Structural reforms and The Rupee slide
Problem: Rupee depreciation and associated volatility and structural reforms needed to
On 26th of June 2013 Rupee slid to an all-time low of 60.76 against dollar and it would not
surprise many if Rupee crosses the 70 barrier in coming months.
Because of gloomy economic scenario all over the world and an improving economic
situation in US almost every currency has taken a hit and dollar has gained position over
them, but Rupee is amongst the worst hit currencies and has been very volatile not only over
last few days but over a few months. Though it is true that world economic scenario and few
measures by US federal reserves has triggered the slide for rupee but a little longer look over
this issue and we can’t deny the issues within the Indian economy. We will take a quick look
at the issues in our economy and then discuss the structural reform measures available to the
government to make the Rupee more stable.
Issues in Our economy:
High Trade and Current account deficit:
Balance Of Trade (US Billion $)
Balance Of Trade (US
CAD(As % of GDP)
CAD(As % of GDP)
We can see how trade deficit and current account deficit of India has been increasing.India's
trade deficit has reached a low point of $190.91 billion and it has to do with the exports
declining 1.76% compared to last year because of slowdown in all economies of world and
imports rising on account increasing petroleum and bullion imports. India has also reached
all-time low current account deficit(CAD) of 5 per cent of GDP previous fiscal. Because of
high trade deficit and current account deficit we have to buy more of foreign currency and
which ultimately results in reduction of value of Rupee.
Higher Gold and petroleum Imports and high gold prices:
Very high prices for gold have created panic among investors and fearing a bubble there,
investors started moving towards dollar. This demand in dollar is also causing depreciation of
rupee.The two largest items on India's import bill are crude oil followed by gold. We produce
little of crude domestically and virtually no gold. Yet, in the world markets we are third
largest importer of crude and the largest importer of gold. This is the most important reason
of India having very high trade deficit.
Volatile Stock Market:
When Indian economy does well, Foreign investors invest heavily into the stock market for
which they need Rupee and which results in higher demand of Rupee and hence Rupee
In today’s scenario where Indian economy is not doing well and so is most of the world's
economies and this combined with US economy showing signs of recovery, foreign investors
are pulling their money back which has resulted in buying dollars and rupee depreciation.
The dollar is still the safest paper currency in the world! So, there is more demand for dollar
in volatile condition like this. This will add to the rupee depreciation.
When a country experiences high inflation over the years it affects economic growth
negatively, leads to capital outflows and ultimately depreciation of the home currency and
India has been facing a prolonged inflation of around 10 % for more than an year resulting in
worsening of economic prospects, Rupee losing its purchasing power or Rupee depreciation.
We have subsidised all petroleum products and this has led to increase in its consumption
over the years this has meant that renewable source of energy have not been able to find their
feet due to lack of innovation and which has also meant that petroleum imports have been
increasing continuously leading to high CAD and ultimately more demand of foreign
currency and reduction in Rupee value.
Political paralysis: Lack of Reforms
Important policy reforms like Direct tax code (DTC) and Goods and services tax(GST) are
yet to be implemented. A retrospective law like GAAR has already created doubts in the
mind of investors. Measures to cut subsidy have not brought any relief as CAD has continued
to rise. FDI in retail has come with many reservations and government has not been able to
bring consensus on this. We are still apprehensive on opening many sectors for FDI.
Environment clearances for major projects still come very late and bills related to Land
acquisition and mining are yet pending. To add to this black money and corruption
prevalent in Indian economy and all of these have halted flow of FDI into the country.
Inefficient monetary policies:
Today government is trying to reduce gold imports(and hence CAD) by further taxing the
imports but the inherent issue is the fact that people have to save using gold as gold provides
positive real interest after accounting for inflation while real returns via other financial
products are either negative or lesser than Gold.
Higher interest rates brings more investment but because of slowdown RBI had to reduce the
policy rates further affecting flow of money into India and thus putting further pressure on
Structural Reform measures:
We should try to focus on the industries which we are already good in to increase our exports
like IT, Gem processing, pharmaceuticals, agro based industries etc. which will help to
reduce the CAD. At the same time we should try for self-sufficiency and slowly try to make
our manufacturing industry export based.
We already leaders in IT and doing well in Services as a whole. We have a very bright future
in Agro-based industry as we employ half of our population there. Agriculture should be
treated as an industry and govt. should invest more there to bring in another Green revolution
because our yield per hectare is still lesser compared to many developed countries. With
china the biggest food importer, a neighbour of ours, we can leverage this position and our
cheap labour force to further strengthen our exports. This would require modernisation of
agriculture equipment, better storage facilities, and better transport facilities.
As we increase exports our CAD will reduce and hence demand for foreign currency would
reduce which will help to strengthen the Rupee.
Elimination of subsidies:
We should slowly remove the subsidies as it will help reduce fiscal deficit (and hence
improve government savings). Elimination of subsidies on petroleum products would force
the economy to be more fuel-efficient and cut the demand of crude petroleum by favouring
innovations in other sources of energy.Direct cash transfer can be helpful in elimination of
subsidies in phased manner.This will help in reducing our trade deficit. Thus by reducing the
fiscal and trade deficit we will not need to buy more dollars to finance our economy
ultimately strengthening the rupee.
Reduce and stabilise inflation:
We should try to address main reasons related to inflation:
Agriculture: Since India is mostly an agro based country, we should try to increase our
investment, modernize equipment, better storage facility, and more incentives to farmers,
reduce transportation delays, reduce dependence on rain in agriculture sector as rise of food
prices are an important factor in inflation.
Policy: We have a very high dependence on imports for meeting our crude oil needs, and as
crude oil rates increase which also result in inflation in the country, so as discussed in the
above point we should try to reduce our dependency on imports for the energy needs.
Improve Supply of common items for public: We should make more investments in S&M scale
industries, give them more incentives so that we have more of manufacturing industries in
India and supply of common products increase.
Keeping inflation under control will keep the purchasing power of the currency in
control and hence keep the growth outlook positive against other currencies including dollar.
Improving infrastructure in every sphere of Indian economy like better connectivity through
roads and canals, improving the condition of ports, better storage facilities for agricultural
goods will help us reduce the time in the transactions and most importantly attract more
investment in every field of Indian economy through FDIs/FIIs. We should improving
infrastructure for fuel deliveries to power plants to end electricity shortages. We need more
projects like Golden quadrilateral, NSEW corridor and we should also look at the river
connectivity programme which will provide water to the water deficient states and help to
reduce floods in the flood prone areas of the country. Better infrastructure will create a better
environment for investment and hence bringing up the demand of Rupee.
The country cannot rely on foreign institutional investment as
these capital flows are volatile. The long-term solution lies in attracting more permanent
capital in the form of foreign direct investment and in becoming export competitive globally.
The government should consider further liberalisation of FDI norms and allow foreign
investment into sectors like defence, telecom and asset reconstruction, easing foreign
institutional investment limit in debt and issuing government bonds in foreign currencies
and/or rupee bonds offshore. Govt. can also issue sovereign or rupee-denominated bonds for
We should also create a National Investment Board (NIB), having members from all
clearance parties which can be single point of contact for giving all approvals and fastening
the investment processes.
Transparent policies should be there for auction of all the resources like coal and other
natural resources, spectrum etc.
Higher Interest rates:We should set up the interest rates in financial products in such a way that
Better investment environment:
the real rate of returns is more than gold which will eliminate the gold investment and reduce
deficit and also can help in more demand of these products thus increasing the demand of
Better tax policies:GST and DTC implementation critical; practical timelines should be
announced and adhered to
FRBM Act:Government should restructure the act and it along with RBI should strictly adhere
to this which can help to bring the deficit under control.
Faster and single point of approvals for investment projectsincluding environmental
clearances helping in streamlining the investment process in the country.
We should have tax treaties with different countries to reduce tax avoidance cases.
Reduce corruption by legislations like Lokpaland by election reforms in the country.
Govt. should give more powers and autonomy to institutions like CBI and CAG and more
regulators should come in sectors related to natural resources.
The above political reforms will create a better and stable outlook of the Indian government
and India as a stable investment option which ultimately will increase the demand of Rupee.
All the above structural measures political, economic or any other will be helpful in one or
more of the following:1) Project India as a better investment destination thus bringing in more investment to the
country for a long term and hence increasing the Rupee demand.
2) Reduce Fiscal and Current account deficits thus reducing the demand of Dollar.
3) Maintain the Purchasing power of Rupee in comparison to foreign currencies.
Hence all these points ultimately result in strengthening the Rupee against foreign currencies