Rupee Fall Exposes India's Economic Weakness

We who were dreaming of being the third largest economy in dollar terms have slid back to sixth, thanks to the falling rupee.

We are moving about with begging bowls for investments and trade opportunities, which will be a while in materialising, if ever, notes Shreekant Sambrani.

https://www.rediff.com/news/report/back-to-back-failures-questions-are-mounting-over-isros-pslv-programme/20260527.htm

It is tempting to ascribe the fall of the rupee against almost all currencies (India is now among the worst performers along with Turkiye) to one or another major cause: Worsening trade balance, emerging energy crisis, and such.

This time, it is a combination of many reasons, topped by that most quintessential of Indian vices, complacency.

Our trade balance has almost always been negative, but we have managed to avoid a balance of payment crisis largely because of remittances.

We have also believed that a falling rupee is good because it makes imports more expensive and exports more competitive and is thus a good self-corrective mechanism.

This time, unfortunately, a large part of our exports are really re-exports -- where the import content of the exports is high - such as gems and jewellery and smart phones.

So the decline in the rupee value has not been all that helpful. The remittances, too, have dipped and thus made the balance of payments somewhat more adverse.

The current flow problem is exacerbated by a worsening stock problem. Both FPI and FDI have been dramatically declining. Our stock market enjoys one of the most insane P/E multipliers, upward of 20 for most stocks.

In a stable stock market, the observed values do not generally exceed 10 and many emerging markets show ratios under 10.

While local punters may get thrilled at such developments, it makes our stock market essentially less attractive.

We still managed to attract FPIs, because of international interest rates hovering near 0 made Indian stocks attractive in the short run.

But with interest rates rising internationally and the US T-bills especially so, this so-called hot money quickly fled India.

Worse, even foreign companies with large investments in India used the avenue of high-priced IPOs to take money out of India, as Hyundai most notably did.

But it was not the only company to do so.

China Plus One Myth Exposed

FDI had been growing in the early 2020s. That gave rise to a false confidence. We assumed that even if China remained the international investors preferred destination, we were firmly the best China+1 destination.

We reverted to bureaucratic controls, assuming that the foreign investor had no choice but tro comply.

We began dreaming of rapid growth, boasting to all and sundry that we were the fastest growing large economy in the world.

We conveniently forgot that our large economy tag is mainly due to the large population. On a per capita GDP, we still rank in the 130s.

Our wage rates may be low nominally, but when discounted for productivity, India emerges as a high cost economy. This is where Vietnam, Malaysia and Indonesia surged ahead of us.

But we were so seduced by the attraction of the seat at the high table that we left our flanks unguarded. Bangladesh and Indonesia stole leads over us in clothing exports.

We allowed our love for go-mata to affect our leather and footwear exports. We began discouraging even buffalo meat exports.

We turned a blind eye to the operation of large trawlers and factory ships just beyond our economic zone and lost a part of the lucrative tuna and marine export market (I suspect some of our own exporters were complicit in this).

We continued to export rice and sugar, which is essentially exporting scarce water and given our lack of concern for residual pesticides, our per unit realisations began suffer.

The less said of our engineering and manufacturing exports, the better, They have been stagnating now for long.

Trump Return Exposes Weaknesses

The second coming of Trump has been like shining a mirror to us, showing our myriad infirmities, be it in trade, investments or diplomacy.

We are at best on the periphery of events. That is why Mr Modi has discovered anew Northern Europe and is busy cultivating more allies in the Gulf sultanates.

But meanwhile, we who were dreaming of being the third largest economy in dollar terms, have slid back to sixth, thanks to the falling rupee.

We are moving about with begging bowls for investments and trade opportunities, which will be a while in materialising, if ever.

What's the prognosis? I am afraid it is more of the same in the short and possibly even medium term. In the long run, as Lord Keynes most famously put it, we are all dead!

Dr Shreekant Sambrani trained as an engineer at the Indian Institute of Technology- Bombay and Northwestern University, then as an economist at Cornell University.
He served as a Professor at the Indian Institute of Management-Ahmedabad, Chief of the Research Bureau, before becoming the Founder-Director, Institute of Rural Management, Anand.

Feature Presentation: Aslam Hunani/Rediff