The gloom and doom pervading the media and public debate in India over the fall in the rupee’s value is difficult to justify.
It’s a good thing World Bank chief economist Kaushik Basu (a former chief economic adviser to the Indian government) put this in perspective by saying: “The situation is not nearly as bad as very often being ... reflected in the headlines.” One pink paper said on its front page on Tuesday: “FIIs the mainstay of the country’s economic growth miracle for years...” Can anything be further from the truth, or more fallacious?
The rupee has seen worse falls, percentage-wise. In 2011, for instance, when the rupee went from 44.80 to 54.20 in a few months (over 20 per cent), there was no hue and cry as is being made out today when the fall has been around 10 per cent from June till now.
Nothing has changed in the past few months. Food inflation is high, the current account deficit is widening, GDP growth is low, imports are ballooning, the bulk of mega projects are yet to take off or are moving slowly. So what’s new?
The fear psychosis being spread over the rupee’s fall is feeding on itself. Unfortunately, people have little faith in the government’s promises, as these are not followed up with action, or the right kind of action. As Mr Basu said, there is no substitute for “good governance, improved bureaucratic efficiency and better business ethos to drive growth”.
Union finance minister P. Chidambaram bravely tried to talk up the stockmarkets, and for a while succeeded, until US Federal Reserve chief Ben Bernanke out-talked him by signalling that he could start tapering the quantitative easing programme by the yearend. This led to the foreign institutional investors scrambling out of the emerging markets, which had been among the major beneficiaries of the QE programmes. India and the rupee ended up as bigger victims simply because of slowing growth and other domestic factors.
The weakness of the rupee (which means imports get more expensive) should be seen as an ideal opportunity to beef up the manufacturing sector to produce many more items that are now being imported. The rupee could well go up to 65 or even 70 to the dollar, but if the government uses this opportunity to help exporters sell more goods overseas, and offer all the incentives needed to cut imports, then the sense of panic would weaken. The government must demonstrate it is in control of the situation, and not get swayed as well-off Indians and the media complain of how studying at foreign universities has become more expensive due to the weak rupee. How it will do this is the million-dollar question!