Come back Chidambaram, your job is here, not in Washington

It speaks much for our colonial mindsets that we think the solutions to our economic problems lie with foreigners. There can be no other explanation for why Finance Minister P Chidambaram and Commerce Minister Anand Sharma should be rushing to Washington and other global financial capitals to convince investors not to panic and that the long-term India story is intact.

Elementary psychology tells us that it is what you think about yourself that matters most, not what others think. If you lack self-esteem others will treat you with disdain. It is you who can teach others how they should treat you.

If we accept this, far from reassuring others, Chidambaram’s airdash to the USA tells investors that he is in a panic and maybe all is not well with India. He has quietly set off concerns among foreign investors that probably never existed. If they have been dumping Indian debt it’s because of the possibility of US Treasury yields going up, not because of a lack of faith in India - despite its foolish policies.

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The fundamental lack of faith in India lies within. Here’s why.

Take the rupee. It is Indians who have been dumping it more than foreigners. In June, foreigners sold around $5 billion worth of Indian debt. In April and May, Indians dumped rupees even faster. During those two months, Indians bought nearly 300 tonnes of gold despite higher import duties - that’s like exchanging more than $15 billion in paper rupees for a piece of metal. A vote for gold is a vote against the rupee - and, by extension, the India story.

In contrast, the fall in international prices of gold is a vote for US recovery. The same applies to the US Fed’s decision to consider easing its $85 billion a month bond buying plan.

[caption id=“attachment_948051” align=“alignleft” width=“380”] Chidambaram’s primary job is to convince Indians to believe in India. If he manages this trick, the foreigners will follow.[/caption]

Money is rushing to dollars because the Fed is exuding cautious optimism on a US recovery, while our ministers are setting off waves of panic by rushing to investors to tell them we are all right.

In any case, the foreigners’ dumping of Indian rupee debt was a UPA creation. In its efforts to lure quick dollars and avoid a rupee slide, two UPA finance ministers - Pranab Mukherjee and Chidambaram now - have over the past two years been opening up the Indian markets to quicken short-term debt inflows. When you open a market, can you close it just after people get in? The current outflows are a direct outcome of trying to be too clever by half with foreign investors. The UPA sought and got volatile money - and is now paying the price for it.

Consider what it could have achieved by tapping Indians for the same money. But, no, Chidambaram has been shouting from the rooftops to cut interest rates when inflation is in double-digits. So why should Indians hold rupees that can only decline in value?

Chidambaram’s primary job is to convince Indians to believe in India. If he manages this trick, the foreigners will follow.

Take another example. Let’s assume ordinary Indians are fools to trust gold instead of real assets. A canny finance minister would have crafted a gold policy and made money out of it. Now, the government could promise a five-year gold accumulation scheme where it guarantees a 1 or 2 percent annual return (payable in physical gold) on gold deposited with government.

Many Indians may well like this scheme. If they don’t it’s because they don’t trust the government with their gold - nothing else.

In such a scheme, the risks of gold price movements are shouldered by the government, but there is really no real cost to it. The government benefits the most.

The Reserve Bank holds hundreds of tonnes of gold, and even if it had to pay, say, 2 percent interest in gold to ordinary people, it will have it all in the vaults. No money has to be paid out, but reserves will come down. Even assuming, optimistically, that Indians deposit 2,000 tonnes of gold with the government, the interest payout over a five-year period at 2 percent would be 40 tonnes a year. If global gold prices fall, the government actually gains, as the return has to be paid out in gold - which now costs much less.

This is one way to tackle what the government feels are the people’s wrong priorities. But what is the message it has really sent by raising customs duties and imposing physical curbs on gold sales? Panic. It could make things worse. What is banned will always command a higher price. The government has merely reinforced the value of gold, and sent out the message that it can’t be trusted on gold.

Then let’s take domestic investment. Why are Indian businesses not investing? Simple. When you artificially underprice energy - coal, gas, oil - commonsense tells you that people will produce less and consume more. It makes sense to be a consumer of cheap things, not a producer. This is exactly why ONGC, Reliance, and Coal India are not enthusiastic about producing more energy from India. We are importing everything - and this is one reason for the rupee to fall. The right corrective action is to free up energy pricing, so that more of these fuels are produced at home and not imported.

What is relevant to gold is relevant to telecom, aviation, every sector. Why would Bharti invest billions of mobile telephony dollars in poor Africa when India is around? Why is the government forced to give sweetheart deals to Etihad to invest in failing Jet, when the fundamental problem is an unviable Indian aviation sector?

Once again, is the problem at home or in Washington or Abu Dhabi?

Then, take taxation. What has the FM been doing? Foreigners didn’t like GAAR (General Anti Avoidance Rules) and so he has abandoned them for now. Foreigners are being given sweet deals to invest their hot money here, but Indians will not be shown the same indulgence. Is it any surprise that wealthy Indians prefer to invest in India through Mauritius in order to be treated on a par with foreign capital?

If Chidambaram really wants the rupee to stabilise, he has to come back home and fix the trust deficit with Indian savers and investors. Luring foreign investors is a waste of time if Indians are not convinced about their own story. When foreigners figure out that Indians won’t invest in India, they will run away too. This is what is happening now.