Rupee Was Bound To Fall When dithering government meets activist courts, it spells trouble for the economy By Mukul Rohatgi The Indian rupee has been driven to a new low of Rs 65 to a dollar, largely by the uncontrolled current account deficit and the decline in economic growth. RBI and the finance ministry are now running helterskelter. But their attempts at controlling the exchange rate appear to be measures that treat the symptoms rather than the disease. Government’s knee-jerk measures included restricting what individuals can spend outside the country from $2,00,000 a year to $75,000 a year. As stock markets reacted adversely the following day, government said don’t panic! The rupee’s recent decline might appear sudden but it hasn’t really come as a surprise to keen observers. This crisis has been building up for a long time. For years, successive governments have relied on capital inflows to balance the CAD and support the rupee. In the past, fortunately, the capital has come in. During 2003-08, capital inflows averaging $45 billion per year easily wiped out the up to $15 billion CAD and exerted upward pressure on the rupee. But they have dried up since then, and the government is now appearing powerless to rein in the CAD to its target of $70 billion for FY14. The global economic crisis hasn’t helped. In fact, the Indian economy has managed to hit the perfect storm: the government has been twiddling its thumbs, so the courts have shown an unprecedented inclination towards judicial activism. While dithering on matters of economic policy, government has chosen to focus on unaffordable doles and subsidies. The latest in that trend is the rather ambitious food security Bill. Its cost is expected to be in excess of Rs 1,00,000 crore. God alone knows if the intended benefits will actually reach those for whom they are intended, as the malfunctioning of the PDS scheme is well known. Meanwhile, the prolonged regulatory process of environmental clearances and the difficulties in land acquisition have made industry rethink new projects. The economy has been drifting directionless, with many delays in much needed economic reforms and without incentives for FDI. Largely compelled by government lethargy, the Supreme Court has been intervening in policymaking. This has resulted in further regulatory uncertainties for investors. Sectors ranging from telecom and mining to pharma and real estate have been left shaken. In the coal sector, India has some of the largest reserves in the world, of around 300 billion tonnes. Yet, it’s expected to import 82 million tonnes of coal in FY14. With an average price of $100/t, the bill will total to around $8 billion. It was with the very aim of tackling such shortages that successive governments had chosen the policy of captive coal block allocations, instead of taking the auction route. With Coalgate simmering inside SC, and outside, it’s now unlikely that coal production will rise in the near future as both government and investors will dither in taking initiatives. Why would an investor choose to develop a captive coal block if the court or the government is likely to de-allocate the same? And why would someone develop any power intensive project associated with a coal block? In the case of natural gas, not only is the KG-D6 basin producing only a fraction of the projections, the matter of pricing this gas has also landed in SC now. Even worse is the curious case of iron ore mining. SC had imposed a prolonged ban on mining in Karnataka and has now imposed one in Goa, in response to PILs alleging illegal mining. It has also imposed restrictions on exports. The loss in potential export earnings since 2010-11 is estimated as being at least $17.5 billion. This apart, thousands have been rendered jobless. As well intentioned as the actions of SC may be, industry and economy now exist in a state of constant uncertainty, which also demands from them lots of patience as a final resolution of PILs can take years. What a pity that a country with the world’s largest resources of iron ore has now turned into a net importer of iron ore! Even the star of India’s rise in the last decade, the telecom industry, is now in doldrums on account of the double whammy of ever-changing regulations and consequent SC actions. Telecom received cumulative FDI of Rs 58,782 crore in the last 13 years, which accounted for 7% of the total FDI inflows into the country. FDI in the entire telecom sector, which includes radio paging, cellular mobile and basic telephone services, plunged 81.64% in 2012-13 to Rs 1,654 crore. Since SC’s ‘2G scam’ decision, only a very brave foreign investor would venture to put his foot into what could be a legal landmine. Numerous road projects of NHAI have also been stuck for years for want of environmental clearances. In December 2012, GMR Infrastructure terminated a concession agreement with NHAI for a 555-km Kishangarh-Udaipur-Ahmedabad project due to delays in environmental clearances. Following this, NHAI had to move SC to delink environmental and forest clearances for its road projects. We can go on citing instances, as industry after industry in India is reeling under the vicious circle of government inaction (or corruption) and unprecedented judicial activism. Unless controlled, this cycle could spin into complete doom. Hopeless jerks!!!
Posted on: Mon, 26 Aug 2013 18:37:28 +0000
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