Hurrah for the Rupee Crisis

Most people are worried, even alarmed by the sudden drop in the value of the rupee en late October. Panicky {businessmen are predicting a forty-rupee dollar by the end of the year (which is pure rubbish).

But I welcome the rupee crisis. In India, governments go into torpor when there things are going smoothly, and get galvanised into purposive action only when there is a crisis. It took the crisis of 1991 to push India into economic reforms, and once it ended, further reform went into virtual cold storage.

In the run-up to an election, governments typically view paralysis as the best policy-they wish to avoid any chance of controversy that may lose them even five votes. ‘A crisis is an excellent way to jerk governments out of their atrophy. Prime Minister Narasimha Rao returned from a foreign trip last ]week to find the forex markets in ‘turmoil, and told the RBI to intervene to stabilise the rupee. One reason for the rupee crisis was the ‘slowdown of foreign portfolio in-vestment, which had reduced the ‘supply of dollars.

Portfolio investors were worried, among other things, by the dithering of the government on pushing forward with the logic of reform, and the possibility of total paralysis if there is a hung Parliament after the 1996 general election. ‘Mr Rao saw the need to send a positive signal to foreign investors that India is not paralysed, and so they should continue bringing dollars Into India.

Hence in one go the Cabinet last week cleared more foreign investment proposals than in the whole of 1994. It cleared telecom projects which could touch an astounding $ 50 billion (Rs 170,000 crores) over the next decade. Over and above this, the successful companies (which generally have 49 per cent foreign equity) will pay licence fees worth Rs 110,000 crore for basic services over 15 years and Rs 20,000 crore over 10 years for cellular services.

Some defaults and retendering in some circles may cause delays and reduce the bonanza somewhat, but it remains mind-boggling. The Cabinet also cleared several other foreign investment proposals that had been hanging fire, such as the Ford-Mahindra and Honda-Shrir-am joint ventures for cars with a total equity base of more than $ 700 million; Broken Hill Proprietary’s $ 285 million project for metallic sheets; and Whyte and Mackay’s proposal for scotch whisky.

Recently there was criticism from Opposition panics of foreign investment in what they regard as non-priority sectors like cars and liquor. The government itself was seen as nervous, and considering backtracking on this issue. Now, thanks to the rupee crisis, it has opted for firm action.

Would these projects have gone though anyway without the rupee crisis? Not all, I suspect, and certainly not so expeditiously. The irony is that reform and foreign investment, especially in infrastructure, is so important for own self-interest that we should be pressing ahead rapidly instead of dithering.

Unless the telecom bids are stymied by legal hassles, they should bring in at least Rs 7,000 crore by January as licence fees for one year. Apart from aiding the forex reserves, this will greatly help the finance minister reduce his fiscal deficit. This in turn will ease monetary pressure, increasing credit availability to industry and lowering interest rates. This, in turn, will strengthen the rupee.

The large fiscal deficit is one reason why Standard and Poor’s have refused to rate India as creditworthy, a fact foreign investors have duly noted. But Rs 7,000 crore per year in telecom licence fees greatly improves India’s long-run fiscal profile, and hence its attraction for investors. Besides, the new projects entail investment of a whopping Rs 40,000 crore or so by 1997, greatly spurring the economy apart from creating world-class communications.

We should have done this years ago, and must thank the rupee crisis for finally ending delays. Much more needs to be done for infrastructure. For instance, we need much more port capacity to sustain our export boom, but the government has no cash to expand its ports. The obvious answer is to give complete freedom to private parties to build ports.

But, despite much talk of privatisation, the government has not permitted private ports so far, and restricted their autonomy even for operating facilities (like container terminals) within government ports. Private investors have proposed projects worth $ 6 billion, but feel that the government is simply not serious.

The government allows companies to operate private jetties, but only for captive purposes-the facilities cannot be used to service other importers and exporters, and this constitutes a national waste. One reason for this dithering is that politicians are afraid to take on dock unions who fear they will lose their blackmailing powers if private ports are allowed.

Currently, Bombay dock unions take seven times as long to handle containers as those in Singapore, and private ports could reduce their business or force them to work harder. It is absurd that the interests of these drones are taking precedence over the national economy, but that is the way our polity works. Although reforming ports policy is urgent, nothing is likely to happen now that the rupee has stabilized and the mood of crisis has blown over.

Still, we need not lose hope. Another rupee crisis will doubtless occur next year, and maybe that will once again give a push to purposive reform. Crisis zindabad! Some critics will say this analysis suffers from a major flaw-that the country’s economic fundamentals are sound and there is really no rupee crisis at all.

The RBI actually helped the rupee slide downward with market forces, and then intervened when it felt the process had gone too far. Critics say this overshooting led to unwarranted panic, since there was no real crisis. The RBI’S reserves of $18 billion are enough to sustain any reasonable exchange rate for at least two years.

The current account deficit is widening but still will not exceed $ 4 billion this year, and the inflow of foreign investment, which had slowed, will accelerate with telecom investment. India is not Mexico, which ran through enormous reserves within one year. Unlike Mexico, India does not let its citizens take money out of the country. India’s current account deficit of 1.5 per cent of GDP is tiny compared with Mexico’s 8.5 per cent; and India is enjoying robust economic and export growth, which Mexico did not.

The rupee-dollar parity had remained stationary in India for two years since 1993 despite 10 per cent annual inflation. This is 5 to 6 per cent above global inflation, so exporters in search of a level playing field want the rupee to depreciate by 5 to 6 per cent annually. It did not do so in 1993 and 1994 because of a he inflow of foreign portfolio investment, so inflation squeezed exporters, who demanded a devaluation.

This the RBI has now arranged. So the supposed crisis is really a managed downward float. The rupee may continue floating down at a modest 6 per cent per year, but no more, unless there is a dramatic change in political or economic expectations which dries up foreign inflows.

And so, it can be said that the supposed rupee crisis was merely a rupee panic. This shows that even a bogus crisis can be just as effective as a real one in galvanizing torpid politicians into taking decisions. Illusions can be as important as reality.

What do you think?