With the rupee’s sharp depreciation, it is becoming increasingly difficult to predict the level at which the currency will stabilize. Most recently, the rupee touched a new low of 65 vis-a-vis the dollar, recording a depreciation of almost 18 per cent since May. India is not the only country facing this predicament; the story is common across most emerging economies. The Brazilian Real, for instance, has seen a drop of 16.5 per cent vis-a-vis the dollar during the last four months. And many other currencies have seen a 10-12 per cent depreciation.
The reason for the plunge of the rupee and other currencies vis-a-vis the dollar is primarily to do with the capital exodus from the emerging markets to the developed markets following the Fed’s indication of a tapering QE programme, a back-to-growth US and a strengthening Europe. Additionally, the high current account deficit and failure to attract ample capital inflows have been putting downward pressure on the rupee.
The rupee free fall has caused serious trouble for corporates who have un-hedged external borrowings on their balance sheets. Input costs have gone up for sectors such as automotives, airlines, oil & gas, consumer durables, and fertilizers. These could create inflationary pressures on the economy in the near future.
The brighter side to the falling rupee, however, is seen in the case of export-oriented sectors that have been reeling under low growth. Textiles and garments, leather products, pharmaceuticals and software services should see major gains as a result of the weakening rupee, as global demand picks up. Rising exports due to a falling rupee can help correct trade imbalances, which, in turn, will help arrest the current account deficit to some extent. But unless measures are taken towards economizing oil imports and encouraging domestic energy resources, the strain on the current account will continue. Oil imports today account for 34.5 per cent of our total merchandise imports, up from roughly 26 per cent about a decade back, and with the requirements of a growing user base, the import demand for oil will keep surging unless domestic supply is accelerated. Hence, concerted efforts are required to improve our energy supplies and give a boost to domestic oil & gas exploration. This can be achieved by ensuring greater clarity in existing policies, and provision of additional incentives such as introduction of efficient revenue-sharing arrangements and encouraging foreign investments in E&P activities. We must also intensify our efforts in renewable energy, particularly wind and solar, which could supply 30 to 40 per cent of our power needs if we get this right .
We also need to export metal ores, and subsitute imported coal with domestic coal. We also need to economize our imports of capital goods, electronics and other consumer durables over the next decade by strengthening domestic manufacturing capabilities in these products.
As a short-term measure, the government should lay focus on bringing in capital flows. For this, rupee bonds can be issued to NRIs, and NRI deposit accounts in banks can be further encouraged. But what is most important is to re-instill investor confidence, for which the commitment to reforms needs to be displayed in right earnest. The environment for investment and industry needs to be made more welcoming and enabling, and all pending reform bills need to be pushed through.
It is disappointing that we cannot get political consensus on GST, which, we all know, can add 2 per cent to our GDP. The reform is good for the country and can provide an easy solution to our many woes.
(The writer is president of Ficci)