Though, some part of this blog has been copied from another blog, this has my views to large extent.
Is India looking for the reasons for the rupee fall for external factors rather than looking for reasons internally? Our well ready economists & knowledgeable sources explain the problem, attributing to changes in Fed rates in the US and a revival in the US economy etc., this is a very shallow explanation. Just because Indonesian Rupiah, South African Rand and Brazilian Real have been competing with rupee in depreciating against the US dollar, there is no reason to wish away our problems and blame external factors completely.
The only way to save the rupee and to prevent its free fall is to start practicing swadeshi all over again, that is, cut requirement of dollars, foreign currency for our day-to-day expenses. Yes, you read it correctly. As a nation we are living beyond our means and you can’t continue doing so unless we want India to crash (and not the rupee alone). That is exactly what is happening: the crash of the rupee is a symptom of the problems that ail the economy. Many of our learned friends will not agree to this, and many others who are used to flash foreign brands and products will not agree either, but the truth of the matter, we are living on borrowings and not self generated wealth.
Next time you bite corn produced in Australia, oranges raised in California, kiwi fruit from NZ, and apples from god knows where, think deeply whether as a nation we can afford this. Maybe middle class and upper middle class consumers can afford these imported fruits at an individual level, but certainly not as a nation. When India’s foreign exchange earnings are not enough to cover our imports, it is a no-brainer that we cannot continue to consume such goods. Stopping such imports and also of other edibles like cheese is not going to make any one worse off. The question that we should ask ourselves is: cannot good quality fruits be grown in the country that we have to spend precious foreign exchange to import them? Similar thoughts applies to much bigger products that we import and consume.
In the good old days, students used to travel abroad for higher studies after they completed their post graduation to take admission in PhD and other such professional programs in top universities. The learning in these top universities would be far superior to what could be had in high institutions in the country. But things have changed in the last two decades: these days you can find parents sending their children abroad to do their undergraduate degrees. Why? This is possibly because it has become a fad to send children abroad and/or considered a status symbol. It is not that every parent who is sending their children have the money to send, invariably many parents take education loans and send their children abroad. This further adds to economic issue, and as a nation we cannot afford precious foreign exchange to spend on children studying at the undergraduate level and doing basic technical courses. A pertinent question to ask is whether the education infrastructure is so poor that we do not have good colleges in country any more. So the issue is why this fad for a foreign education?
However you would not have seen any economist or politicians addressing these points. Most of their conversation revolves around tight monetary policy of RBI and decline in growth impetus, etc. This misses the real issue. The fact of the matter is that the process of liberalization that was kick-started in 1991 was so lopsided that it promoted culture of consumption without any controls & balance. True, before liberalization the economy was in shackles and consumption in country was artificially restricted. This was by way of import curbs and by the process of licensing (license raj). Thus things like washing machines & air conditioners were treated as luxuries, although in reality it was a great boon for families especially those with working women.
Liberalization provided a great opportunity to break the shackles and set up a modern, efficient manufacturing base in India. Well that really did not happen adequately. Had that happened India would have become a major exporter of manufactured goods that would have been enough to take care of India’s import requirements. But India focused on export of service goods (software/BPOs/Call centers etc) based on existing educational / literacy skills of mass population, and these were easily replaceable and continued to be an exporter of raw material. For example till the ban in exports of iron ore, the country was exporting iron ore to China. A country which is focused on its growth (like China is) would have instead tried to manufacture steel from this iron ore which could have been exported instead. This would have resulted in more foreign exchange earnings. But India had no such strategy in place.
Instead of exporting manufactured goods, India has become an importer of raw materials. A good example is coal that is imported into the country for fueling thermal power stations. This is in spite of the fact that India sits on reserves of billions of tons of coal reserves in its bed. India spent $18 billion in coal imports in the last fiscal year 2012-13. This is by no account a small sum and especially when foreign reserves are its low.
But while exports did not go up during this period, imports of not only coal and petroleum products (valued at $169.25 billion in the last fiscal year), but other consumer goods also went up.
World class manufacturing facilities did not come up in India due to many reasons. But primarily the culprit is the policy paralysis in country for many years that resulted in inadequate infrastructural facilities whether it was electricity generation, port facilities or proper roads & transportation. Bureaucratic hassles, delays in approvals and widespread corruption in granting permissions played a none-too-insignificant role in this process.
Entrepreneurs finding a bleak scenario soon realized that realty was a booming sector where large profits could be made without much hassles and was considered to be recession proof. As a result entrepreneurs of all hues and colors turned to realty. Even many IT companies started dabbling in real estate. With politicians joining in the game, realty became the name of the game. Thus the high growth evidenced in the country in period 2000-2009 and especially between the years 2005-2008, is nothing but an indication of the rapid growth in the real estate sector that led to burgeoning cities (never mind poor infrastructure and inadequate planning). But the increase in growth of realty sector is an artificial growth that may add to national income yet doing nothing to increase India’s exports or foreign exchange. A huge middle class, which has earned moolah through direct speculation in realty or by working in companies whose profits had soared due to their investments in real estate, started feeling empowered. And this empowerment was reflected through increased consumption. This has led to spiralling imports. It may not be out of place to mention that India’s savings rate has plummeted in the last five years. From 36.9 per cent in fiscal year 2007-08, it tumbled to 30.8 in 2012-13 and is expected to go down to 30 per cent by the end of fiscal year 2013-14, which largely reflects the increased consumption by the middle class, which was the bone of savings rate till then.
The rupee may have tumbled in the last two weeks, but the signals were there for anybody to see for the last few months. In the last fiscal year India’s imports of gold soared to $50 billion. This was not due to the proclivity of Indian consumers to own the yellow metal or sudden spurt in demand. Rather it was a signal from the market that the rupee could not be trusted to hold its value. Gold was being imported, because people preferred to hold their savings in the form of the yellow metal than in the form of Indian rupee in banks or investments.
Whether it is an individual, household or a nation, nobody can live beyond their means. Thus there is no other way for India and as Indians we have to learn to live within our means. The time has come to reduce to zero the imports of inessentials and restrict imports to the essentials. Though this will lead to lot of unhappiness who want to import and sport international brands (cars/watches/TVs/refrigerators & what not), this is the way to go forward if we want to get any better of the current situation and get out of the sticky situation the nation has got itself into.
From 1991 to 2013, the pendulum has swung from one extreme to the other. It is time to restore balance in our lives, think in terms of age old concepts like import substitution and check the rampant spread of this consumerist culture. Otherwise doomsday is not far away and we could be in far worse situation than where we are currently.
