If we really want to curb the further depreciation of the rupee and make the rupee appreciate, we want to come out of the mindset that the exchange rate is merely a number, bring policy corrections to help reduce the outflow of foreign exchange by imposing suitable tariffs to discourage imports and bring self reliance, discipline FPIs, and correcting rules governing royalty outflows, suggests Dr Ashwani Mahajan, National Co-Convenor, Swadeshi Jagaran Manch.
Key Points
- Growing global scepticism towards globalisation has fuelled debates around de-globalisation, fragmentation and economic sovereignty.
- Tariffs, financial systems, semiconductors and supply chains are increasingly being used as geopolitical instruments.
- Dependence on foreign-controlled technologies and payment systems has exposed vulnerabilities in national economies.
- Rupee depreciation stems from imports, FPI outflows, royalty payments and weak domestic production.
- Policy measures including import curbs, FPI regulation and royalty controls are suggested to strengthen the rupee.
We witnessed an era of planned economic development for nearly 40 years after Independence.
Subsequently, we moved into the era of globalisation, or an era of 'Washington Consensus', leaving the past behind,
Today, we are witnessing a phase where people across the world -- weary, exhausted, and disillusioned with globalisation -- and new concepts like 'de-globalisation', 'reverse globalisation', 're-globalisation', 'fragmentation', 'decoupling' etc gaining currency.
During the era of globalisation, perhaps every platform and every institution related to economic activities, economic policies or the economic landscape used to celebrate every instrument of globalisation, free markets, free trade, global value chains etc.
But in recent times, especially after COVID-19, countries have started realising that institutions and instruments of globalisation are actually instruments of economic disaster, which may lead to loss of economic and even political sovereignty.
A mention of the recent World Economic Forum conference at Davos would be important here. Throughout the era of globalisation -- spanning from 1991 till recently, the WEF used to celebrate globalisation.
It was asserted that if the world was to develop, and if developing and even middle-income nations were to progress, globalisation was the only way forward.
However, at this year's WEF annual conference, Canadian Prime Minister Mark Carney stated that the negative consequences of the last two decades of deep global integration were now clearly visible.
These consequences were manifested in the form of crises in finance, health, energy, and geopolitics.
He argued that this global integration, once seen as a virtue, accepted without question, has now become a source of weakness.
Carney further stated that today, the instruments of globalisation are being used as weapons by major powers. Tariffs, financial systems, and global value chains are no longer neutral economic tools; instead, they are being used as weapons.
He stated that when major powers are attempting to subjugate other countries through integration, it cannot be said that globalisation is for mutual benefit.
How Globalisation Became A Weapon
If we look back, the idea of globalisation was sold to us with the promise that the most cost-efficient producer would dominate the market.
We were told why manufacture an entire car yourself?
One country could make the horn, others can manufacture engine, gear box, and other components; one country may assemble them all, and you get a high-quality, affordable car -- benefiting the consumer.
Yet today, we see that the tariffs -- which were forcibly lowered under the influence of those driving globalisation, developed countries, in the hope of economic development -- are being weaponised, those very drivers like the United States of America in the form of 'reciprocal tariffs', 'punitive tariffs' and so on.
The global value chains that once justified the entire globalisation narrative are now being weaponised as well.
Critical components like semiconductors and rare earth materials are also being weaponised.
Furthermore, we were told to simply trade, without needing to worry about the mechanics of payment systems.
Western countries provided SWIFT available to everyone.
Today, however, that very SWIFT system is being weaponised. Consequently, the rapid pace at which we embraced globalisation has significantly impacted our production systems, and made us dependent on those who control the critical chain, may it be GVCs, technology or payment systems.
We witnessed how our industry was affected due to the shortage of semiconductors post COVID-19.
Later, how China started strangulating industries across the globe by short supplying rare earth material, started charging monopoly prices; how the US administration has started endangering businesses by imposing its security laws over provisions of software and technology; how the sword of sanctions from the USA keeps hanging over all countries; how nations' reserves kept with the USA's Federal Reserves had been freezed on political grounds; many such examples keep coming to fore.
It is not that we lack rare earth materials; we have them in abundance. Yet, we do not mine them, or even if we do, we fail to process and manufacture them.
We all fell victim to a kind of spell -- much like someone being hypnotised; in this case nations had been hypnotised.
Is Exchange Rate Merely A Number?
The idea and influence of globalisation has not yet faded from our minds. Excessive belief in globalisation makes some people think that the exchange rate is no more than a number. Though the basic economic theory says that the exchange rate is determined by the forces of demand and supply of foreign exchange.
If these forces of demand and supply come from a free and fair economic framework and eco-system, no one can question the legitimacy of this number (the exchange rate).
If markets are actually not free and fair, it's important to understand how can we ensure that these numbers do not harm our economies or the well being of the people.
Yet bigger issues are ensuring our sovereignty and security.
The question is whether the assumption of free and fair markets is reasonable.
Here lies the catch, which determines whether or not we can call an exchange rate merely a number.
We shouldn't be carried away with the statements of so-called big names.
An enquiry into reasonableness is needed. If determinants of this number could be improved with the help of some policy instruments, then why is the same not being recommended by these economists and what is their objection for the same?
Recent depreciation of the rupee is majorly due to increase in imports, especially from China, withdrawal of foreign portfolio investors (FPIs) from Indian stock markets, greater transfer of investment income by foreign investors and reduced inflow of net FDI.
Should we see these factors as silent spectators and treat the depreciation as a fait accompli?
Those who treat the exchange rate as a number would not appreciate the idea of correcting the same by a judicious mix of policies as a solution for rupee depreciation.
First, these economists are against restricting imports as it would amount to interference in the free functioning of the markets, while admitting that markets are neither free nor fair.
We should know that most of the items we import from China are also produced in India. But since production of these items in India is marginally (or sometimes significantly also) higher than the landed price of imported items, they are imported from China or other countries.
In many cases our cost is higher due to higher logistical costs, higher electricity tariffs or cesses, which are beyond the control of domestic producers.
Only a clear-cut policy direction, including higher tariffs, can curb their imports.
For instance, to curb the import of solar panels from China and other countries, the Government of India has mandated the use of panels satisfying domestic content requirements in solar installations under any government scheme. Such restrictions can be imposed in the case of more items.
Second, it's an established fact that FDI investments in stock and debt markets are highly volatile and they (FPIs) are also called 'fly by night' operators.
Moreover, they make use of market imperfections in their favour, using technology, and exploit small domestic players.
In the first place, allowing them to invest in India was wrong. It's unfortunate that instead of disciplining them through policy instruments, they are being rewarded for their indiscipline by way of tax concessions.
Thirdly, we know that through FDI, foreign investors bring foreign exchange with them. They stay invested in the long run, but they also take away huge funds by way of outflow due to income transfers, which has been increasing in leaps and bounds.
A major component of their income transfers is royalty payments and technological fees.
It's notable that prior to 2009, a cap existed on royalty payments, which was lifted by way of an order of the ministry of commerce.
Since then, the outflow of foreign exchange for royalty payments has been increasing exponentially.
If we really want to curb the further depreciation of the rupee and make the rupee appreciate, we want to come out of the mindset that the exchange rate is merely a number, bring policy corrections to help reduce the outflow of foreign exchange by imposing suitable tariffs to discourage imports and bring self reliance, discipline FPIs, and correcting rules governing royalty outflows.
Dr Ashwani Mahajan is National Co-Convenor, Swadeshi Jagaran Manch and former Professor, PGDAV College, University of Delhi.
Feature Presentation: Aslam Hunani/Rediff
