Allow Rupee to Rise

Article Ref: 10-006 of 1^st August, 2010                Full Article from Box. net – PDF file

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India is a giant country that has seen the “Best to Worst days cycle” in last 2000 years. India used to be the largest GDP growth grosser in first 12 centuries. Here is what Mr. Maddison wrote:

According to economic historian Angus Maddison in his book The World Economy: A Millennial Perspective, India had the world’s largest economy from the first to eleventh century, and in the eighteenth century, with a (32.9%) share of world GDP in the first century to (28.9%) in 1000 AD, and in 1700 AD with (24.4%).[8]

Most people, including Indian themselves, try to analyze the country under telescope and microscope but fail miserably. They finally give up in despair with ITDC picking up their breath with campaign – Incredible India. Nothing hurts or glees the Indians except some false prides at times, and India walks through the global economic forest like an elephant unmindful of admirers or foes. The Indians worship “Lord Ganesh” the Elephant God in full symbolization of the true nature of the giant country.

Rated as the poorest country only 60 years ago, the India has rediscovered itself in last 7 years. Contrary to populist belief that foreigners robbed India of its true wealth, it is the Indians who frittered away its glorious wealth to the foreigners. Indians are known to punish themselves – they do fasting or eat one time for 3 out of 7 days in a week, roll themselves on roads to worship the deities, lash themselves with cords, in manifestation of religious belief to purify their souls.

India’s Central Bank – Reserve Bank of India, Prime Minister Manmohan Singh, Finance Ministers Pranab Mukherji and erstwhile P Chidambaram, have robbed India of its real wealth by constantly devaluing its currency – Indian Rupee – for over 60 years. Ask yourself and after getting an answer, ask these glorified leaders, why the hell the Indian Rupee should have been devalued by 90% over last 63 years when its population rose three fold, industrial production rose ten fold, agricultural production rose twenty times in green revolution, its human exports in the form of educated immigrants rose thirty times to western and gulf countries, its brainy exports (software) rose almost 100 times and its GDP rose to the fastest rate over last few years?

These leaders, some renowned economists, were “classic book type” bureaucrats who applied their intelligence when common sense was required. As result, Indian goods were sold out abroad damn cheap and made the imports of essential commodities expensive to almost entire Indian society.

Look at the following table:

• The table illustrates the figures since 1973.
• In 1950, the exchange rate was Rs. 4.7619 against Rs 47.61 today – 900% devaluation
• In other words, the Indian commodities were sold out almost free of cost.
• Vital commodities like Oil and coal were priced almost 100% higher raising petrol, diesel, fertilizer, transportation, electricity, cooking gas, kerosene and ATF for airlines.

How India imports inflation by devaluing Indian Rupee?

1.  Most of the commodity prices are denominated in US Dollar. After years of paper trading through derivatives to lower the commodity prices, the financial crisis brought them to halt, and in fact they have started surging. The continued devaluation or proactive suppression of appreciation of rupee by RBI intervention, what they call “sterilization operation”, the higher commodity prices in the international market translate into higher prices in Indian rupee due to deliberate devaluation. This forces the local producers of those commodities to raise the prices, resulting into inflation.

a.  EXAMPLE 1: if steel or metal prices rise in international market in USD terms, the effect is more than felt in rupee terms due to weaker rupee. As result, the local producers raise the prices. The real estate prices also rise due to higher input of these commodities such as steel, cement, copper and aluminum.

b.  SEBI’s Role in enhancing inflation: SEBI introduced the futures and options in commodities at most inopportune time. Most of the commodity contracts are “non delivery based” and “cash settled” in rupee terms (what they call “badla”). For instance, a contract of commodity A (say, steel, sugar, corn or soyabean) is cash settled without any delivery. So a speculator is encouraged to “paper trade’ and bid up the prices on the MCX with the hope to settling the trade on “difference’ basis on settlement date. Due to higher paper prices of such commodities, the physical market too gets higher that results in higher inflation. These commodities are of daily necessities and form large part of inflation index.

c.  RBI’s role in propping up inflation: RBI too promotes inflation by deliberately devaluing the rupee or restraining its natural rise. When the foreign funds bring in the dollars and try to buy in advance Rupee from the free market, the RBI restrains them and give them better “off market rates” to avoid their buying rupee from local markets. As result, the Rupee that should have gone higher due to foreign funds inflow, turns lower or remains stable at the most. RBI’s so called “sterilization measure” interfering in free market mechanism restrains the Rupee appreciation that causes inflation by letting dollar denominated commodity prices translate into higher prices in rupee terms, encouraging speculators to engage into non deliverable commodity contracts with passive participation of SEBI, that causes the local markets to boost those commodity prices, resulting in double digit inflation.

2.  Oil Prices – major inflationary factor encouraged by RBI: Large part of the India’s import is due to higher oil prices. When the oil prices rose by 100% in $ terms, and Euro also rose by 90% (from 0.84 to 1.60 sometime back), the effective rise in oil prices in euro terms in euro zone was significantly subdued resulting in lower inflation and also lower interest rates.

a.  However in India, due to RBI’s reckless policy of intervention in the name of sterilization, caused Rupee to fall from Rs 39 (during BJP time) to Rs 48 at present (devalued by RBI under Congress government by 23%). The rise in oil prices were inflated more by 23% in rupee terms, necessitating in higher Petroleum subsidy running into Rs 200,000 crores in last 4 years.

i.        The government is then caught in dilemma. Either it has to cut the subsidy at the cost of public outrage which may cause election loss or raise the taxes to balance the budget avoiding deficits.

ii.       The recent cut in oil subsidy by letting the market forces determine the petrol and diesel prices, the mere rise of just 6% in oil prices caused the inflation to run into double digits forcing the RBI to raise the interest 3 to 4 times recently by almost 1% point. It raises the cost structure in entire economy, reduces the housing demand due to higher mortgage financing rates, reduces the Auto demand due to higher car financing rates, lowers the disposable income in the hands of consumers forcing GDP down and in general lowers the economic activity in every segment that would lead India towards “forced recession”.

iii.      Only due to RBI’s misconceived policy of devaluing rupee by pro-active sterlization actions tempering the free markets when the country is forced under WTO to reduce the taxes and open up the markets at the cost of domestic producers.

iv.      No one hates Indian Rupee more than RBI, Ministry of Finance and Indians themselves. Rupee is the face of the nation. It is the most visible child of the nation. We have to love our child and take full care of it. Look at United States. In spite of its enormous economic problems, it always seeks “Stronger dollar” even when the fundamentals do not warrant. Why do we Indians, the Micky mouse imitators of American way of life in all aspects, do not follow this basic rule to support our own currency? Why do we hate our own child?

v.       All Indians should Ask themselves; do we want our children to become weaker or do we want them to become strong, self supporting and earning more in adult life to help entire family including parents?

vi.      If that was so, why do we Indians go on depreciating our only child – Indian Rupee – for over 60 years? When our child turns into adult after about 21 years, we let him roam around free and start earning. If he does not earn and support the family, he is ignored or abandoned. In that case, why do we have to “support” the rupee even after 60 years, when leaving it alone could usher in new economic age in India?

vii.      The “Reservation policy” aimed at supporting Scheduled Tribes and Scheduled Cast is almost similar. Why do not they grow up after 63 years of independence and support themselves after first 21 years of support? The merits take backseat, unwanted people man the government departments, and the corruption pervades like a fire in the dense forest.

b.  The refineries lost money due to their portion of subsidy, common man lost in higher kerosene or gas prices, airlines lost because of higher cost of ATF, land transportation such as Railway and Road Transport cost higher, and cost of electricity rose due to higher inputs of basic raw material such as Oil, diesel or coal. Energy bill (Electricity + Gas + Petrol/diesel for home driven auto) constitute almost 25% of household budget. As result whole cost structure in the country rose to unsustainable level, raising inflation to almost double digits, requiring higher interest rates or tightening of cash reserve ratio (temporary measure to restrain real rate rise).

c.  Had the government and RBI allowed the rupee to rise, instead of weakening, everything would have worked in reverse direction, causing the subsidy burden to fall and inflation coming under severe check. It would have justified lower interest costs. It would have also helped the government to save on interest expenses on public borrowing. The budget could have been balanced or significantly improved resulting into “higher investment rating” of India in international market by improving the benchmark interest rates.

d.  India never saw lower oil prices in the market.  The continuous weaker rupee worked at cross purposes. India never saw petrol or diesel price below Rs 9 per liter even when the oil prices fell to $9 per barrel.

e.  The main enemy was RBI and its consistent policy to weaken the rupee at all time. Reserve Bank of India is the most inefficient monetary institution in India. Almost all of its actions suck and they invariably give “wrong advice” to the Government of India hurting the whole nation. The surprise is – almost all ordinary Indians, intelligentsia, critics, analysts and economists admire the inefficient officials sitting behind the fortress on the Horniman Circle in Mumbai without realizing that these guys or babus are hell bent on hurting the Indian economy. RBI is the single most institution to makes the India poor and fritter away its glorious wealth. Either it should have thorough overhaul or disbanded altogether.

f.   The RBI officials simply do not have international exposure in monetary affairs. RBI vented out its frustration at one time lamenting rise in Forex reserve because it was unable to manage it. If China could manage over US$ 2 trillions of Forex Reserve, why not RBI manage just 15% of it – about US$ 300 billions? If these guys can not manage the Forex reserve of modest size, they forfeit their rights to manage India’s economy.

g.  FOREX reserve is more like balance in nation’s savings account. Do we want to see our savings account balance to go lower? Certainly not, then why does RBI want to reduce Forex reserve by discouraging foreign funds inflow?

h.  RBI does everything to lower the rupee. Every action sucks and run in that direction. It lowers the interest rates on NRI deposits, 50% lower than domestic deposits, so that NRI do not buy rupee and help it maintain its weaker rupee stance. Why? During Forex crisis in 1992, it was NRI who lent billions of dollars free of security. Even Britain asked for gold as collateral, NRI did not. NRIs are therefore treated like a disposable towels.

3.  Asian Crisis, Rupee and Thai Baht exchange rates – Comparison

a.  Before Asian crisis, the Rupee was at 36/$ level and Thai bahts at 25 /$ level to USD. After the Asian crisis erupted, the Rupee sank to Rs 48 and Thai Baht fell to 56 level on 1Jan98. However, as of today, the Thai Baht has improved to THB 32/$ whereas Indian Rupee has remained at same level of Rs 48/$. Now, ask yourself – which is the better and stronger economy – Thailand or India? Where is the maximum money flow – Thailand or India? Which has the most vibrant stock market – Thailand or India? Which country has higher GDP growth – Thailand or India? If that was so, why Thai Baht should appreciate by 42% and Indian Rupee should weaken by 2%?

b.  It is absolutely clear that these three musketeers – RBI, SEBI and MOF (Ministry of Finance) have consistently worked against the broader interest of India and entire Indian population by devaluing the rupee at all the time.

4.  India’s Debt Level, Debt Servicing and Effect of Indian Rupee exchange rates:

a.  The rupee should have been at Rs 26/$ level against Rs 48/$now. That is, appreciation by at least 50% in normal course.

b.  India’s debt at about US$ 120 Billions translate into Rs 576,000 crores. Had Rupee seen the rise by 50%, same debt would have been at Rs 312,000 crores or about Rs 254,000 crores less than what it is now. The interest borrowing cost of the government in that case could come down saving almost Rs 25,000 crores annually.

c.  India could have used part of its foreign exchange reserve to retire at least 50 Billions of external debt in phased manner.

d.  To earn $ 50 billions from exports, need increase in Export Revenues by $ 500 billions (presuming 10% profit margin and presuming that not a single dollar goes bad which is impossible). $ 500 Billions rise in exports? Does India have any major industry that could turn in superlative export turnover of $ 500 Billions? Even if it has, who is going to buy in international market which is in severe recession?

e.  By letting the Rupee to rise, the national debt level could be reduced significantly that would raise the rating of the government of India, and also the entire corporate sector.

f.   The stock markets could also rise by at least 35% at least, which can be used by the Government to sell its stake in many of government owned companies to realize the cash from the market instead of levying taxes on its citizens. In fact, government could afford to reduce the taxes of individuals and corporate sector simultaneously. That would propel the markets even higher.

g.  Lower interest rates, higher rupee, lower import costs of major inputs such as oil and coal, lower commodity prices in rupee terms due to higher rupee reducing the inflation and higher rupee savings in the hands of individuals and corporate would raise the GDP to unbelievable double digit level surpassing even China, and also making huge amount available for key infra structure projects. It will be a “Win-Win” situation for all in India – Individuals, Corporate and Government itself.

5.  Will EXPORTS be affected?

a.  To some extent, some hard goods manufacturers might be affected but will be balanced out in 6 months or so. Those who want to buy Indian goods, they are going to buy it, whatever be the price, Are not people buying Real Estates today at whatever price even after 50% rise in property prices? Stark necessities dictate demand, not the weak or strong currency.

b.  Major export industry is “Software” which is mainly a service industry. The outsourcing is not going to stop. If rupee starts rising, those on the sideline may have to jump in and sign the outsourcing contracts before it is too late. Did India’s software sector lose competitive edge during BJP rule when the Rupee rose to almost 39/$ level, a rise of 20%? Absolutely not. And those companies who want to out source, they are going to use India because it is the only English speaking country with indispensable talents.

c.  Higher rupee could also cause migration of student overseas due to cheaper education by 25% to 50%. There will be less demand at home that would cause corruption cost to ease. The donations will no longer be necessary because overseas window has opened. The people will compare – is it cheaper to study abroad due to firmer rupee or at home with higher cost of corruption? Even government would not mind higher exchange allocation to soften the pressure on rupee.

6.  Foreign Investment to rise..

a.  There will be increased money flow from overseas. The overseas investors will not only gain from the rise in equity prices, but will also gain in exchange, making return in their home currency almost double. They would buy more equities or increase FDI (Foreign Direct Investment) that would help massive power, road, ports and infrastructure companies.

7.  Government of India to benefit most..

a.  Government of India will be the biggest winner in Rupee Rise game. Following are the advantages for the government:

i.        Its oil bill will come down significantly. Higher rupee may also act as “antidote” against higher oil price in $ terms in international markets.

ii.       Oil subsidy level will come down significantly, much faster than the present policy envisages.

iii.      India’s refineries will welcome the lower rupee. Its purchase cost would be trimmed with the result its working capital requirement going lower. The margins will widen that would generate positive cash flow for further investment.

iv.      Nation’s oil explorers like ONGC, GAIL, PETRONET and Reliance/Essar Group can make more strategic acquisitions overseas with stronger rupee. Their cost of acquisition would come down by almost 50% resulting into higher inflow of feed stocks at cheaper prices. Such benefits could also usher in the era of falling oil prices in India for next 10 years to the glee of Indian consumers, India based Airlines and Auto manufacturers who would see higher demand for their vehicles.

v.       Indian debt level may reduce in rupee terms. Its external debt servicing cost may come down by over 30% at least.

vi.      The budget will turn into black with this master stroke of changing the Rupee policy. The government can now think of reducing taxes, rather than increasing them, getting it desired votes from all consumers.

vii.      There would be no need to follow the policy of appeasement to Scheduled Tribes, Scheduled Casts and Backward Tribes by following reservation policy any longer. If they do not vote, other higher ups will vote. Further, the government will have more disposable funds to help those backward communities with real fund based help, rather than displeasing the vast urban community with unfair reservation policy. The merits will begin to take hold of every corner in Indian society.

viii.     Government of India will become one of the richest government in the world. It holds and controls more than 200 state owned enterprises many of them are listed entities. The doubling of stock market from present level influenced by lower interest rates, higher GDP growth and lower taxes would almost treble the market cap of its controlled enterprises. It can now afford to dilute its stake and privatize them at much higher prices than now. The budget surplus will simply grow beyond wildest imagination.

ix.      Roads, Railroads, Ports, Water damns and  Power plants will now be built at much lower cost than ever before. The real prosperity will travel from the coastal areas to hinterland the way the Chinese economy has prospered from outside to inside core.

x.       India can then afford to have free float of Indian Rupee to make it as most indispensable currency in the world. It could be used as “world’s safest currency” due to enough backing of gold in India. It is English speaking country after all with open democracy. All benefits of open democracy will now be felt with more consciousness than ever before. RBI will have more role in managing monetary policy than inventing economic policy which is the core function of the government or law makers.

It is time to tell RBI – better take a back seat, You have done enough damage to the economy. Now, go behind and reflect on what you did that should not have been done, and what you did not do, should have been done.

Let India put at rest its disastrous policy on Indian Rupee for good. Let new symbol start its journey with the position of strength. Sorry, RBI – this article may not be to your taste, but then, someone has to bell the cat. Kalidas is honored to do that job.

Anil Selarka (Kalidas)

Hong Kong, 1^st August, 2010