Keeping the faith at 60s - Currency & Economy

The upside to India's currency depreciation 

With the Indian rupee falling beyond 60 per US Dollar breaching many a psychological barriers in its course, there is enough negative sentiment and market scare. The numerical equivalence with India's retirement age gives an eerie hanging-up-the-boots feeling to our fiscal and monetary policies.

 

If this is the only way sense can prevail, then let’s grudgingly head towards to it. At least some cheer that this economic quagmire will correct.

 

What ails our currency also ails our psyche, in quite broad terms. I will not shift the blame squarely on the government, lest this article becomes another outburst on Government’s - policies, reneging on policies and absence of favorable policies. A blame game never ends decisively with a solution. So what makes me optimistic when the currency is at its cheerless 60s!

“Pushed to the corner” syndrome

The nostalgia of 1991 seems to have returned. Many a economists strongly believe that the pervasively deteriorating CAD situation with additional burden of benefit schemes and a fragile recovery, may usher us back to IMF doors. When that happens, we would have been sufficiently pushed against the wall. While this may still be far, the alternatives to kick-start the economy are few. Hence, the government which has been procrastinating, confused or lost, can find some sense of direction, albeit with embarrassment from our creditors, investors and chastisement from rating agencies. 

If this is the only way sense can prevail, then let’s grudgingly head towards to it. At least some cheer that this economic quagmire will correct.

Imports pinch

A country may choose to depreciate its currency like Japan did few months back, or it happens progressively when the exchange currency becomes stronger. For a country that is a net exporter, this depreciation enhances competitiveness and pushes up further exports, fueling greater economic activity. India being a net importer, there is now a double whammy from weakening currency and slowing economy. This impacts purchasing power, capital flows, employment generation, ability to fund welfare schemes and the ensuing spiral.

The bright spots when this situation looks grim is in laying foundation for domestic manufacturing, improving agricultural output and services sector to expand. There are no short-term fixes, not at this juncture, but to tap the demographics in India and make them busy. If Washington apples are getting expensive, there is enough incentive to improve output of Himachal apples. When US was hit with one of the worst recessions, with imports far outbalancing exports, it had to bring jobs home and get their hands dirty.

With no dearth of supply-side bottlenecks or, consumption, India is poised for its next Manufacturing revolution, Energy revolution, Agri-revolution, export competitiveness etc, with a long-term view.

Broad brush strokes vs Micro-positives

The brouhaha surrounding a dismal economic situation comes from our Government’s continuous reliance on foreign capital to heal the CAD crisis. A recent Citigroup report puts foreign ownership of Indian equities at nearly 48% of market’s free-float. The over-dependence on FDI, FII flows in Indian debt and equity demands that India delivers financially to its foreign investors and creditors. When the returns get beaten down and risk to their capital increases, it is logical to expect a huge noise belittling our credibility and exposing our non-performance. The weakening currency is a consequence and also a source of such widespread discontent, leading to broad brush strokes with negative outlook. 

When the going gets tough, it is relatively easy to fall prey to pessimism, as much as jumping into euphoria during good times.

Brushing aside the noise, political jibes, expert views and structural imbalances, we need to take comfort from examples of successful companies, social initiatives and individuals that did not wait for the “right time” to take shoot. Regulatory or, policy enablement may give wings, but can’t be the legs to our growth. The power crisis in Tamil Nadu earned criticism for the successive governments, as it impacted a fast industrializing state and its people with power cuts. This grim power situation however proved fortuitous for generator, inverter, UPS, wind-power and solar-power companies. While per unit cost of power was expensive initially, it pushed innovation and competitiveness harder among these diverse alternate-to-grid power suppliers. Such micro-positives abound in turning our limitations into opportunities. This self-belief needs to be reinforced.

End Note

The concept of bad times should be one of reconstruction, innovation and a certain ownership of our mistakes with a will to change. This postponed opportunity and awakening is where the rupee in its 60s is driving us towards, politically and individually.