Addressing the symptoms and not the disease: Why arresting the Rupee’s fall is impossible.

Trying to control the falling Rupee by increasing duty on imports, raising FDI limit on certain sectors, removing restrictions on FDI in retail will not only fail, it is not the intention of this government for these measures to work in the first place. The situation is merely being used to push through reforms that benefit foreign investors such easing of conditions such local sourcing on the controversial FDI in retail.

The reason why the Rupee is falling is because India’s imports far exceed exports, Current Account Deficit (CAD) which the Finance minister keeps referring to is sky high, economic growth is slowing and unemployment increasing. If foreign capital stops investing in India there would be a serious problem as we won't be able to pay for imports that we need. Why are our imports so high? Can we not export more to stabilize the situation? Is there anything the government can do? These are obvious questions with even more obvious answers. 

Let’s look at India’s top imports: Crude oil and Gold. In terms of deficit, Crude oil accounts for about $100 billion in net deficit and Gold for about $54 billion. We are not an oil-rich nation so yes we cannot do much about reducing oil import, nor are we trying since our current economic model encourages us to buy cars which need oil to run. But I do not wish to debate the economic model here. The neoliberal advocates of consumption driven growth can rest peacefully. But gold? Why do we need so much gold? Does it feed people? Does it build houses? Well, not really. I would be quite interested to hear the argument about how necessary Gold is for survival or quality of life for that matter.

Incidentally, Mr. Ahluwalia (Chairman of the planning commission) and Mr. Chidambaram (Finance Minister) both agree with me on this one and have appealed to the public to stop buying Gold. With all due respect sirs, I have no sympathy for your cause. You raise import duties which you know will only encourage smuggling, you ‘appeal’ to people which isn’t what free market is about and you find fault with the RBI. People should be able to freely buy what they want right and the 'invisible hand' should save us all? So why are you ‘telling’ consumers what to buy?

I hope everyone sees who buys Gold. Not the one who cannot put two meals together. It is the wealthy and for the record I have nothing against wealthy. But Mr. Ahluwalia and Mr. Chidambaram, when you have created an economy with huge amount of black money, with massive disparity, with a super rich club that is growing every day, what exactly do think these rich people are going to do? Of course, they will buy gold and that is what they are doing. Don’t complain about the consequences of your own policies sir, please own up. 

In an economy that was actually making people rich because of real growth this would not be a problem. Innovation, better educated workforce, better infrastructure etc. would have ensured that exports rise as rapidly as imports. But alas, government of India chose a shortcut method. Even now, they cannot seem to see the connection between a well educated population, good administration, well planned cities and the economy. All I see in newspapers is coverage about what the RBI will do, how will markets react, will growth be 6.1 to 6.3? I hope my fellow countrymen see that it does not matter what the RBI does if we as a country cannot innovate, if our universities produce graduates that are not employable, if the cities keep growing haphazardly and our economy is fundamentally weak as a result. If the government had played its role in redistribution of wealth, the super rich club may have been smaller and instead we would have a country buzzing with entrepreneurship, with small and medium enterprises, with investors investing in new startups rather than this mindless quest for gold.

But Mr. Chidambaram, you only harp about economics. You have forgotten that factors such as clean administration, education, political leadership are necessary for an economy to do well. Otherwise, the FII’s have nothing to invest in no matter how liberal you make the economy. I write this from Canada. I benefited from liberalization which enabled my parents to take out a loan to send me abroad to study, but I feel we missed an opportunity in the last decade. We got too focussed on enabling middle class kids to go abroad, get loans to study at expensive business schools and establishing a few good elite institutions in India but forgot that catering to a select part of the population isn't enough to achieve growth. Now we are stuck with few rich people buying gold and imported cars while the pace of innovation is nowhere near what a huge country like India needs. Here in Canada, which has a very conservative government, when the government talks of stimulus, it talks of training youth, helping startups and small businesses, and yes natural resource development. But in India, which has so many youth, there is no focus on the first two. All I see coming out of Cabinet meetings (in the papers) is- let’s mine more coal, let’s get rid of the ministry of environment, let’s get more FIIs and Walmart. Is that all our intellectually bankrupt political leaders, economists and bureaucrats have for means of promoting growth? Is there even one substantial program for entrepreneurs or new industry?

A few days ago the Prime Minister met with 'top industry leaders' for 'ideas' on how to accelerate the economy. Has he ever bothered to connect with youth for ideas? Does the government spend even half as much time speaking about improving education as it does about increasing FDI? In the past 5 years FDI limits have gone up but how much has education expenditure changed? It has gone up from 3.2 to 3.3% of GDP (2010 to 2011). Is that enough to accelerate economic growth to 8%? Oh, sorry I forgot our leaders haven’t yet figured the correlation between better skills and better economy, but I hope they do soon because whether it is a socialist or a free market economy, without education and infrastructure neither will work.

As the Rupee plunges even more, I hope there will be a political war cry to change something fundamental about how the country is being governed. I will give our PM one simple idea, remove black money from Real Estate, mining and all the notorious sectors where there is more illegal than legal cash changing hands and your problem of the Rupee will be solved. Otherwise, raising duty on imported cars and watches aren't going to make a spec of a difference.

What I write is based on newspaper headlines, obvious statistics and what I hear from friends and relatives. I do not claim to know the ground situation but I feel that sometimes being outside can give you some perspective and therefore I have written this piece.