travels since 2004 when he took over as PM, of which bills of five have not been received. Other ministers spent in 2011-12 alone Rs. 678 crore on travel overseas, i.e., 12 times more than in 2010-11.UPA dinner hosted by PM early this year cost Rs 7,000 per plate. This level of expenditure can’t be justified under any circumstances and leaves ample scope for reduction, say, up to 50%.
• Curtailing subsidy: Food security programme propose to cover 67% people including 22% BPL. Rs.7,50,000 crore was spent in 9 years for petroleum subsidy, Rs. 2,00,000 crore for NREGA and Rs. 72,000 crore in the loan waiver. Can’t these be limited to BPL category only?
• Implementation of projects: Ought to be without cost and time overrun and any leakage. This also requires timely clearance from all concerned authorities. This requires immediate attention in the backdrop of the Vedanta and Posco fiasco, a part of Rs. 7 lakh crore worth of infrastructure projects held up.
• Increasing revenue through disinvestment in public sector.
• More progressive income tax rates only for high individual income categories, introduction of income tax on agricultural income and imposition of appropriate progressive expenditure tax.
• The huge stockpile of food grains should be gradually released to combat inflation.
• Limit for overseas direct investment has been brought down to $75,000. But such investment has come down from $21 billion in 2008 to $5.7 billion in 2013. Even then, all such proposals should be thoroughly examined before approving. This is to ensure net foreign exchange inflow in each case. Similarly, remittance for non-essential purposes like housing should be prohibited.
• To exploit the reducing cost scenario for enhancing export, in every sector, the government and people concerned have to concertedly strategize.
• Last but not least, urgent appropriate measures must be taken to attract and facilitate more and more NRI investment.
The above steps would largely meet the twin objective of containing deficit and inflation.
