Noted economist, Arvind Panagariya, has lately in his article in Foreign Policy magazine argued in favour of depreciating Indian currency. In a laudable attempt, he has cited India’s trade imbalance and argued that a weaker rupee will in fact help cut deficit since imported goods and services are bound to become costlier, upon which Indians would shift to domestically produced items. Such arguments may sound positive in an ideal world. In the real world, however, a weakening currency raises many eyebrows, including of foreign investors and rating agencies, and on its face is an indicator that not everything in the economy is sorted.
Even those who are not seasoned economists or politicians can tell why the rupee is falling against US dollar. Outflow of investments from Indian markets, rising interest rate in the US, India’s widening trade deficit on account of rising crude prices in international market are some key reasons behind rupee’s depreciation. And honestly, no one would want a freely falling rupee, not even exporters who gain from it since their goods and services become more competitive in international trade. That the RBI intervenes by way of selling dollars to stem any sharp fall in Indian currency is in itself a manifestation of anxiety and subsequent corrective actions undertaken.
Reality is indeed strikingly in contrast to rhetoric. India has a rising middle class that is buying imported goods- from mobile phones to luxury cars- like never before. Electronics are now at the second place on our imports table only after crude oil. Crude is traded in dollar and there lies no justifiable argument that can establish that a falling rupee is a good phenomenon. Arvind Panagariya’s appreciation of a falling rupee and its positive impact on India’s trade with foreign economies thus sounds unconvincing. And for the ruling dispensation that is on the defensive mode on demonetization ever since the RBI report saying almost all scrapped notes are back into the system is out, finding pluses in a falling rupee can be suicidal.
As if the rupee tumble wasn’t enough in the final months of the BJP-led government, rising oil prices are setting the tone for next general elections. For most Indians, if the price of petrol and diesel has touched historical highs, it is the fault of the government they voted in. A common voter has nothing to do with US sanctions on Iran or supply cuts by OPEC or falling inventories of US shale. But yes, the new voter equipped with a smartphone does know that central and state taxes on petroleum almost double their price in retail market. They also feel the pinch when on account of high transportation costs the prices of vegetables and other essential commodities shoot up.
International economists have repeatedly stressed on the need of a second term for the Modi-led government so that India can realise its true potential and the dream of inclusive development can come true. But for the electorate, any government that cannot rein in petroleum prices and stem currency’s fall isn’t an efficient one. The backward classes are already feeling disenchanted with the government over issues ranging from cow slaughter to reservation, and if the burgeoning middle class also distances itself from PM Modi over rising costs of petrol and other imported goods, the BJP may taste a shock similar to NDA defeat in 2004.
Although the government and party officials are aware of the double-whammy of rising oil prices and falling rupee, the Modi-led cabinet isn’t finding enough elbow room to maneuver and produce desired outcomes. The truth is traditional measures won’t bring about the change needed; it is time to take the unconventional route. It is time that the Indian government makes it clear to the United States that their unilaterally placed sanctions on Iran are damaging to India’s interests; hence we would not abide by them. We import more than 80 percent of crude we need, hence not working actively on such alternates as lithium ion batteries that power vehicles is a policy failure. China is the world leader in lithium batteries and it is high time we take a cue from them.
As far as the falling rupee is concerned we may not be in a position to reverse the trend in the short-run. But since we know it is the declining demand of Indian currency vis-à-vis other currencies that results in its touching new lows with every passing day, we are to work aggressively on Make in India. Even if we leave out crude from our import basket, other items including consumer goods and machinery parts, which can be replaced with domestically produced goods, crave for policymakers attention. And for making Make in India a success, India first needs to shake up its bureaucracy that is riddled with inaction, inefficiency and vested interests.
The nation needs a second phase of reforms and decisive policy actions, thus a second term for BJP remains an indispensable element. But the BJP cannot overlook the fact that since they won a landslide victory in 2014 on the back of tall promises, voters may get disillusioned even on mediocre deliveries; the electorate in fact was looking forward to miracles from the Modi-led cabinet and a non-delivery on this part can be damaging for the party. Criticism of the government on rising price of petroleum products and depreciating Indian rupee can spell anything but a boost for Prime Minister Modi.
No economist can predict where rupee and crude are heading in the near future. If forecasts are anything to go by, crude will inflict more pain on importing countries, and a robust US economy will not allow Asian currencies to rebound. Should the existing conditions continue for 3 months more, the rupee breaching the 80-mark against US dollar and petrol prices touching new records of Rs. 90/ litre cannot be completely ruled out. Slowly but steadily, an anti-Modi wave is picking up, and convincing the electorate that the government has no control over rising petrol prices is becoming even more difficult. Squarely blaming external factors cannot be a defense for long.
It is in the best interest of the BJP to dissolve the Lok Sabha before this wave becomes too prominent and formidable. With Amit Shah as the chief strategist, we can hope that the BJP may consider going for early general elections to not allow opposition build on the momentum. But even this looks doubtful in the wake of legislative assembly elections in the states of Rajasthan, Chhattisgarh, MP, Telangana (assembly dissolved by TRS) and Mizoram later in 2018. The way around is to dissolve, without any further delay, assemblies of first three aforementioned states where BJP is in power, and persuade the election commission to conduct state assemblies and Lok Sabha polls simultaneously.
Reining in petrol price rise and rupee fall isn’t an easy task given the macroeconomic factors involved; betting on early polls can be a game changer.