Dr. DD’s speech at the IIFT Conclave, Dubai, UAE
Indian
Institute of Foreign Trade (IIFT) that marked its Golden Jubilee this year, recently,
for the first time, held a conclave in Dubai’s Dhow Palace Hotel, UAE. Eminent
Speakers from diversified industries viz; Banking, Shipping, Steel, Commodity
etc. were invited to present their thoughts on the World Trade - Its Challenges
and Implications. Dr. Durgadoss chose to Enlighten on the falling Rupee and
Increasing TradeGap and the way forward.
“Rupee Dives Trade Gap
Thrives – Where do we Go From Here?”
Good Evening Ladies
& Gentleman
At the outset, let me clarify that I
do not have the privilege of elongating my greetings session, since I had to
honor my time slot of 10 minutes.
Hence, without burning too many
Calories on exchange of pleasantries, let me take you to the topic straight!
There is a saying – if you speak for
10 hours, you can prepare for just 10 minutes. But if you speak for 10 minutes,
you have to prepare 10 days! I confess I have not prepared for ten days, but
yet I try to convey and share my thoughts with you today.
There is a joke floating in the world
of web on Indian Rupee. A bunch of Indian Cricket Fans said that more than the
match they like the process of toss – They were asked why? They said that was
the only time they see the Indian Rupee (the coin) going up.
Jokes apart – let us come to reality.
The Rupee started at 1 USD = 1 Re in 1947. Now it reached near 70 Rupees per
USD recently. The depletion pack was lead by Indian Rupee 20% drop since 2013
Jan, Brazil 15%, Indonesia 12-13%, Philippines 7-8%, Vietnam 10% and so on. The
currencies of some countries like South Korea & Taiwan have in fact
appreciated against the US Dollar. Are we so bad? Why this bleeding of Indian
Rupee in recent days.
Reasons
The
USA connection:
In
the 1970’s, the Fed Governor of USA said, ‘it is our currency (US Dollar) and
your problem’, when he was asked about the newly printed US dollar spreading to
other parts of world.
Since
2008, to get over the economic crisis, USA started pumping money by buying
bonds every month – today at 85 Billion USD per month. The deficit during the
first term of current USA president crossed 1 Trillion USD. The national debt
was increased during his first term, more than the previous 43 presidents
combined!
Hear
out this story from USA. Four Years back One of the rich tourists walks into a
tourist island in USA. The whole country was in recession, there was gloomy
outlook, the town was deserted. The tourist went to a hotel. He deposited USD
100 note at the counter. He said he will go up to the fourth floor room and
see, if he likes it, he will take it. If he does not like, he will go back. He
went upstairs.
During
this time the hotel manager used the currency of 100 USD for paying the meat
supplier. The meat supplier in turn used this 100 USD to pay his dues to energy
supplier. The energy supplier in turn used this 100 USD note to pay back his
dues to the Hotel, for the rent he owed.
Now
hotel owner got back the same 100 USD. Meanwhile, the tourist came back to the
cashier and said he did not like the room, got back his 100 USD note and walked
out.
Nothing
changed – but this 100 USD note discharged the debts of three stakeholders and
everyone’s credit limit got restored, got enhanced, as the banks were happy
that the debts were settled.
All
these stakeholders decided to seek offshore high yielding investments using
these new enhanced limits, they bought a beach town in India. The property
prices in the beach town of India went up with the demand from dollar backed
Americans. Dollar coming to India, rupee got strengthened. The Indian owners who
sold the beach town were lured to get cheap USD loan and bought luxury goods
from abroad. They used the sale proceeds that they already got, for buying
another beach town in India. Rupee strengthened, property prices went up in
India, Luxury goods freely imported on new American Loans, Americans bought
beach town in India-all round euphoria. When US applied breaks on pumping of
new printed notes, interest rates went up in USA. These American owners of
beach town sold the property in India, fled India, Dollar going away – Indian
Rupee bleeding – the India owner got stuck with foreign loans & new
properties they bought at new low market value. Chaos commenced.
This is how
business was done in the various so called, “developed nations”.The
nations confused between motion & progresses.
A
Rocking Horse moves but does not progress. Nations thought the debt movements
were progress, but they were only motions. Net result was a economic chaos. USA
had to bail out their economy. They started printing USD Dollars. US Dollar
once was linked to gold. But today 1 USD can buy only 0.02 gram gold.
Federal reserve flooded the market with some
2.75 Trillion USD over past five years. USD started looking for higher returns
outside. The excess money printed, instead of just creating jobs in USA market,
flowed out to emerging markets like India. The US Dollar started flowing into
India chasing – stocks, bonds, properties and Indian currencies. Our prices
started going up. We were living in the illusory world (The Maya) of rising
property prices, strong Rupee and we thought we were growing – but we were only
moving not progressing.
Since
USA is now showing signs of recovery, their domestic money pumping tap getting
closed, the US Dollar already came to emerging markets started a reverse flow.
The result – Carnage in the currency market of emerging markets.
Reason 2
Current Account Deficit (CAD)
India
ranks third in CAD deficit following USA & UK at about 90 Billion USD, last
year.
A
deficit on the current account (CAD, in short) means that India has to pay out
more dollars than it receives from exports. The deficit can be bridged either
using the country’s foreign exchange reserves or from foreign capital inflows.
India
actually had a surplus on its current account until 2004-05. Since then, the
current account deficit (CAD) has increased at a very rapid rate.
CAD is financed by -
ü Direct
FDI
ü Portfolio
Investments
ü Overseas
Corporate Loans
ü NRI
deposits
All
these capital flows are not only influenced by opportunities in India but also
global environment.
The immediate consequences of this
excess dependence on foreign capital inflows are volatility and rapid
depreciation of the rupee.
Nearly 25 per cent of foreign
capital in India as of March 2013 - is portfolio investment. This is the money
that can be withdrawn very quickly when investors perceive better opportunities
elsewhere. Can we continue to finance CAD by hot money? Is it sustainable ? We
have to think…
So
why is the CAD growing so rapidly?
Import
Growth: CAGR of 22% since 2004-2005 why? Import duty was reduced since
2003-2004 considerably.
How to Arrest CAD?
Earn more dollars than spend. How?
Well, there is no magic – we have to
ü Increase Exports
ü Decrease Imports
Till
we arrest CAD, Finance it out of long term FDIs not out of hot money
There
are other reasons for the Rupee Fall
ü Increasing Capital goods imports
since 2004 – 2005 – From 25 Billion USD to 100 Billion USD Last year
ü Manufacturing Sector declining in
India
ü Foreign investors losing faith due
to Policy Paralysis
ü We promote charity, not empowerment
– “We feed fish for the poor but do not teach them how to fish” – populist
schemes cut down our ratings.
Measures
Immediately we have to arrest Volatility even at
the Cost of GDP growth. Cutting down imports, increasing FDI/NRI remittances
are the short term measures.
In the medium term
Fuel
subsidy reforms, monetizing gold, better fiscal discipline, better investment
climate creation are on the cards.
In the
long term,
we should raise our exports, solar Power to be focused, shed Populist schemes
& Promote manufacturing.
Where do we go from here?
I
prefer to duck any question on the prediction of the rupee. There could be two
way movements in the range of Rs.60-70 band.
These days, interventionary policies
deprive us of the precision in our predictive abilities.
The
other day my wife – a micro biologist was following the Sep 17-18 Federal
Governor Meeting. I asked why on earth she is following this. She said
depending upon her prediction on whether FED will withdraw the pumping of
dollars into the market, she will decide her gold purchase or taking Rupee
draft. She predicted FED will not alter any of their current printing plan.
She was bang on target. I realized the professional
predictions gave me harmful Companions viz; Diabetics/Blood pressure. But my uncomplicated
harmless companion gave her best prediction and strengthened our harmony.
The moral of the story – If the predictions of the professionals
ask you to go “North”, you opt for going “South” – You will be right!
Finally,
Criticism
apart – Is there any hope? Yes, we need to take a call on these…
Greed or Need?
Conviction or Compromise?
Present
day happiness or potential sacrifice for future generation?
When
something can’t be cured – it has to be endured. Sacrifice is the Key! Momentum
leaders will build the waves and ride on it.
They
don’t wait for the waves …..
Let me conclude -
The leaders are to be guided by the
hope of a saint -
In Crucial things, Unity – (Economic
Agenda)
In Important things, Diversity –
(Culture & Skill)
In all things Generosity – (Inclusive
growth)
How do we align Unity / diversity and
generosity? I am not taking a fresh guard for the next 10 minutes. I do not
want to earn the wrath of my next speaker.
Well, I reserve this topic for yet another day at yet another
forum.
Until Then
Bye ! Bye !