Rupee –The fall guy

Asoke K. Laha
President & MD,
Interra IT

Has Rupee become a fall guy? There are newspaper columns written on the subject, Politicians and the experts pour their views on the subject – sometimes reflecting the colour of their political hues and the economists articulate their views based on their convictions and gut feelings. I do not know whether the last word on the rupee fall has been scripted. The Prime Minister’s statement in the Rajya Sabha was equivocal in the sense that the fall, according to him, is not that bad since it will bring some positive spin-offs to the economy.

As an IT entrepreneur, I am more concerned than most of the people when the rupee fluctuates. Pure economics states that when the value of a currency falls vis-a-vis the currencies of other trading nations, exports stand to gain, since the overseas buyer finds it economical to import from countries which have devalued currencies. In the same way, the fall in the value of the local currency makes imports dearer. Let me take an example that we IT service providers to overseas customers face more often. Indeed, such curious things happen more often in the merchandize exports than in the service exports. When the value of the local currency falls in terms of the currencies of the trading nations, the overseas buyer will renegotiate the prices for sharing some of the benefits accrued to the exporter. That is a general rule rather than an exception.

Should we have to panic about the steadily falling rupee against the US dollar? My personal opinion is that we have overplayed the incident. The exchange rate in India is influenced by many factors and important among them are export and import of goods and services and inflows and outflows of remittances, such as from expatriates sending money to India, foreign direct investment, portfolio investments from foreign institutional investors (FIIs), revenues from foreign travellers, royalties, dividends, etc. While exports and remittances swell up our foreign exchange kitty, imports and withdrawal of deposit by the FIIs and private equity funds, etc will act as a drain on our foreign exchange reserves. 

What would be the impact of this unwarranted spiral? Imports have become costlier. That alone is not a cause for worry. Indiscriminate imports were the bane of the economy ever since we have relaxed the imports norms. Gold imports have soared in the last few years. Import of capital goods will become costly and restrictions on such imports will adversely impact the investment in the country. Oil imports and defence equipment will continue to strain the outflow. But there are silver linings. The government should tap oil from countries like Iran increasingly since the import bills can be settled in rupee terms since that country needs a lot of items to be imported from India.

Some of the African countries have recently become oil-exporting nations. Many of them are keen to have meaningful tie-ups with India, particularly in the IT field. They are keen to have Indian expertise for setting up IT parks and building digital infrastructure. There is a fair degree of awareness among these countries to have the reverse innovations developed by India in the fields like medical equipment, electronics, etc. For instance, an ECG machine developed in India would cost only US$100, whereas imports from western countries will cost at least ten times more than that. It is prudent for India to enter into long-term contracts with these countries for oil imports, wherein the currency denominator could be rupee. At the same time, it is necessary to explore new ways of meeting the oil demand, such as increasing domestic production, investing in shale gas exploration, ethanol production for mixing with petrol, and tapping alternative sources of energy, etc, which can reduce the oil import demand considerably.

Let us now look at the real reasons behind the rupee going down. I believe not many are aware of the real reasons behind that. Of course, domestic reasons like high fiscal deficit, inflation, import compression, capital squeeze in developed countries, etc are pointed out as the reasons for the slide.

Let me come back to the central issue: why the sudden spiral in the rupee depreciation? In the aftermath of the slowdown in the US, the US administration had taken several steps to rejuvenate the economy. The most important among them was quantitative restrictions. While pumping almost US$85 billion in a month for recovery process, the administration has increased the long-term interest rates in the US to 10 per cent. This would mean that investing in bonds and debentures in the US has become lucrative. FIIs, pension funds, private equity funds, etc, to take advantage of the long-term interest rates, had withdrawn their exposures in the emerging economies to invest in the US. Exit of such funds has not only created current account problems but also destabilized the capital markets in these countries. Now, the US economy is on the recovery path. 

There is gainsay in mentioning that a strong currency reflects the strength of the economy and insulate the economy from onslaughts, which can put its citizens into considerable disadvantages, such as higher prices, mounting external debts, etc. Though a depreciated currency will initially help exports, in the long run such advantages get squared off. It is, therefore, important to have a healthy export sector. The ICT sector can be nurtured to become a backbone of India’s exports. When I say ICT, I mean both software and electronics. Software and IT-enabled services are already contributing substantially in this regard. However, we have not tapped our electronics sector for export purposes. We remain as a huge importer of electronics. One estimate says that electronics imports will outpace our oil imports by 2020, further straining our current account deficit. It is important to have strategies in place for accelerating the export potentials of the electronics sector.

Coming back to our central theme rupee depreciation, I share the views of some of the optimists that it is not something that is sinister, but a signal for us to restructure our strategy to bring about greater dynamism in the economy. It is not a matter to panic but an opportunity to introspect and take forward action.