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This perhaps is the billion dollar question and many economists are probing for an answer while Government of India is looking for short term measures to stabilize its currency depreciation.

The market did give a sentimental boost to the appointment of the new RBI Governor. To handle inflation and slowing down the downward slide of Rupee, his predecessor few months back increased the CRR, instead of opting for a traditional route to increase the interest rate. This did put pressure on the liquidity knowing fully well about the upcoming US $80 billion per month bond buying program by US treasury which will further chock the liquidity in the market. With Syria now at the top of Obama’s agenda, there could be some tradeoff between the BRICS nations and US with their planned tapering of the US Federal Reserve multi-billion dollar monetary stimulus policy. US may agree for an orderly exit on a short term basis but this is going to come eventually and emerging economies in the world will need to change their fiscal policy to deal with it. Already seeing the sign from Putin softening his stance on Syria and China and India joining the chorus to articulate the need for an orderly exit of the US stimulus policy. So I believe in a short term, the emerging economies will get some respite and we may see Rupee settling near about its current level (66) for the next 2-3 months.

But then WHAT? How can RBI increase India’s forex reserve? What must Government do to augment  growth that is currently struck  near about 4% of GDP and to cut the CAD? With inflation over 10% and population growth is in excess of GDP growth, is the welfare measure like Food Security bill is going to be our answer for the future?

1. Allow domestic bank to raise funds from foreign markets and use technology to boost deposits from NRI’s. There are over 22 million NRI’s worldwide and in US alone has over 2.3 million with an annual buying power of over $25 billion with double monthly average income compared to US national average. I’m sure the current reduction of SWAP by 50% by newly appointed RBI Governor will help aggrandize forex level and will deflate the CAD.

2. Oil imports: Only fools argue to take restrictive measures to reduce oil consumption, like shutting down gas station after evening hours and so on. That’s not happening and to intensify growth, knowing our inability to boost domestic oil production will continue to increase our dependency on foreign oil. So what do we do:

a) Reverse the import priority from Saudi, Iraq and Iran to Iran, Saudi and rest. Once the currency slides and the borrowing window moves from dollar market to Rupee market, use the Rupee with Iran to import oil. I accede it will politically be an enigmatical task with USA as our strategic partner, but as a tradeoff, India can offer liberalized domestic retail and insurance sectors to the US economy.

b) Pass a federal legislature to make it mandatory for all public transport nationwide to run on alternative energy (natural gas to electricity and so on) in a time phased manner.

c) Replicate Gujarat’s Solar model to all other 28 states in India(Gujarat now produces over 20% compared to the country’s total solar energy production)

d) Facilitate investment in energy sector and increase in the share of renewable sources of energy (currently the ratio between Non-renewable to renewable is 88% Vs. 12%) from wind  to biomass to natural gas and eliminate oil based high cost production. With over 225 GW installed capacity (5th largest in the world), India can’t afford to have 32% network losses whereas the world’s standard is at ~15%.

e)  Give clearance to Iran, Pakistan and India gas pipeline

3. Don’t dovetail into the pessimistic measures like the one RBI recently promulgated by putting restrictions on Indian companies buying foreign assets and individuals to repatriate dollar out from India. Instead cut excessive Government spending. It’s a fiscal profligacy to see hefty increase of 18.5% in central Government expenditure in the last budget. To boast liquidity,  recapitalize the banks, cut the CRR, ease out the contentious restrictions on NPA, encourage banks not to look for a short term net profit margin, but improve their risk tolerance level to increase their retail investment portfolios and not just to home, car or similar products. The recent land reform bill is certainly a welcoming sign to move towards a more confiding industrial policy.

4. With Rupee weakling, it will be harder for Indian students to go aboard for higher education. I’m sure US universities will soon feel the pressure but it’s a perfect opportunity for India to increase its education spending from its current level of 3.1% of GDP.  Encourage private investment and implement open window policy on foreign investment in education.  An interesting thought--  Education should always be a federal subject and the States need to execute. So give autonomy to the individual school board in a transparent manner to invite individual (NRI) investment and in the bargain, investors will get a Board seat. This will not only attract investment and will increase private participation, but will stimulate reverse brain drain, increase accountability of the school board’s and will improve quality of education

5. Normalize relations with Pakistan. No country in the world has progressed with tension on its borders. Take the recent example of China & Taiwan. What will it take for China to overrun Taiwan? So, instead of increasing defense spending by over 17% in the last budget,  allow free trade with Pakistan to boost inter dependency between the economies, increase people to people contact by liberalizing the visa regime and take mutually aggressive measures to reduce the trust deficit. All these steps will allow both the countries to reduce their defense spending and free up capital. Few days back a gentleman in NYC told me that India is now the biggest importer of arms. Not sure I should feel proud or be ashamed when majority of our population is deprived from the basic social needs. Why does Scandinavian countries don’t spend much on arms but proudly take the top position in terms GDH (gross domestic happiness ) index? Why was there a need for a European union? We must introspect and leave the baggage of our painful history behind to move towards a healthy future.

6. Encourage capital investment in agricultural sector - Over 60% of our workforce is still dependent on this sector and we even don’t have a robust crop insurance product with our domestic insurance companies? For inclusive growth, we need to move from short term solutions and revenue expenditure to long term capital investment solutions. We must push the momentum for more technology based innovation to improve our current yield which is well below world average and market led intervention to increase its current 4% growth level and to boast exports. A percentage increase in the productivity has a direct bearing on food based inflation.

I’m sure many great Indian minds have many other compelling solutions and but the question is – when do we start the correction process? We don’t need a genius but little political will to execute and our leaders must rise to the occasion to prove their mettle.


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Category Others, Other Articles by - Arup Chakraborty 



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