By S Murlidharan
When your hair and bones start thinning, it is a grim reminder that the inexorable process of ageing has started. You cannot do much about it. But when a country, over the years, suffers from current account deficit (CAD), its currency would get badly mauled. Unlike with ageing, however, one need not resign oneself fatalistically to the inevitable with exchange rates because erosion therein can be halted with some ad hoc and unconventional measures that could raise eyebrows and hackles alike.
The government has been steadily upping the import duty on gold with a view to making its import unattractive. While this might indeed discourage investment in gold, there is no guarantee that the craze for gold for ornamental and ostentatious use would recede, given the social mores obtaining in large parts of the country. Nothing short of a physical ban on import of gold, therefore, would stop the hemorrhage of precious foreign exchange. The resultant loss of import duty revenue would be more than made good by the steep reduction in the current account deficit.
One also need not be detained by the argument that a physical ban on imports would give a leg up to smuggling because the foreign exchange outgo on this account is not out of precious reserves held by the official banking system but out of the reserves held by the nether world - reining in which is an altogether different issue.
Another area where the government has to get physical willy-nilly is in the careful and judicious use of petroleum products. Car pooling, which has all along remained a platitude, would become a reality if physical restrictions like allowing only even-or-odd numbered cars to ply on alternate days are imposed. This might strain traffic police resources like never before but it would be for a worthy cause. Those who consider traveling with others infra-dig would willy-nilly have to resort to public transport.
The Prime Minister perhaps would do well to break his reticence, understandable in the context of corruption, and address the nation on why the government needs to get physical with these two scarce commodities the Mother Nature has been niggardly with in their supply to the nation.
The automatic route to external commercial borrowings (ECB) under which a company, irrespective of its pedigree, can borrow upto a whopping US $700 million a year has been responsible for the mindless borrowing abroad based on low dollar interest rates. The RBI has found that as much as 80 percent of such borrowings are unhedged, so much so that with a steadily depreciating rupee, the repayment and interest obligations have burgeoned, wreaking havoc both on individual companies and the larger macroeconomy.
The RBI should forthwith close the automatic route except for the bluest of blue chip companies, thus making the approval route the norm. Approvals must be granted subject to stiff conditions that would render ECBs unattractive save for those who have got enough export earnings to service their borrowing commitments.
Another holy cow that must be disciplined is the foreign institutional investor (FII) who has virtually untrammeled access to the Indian bourses. When the FIIs exit, the resultant demand for dollars dents the exchange rate. There is no reason why we should not read the riot act to them by imposing, say, a 2 percent Tobin tax on repatriation within, say, six months of inward remittance. It is wrong to believe that FIIs would abandon India unless they are coddled and wooed with all sorts of sops.
In any case, it is now common knowledge that a substantial part of FII investment is laundering of ill-gotten money by Indians through the process of round-tripping. That such investments are used to prop up the shares of companies promoted by those indulging in round-tripping considerably weakens the argument that FII money, chasing as they do shares of well-managed companies, has improved corporate governance standards in the country. The proposed Tobin tax would meet partially the criticism that the government gives needless encouragement to hot-money, which is what the FII flow essentially is.
Export or perish has a nice ring to it but export orders cannot be bagged at short notice, especially when countries all over are masochistically indulging in competitive devaluations to penetrate export markets. Traditional export destinations by and large continue to remain in a comatose state. Therefore this mantra at best should be invoked in the longer run. For the same reason, removing the cobwebs of confusion in FDI policy (which represent long-term stable flows) is not something that can be rushed and thought of as a solution to stem the rot.
A short-term expedient, howsoever detestable on moral grounds, that can nevertheless be tried one last time is an amnesty scheme that could persuade black money stashed away abroad to return home. With the guesstimates of such money varying wildly between US$ 500 billion to US$ 1,500 billion, the government can hope to net a tidy sum that could not only ease pressure on the Indian rupee but also bankroll infrastructure projects. The routine admonition that this is the last opportunity for returning to the path of rectitude must accompany the proposed scheme as well; only it should not be allowed to degenerate into a joke, as happened with the previous admonitions.
If Indians can thus be indulged, there is then a stronger case for indulging NRIs with the bait of higher interest on their long-term deposits. As it is, diaspora remittances have been the mainstay of foreign exchange earnings for the country but they must be incentivised to do more during these troubled times.
The author is a Chartered Accountant
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