Rupee Turns Senior Citizen

It was last week of June when the rupee touched the mark of Rs 60 against one dollar. This was a moment of rejoice for few and for many it was a matter of concern. This represented the two sides of rupee. The rupee haunted its own birth country i.e. the India. Why this has happened? Is it the symptom or reaction to the depreciation of rupee? Dollar works on the principle of demand and supply. Current account comprises of the balance of import and export. It reflects on the value of goods imported and exported. It’s similar to our savings bank account. The debit balance stands for import and the credit balance stands for export. India being a developing country is basically an importing country. We import a lot of things. This leads to deficit in current account. The table giving the details of crude and gold imports as well as investments and remittances is given below:

Year	Net Oil Imports ($ bn)	Gold Imports ($ bn)	Net FII ($ bn)	Net FDI ($ bn)	Remittance ($ bn)
2008-09	66.1	20.7	-14.0	17.5	44.6
2009-10	58.9	28.6	32.4	18.7	53.5
2010-11	64.5	40.5	30.3	7.7	53.1
2011-12	98.8	56.2	17.2	22.1	63.5
2012-13	-	-	23.7	17.8	65.6

(taken from BS 21/6/2013)

When we import a product or service you have to pay money in dollars ($). Even though we import from China, South Korea, Taiwan you have to pay in US$. This is because the US$ is the universally acceptable currency. When we pay the amount in US$ the Forex reserves lying with us i.e. RBI gets depleted. As the quantity of US$ gets reduced and the demand for it increases, the value of US$ increases. This means that when the demand for dollars increases against its supply its value increases and value of rupee decreases. The result is that we have to give more rupees to purchase one dollar.

E.g. When you purchase an Apple mobile or laptop, the importer of this product has to pay in US$. When RBI has to provide more US$ the only source by which it can regain it is through export of product/service. India does not export as much as it imports. E.g. If India imports products worth US$ 500 then it exports products worth US$ 250.

This gap of US$ 250 is current account deficit. One of the major things which India imports is the Crude Oil.

The Role of FDI and FII

Another question that arises is that why does government propose to amend the rules relating to Foreign Institutional Investors (FII) and Foreign Direct Investment (FDI)? FII are the financial institutions who invest in the shares and other securities of the company. Foreign Direct Investment means the investment which is made by setting up business or manufacturing in India. This investment is made though setting up SPV, Joint Ventures or Wholly Owned Subsidiaries (WOS). The companies start their own businesses in India. Now as a way out government proposes to amend the rules relating to FII and FDI. By amending the rules relating to FII and FDI the inflow of dollars in India increases. This is like a pain killer medicine. As the government cannot increase manufacturing capacity and increase exports in one day this is the way out. But when you take pain killer it does not reduce your pain permanently. The side effects are that when FII’s invest in Indian economy they also exit when they want. This makes markets upside down. FII’s are purely investors. They will exit Indian economy when they get good returns on investment. So amending the rules is not the only answer.

The case with FDI is a bit different. Foreign Direct investors are businessmen. They invest to do business and earn money. This contributes to our economy, increases tax income, increases the inflow of dollars. Hence the increasing cap of FDI is important.  But even though the FDI cap is increased the foreign investors don’t want to do business in India. This is so because of the regulatory environment, poor tax laws, poor implementation of tax laws, uncertainty in policy decisions etc. Law made by one government is abolished by the other government. Coalition government can’t implement laws without the support of other national parties.

The move by government to increase the FDI cap is good but only when government keeps the house in order.

India’s competitiveness

One question which needs to be answered remains that why Indian exports are less as compared to imports? The answer is that whatever we produce most of it is consumed in India itself. Not much goods are manufactured and exported as they fail to meet the foreign countries quality standards.  

Many of the Indian goods are not globally competitive. We are living in a globalized world. So whatever we produce has to be globally competitive. There are some companies which are competitive globally, but these are not enough. E.g. Reliance Industries is globally competitive.  When the manufacturers like Mercedes, BMW, and Gillette are selling their products in India we have to produce the goods that can compete with these goods in Indian as well as global markets. This will increase exports as well as improve customer satisfaction.

But the major drawback why Indian companies can’t do this is the same as discussed above viz. Policy paralysis, corruption, scams, lack of credit, government intervention, poor implementation of tax laws.

This has created a vicious circle which needs to be broken by us. What we can do is that instead of purchasing an Apple mobile we can purchase of Micromax. Instead of going for Gillette shaving cream we can purchase Godrej shaving cream and Supermax blade. This is not boycott of foreign goods but it is just to reduce our preference for foreign goods. We should also strive towards manufacturing goods that are till date not manufactured in India