Aim Long Term For A Strong Currency

 

Strong currencies reflect strong economies.

Shyam Ponappa   |   December 3, 2020

Is a strong currency not desirable for India? There seems to be broad acceptance that a declining rupee is essential for exports. Is this true long term that it is in India’s interest to have a currency that is consistently losing value? Consider this in the context of our long-term interests.

As exports become more expensive with a stronger currency, sectors relying on wage-rate arbitrage, such as Information Technology Enabled Services and labour-intensive manufacturing, will suffer reduced margins, or may even become unviable. Such activities ideally need policy support for transition where feasible to more productive alternatives over a reasonable period. These could be for improvements of process and product design, with automation or computer aided processes, as in jewellery, or skills for a different activity. For high-value products, enhanced quality may be needed to deliver perceived value.

The Indian rupee has depreciated against the US Dollar continuously on average from 1980, except for 1992-95 when it traded between Rs 30-33 to the dollar, and 2003-2011 when it was Rs 44-48. This reflects the relative strength of the economies and market sentiments, with the US having been a more productive economy, with lower inflation.

Excluding countries dependent entirely on natural resource endowments, such as oil, or attributes such as being a tax haven, strong currencies reflect strong economies. Examples are the US dollar, euro, British pound, Japanese yen, Swiss franc, Chinese yuan, and Singapore dollar. The relative weakness of economies is likewise reflected in weak and depreciating currencies. High inflation or internal contention and turmoil undermine the strength of an economy, and the currency usually depreciates.

The advantages of a strong and stable currency are that buying power for imports is protected. For India, this is important for containing expenditure for oil and other energy imports, defence procurement, gold, electronics, withdrawals by foreign portfolio investors, external borrowing repayments, imports of raw materials and intermediates used in manufacturing for domestic markets and exports, and for travel. For a given set of items of expenditure, a strong currency gives consumers more disposable income because of reduced costs, and enterprises have higher surpluses from better profit margins.

In the short run, constraints on movement and economic activity during the Covid-19 pandemic led to increasing inflation in food, gold, transport (including higher taxes on petrol, diesel and alcohol), and com­munication.¹ Some analysts suggest an overweight food component may overestimate inflation. The problem arises if there is a stock policy response of raising interest rates now, whereas our circumstances require a facilitation of flows, and not restraints. This also applies to the level of contention through all government action, as against focus on the economy and security/defence to get us through these times. We need our government to focus on facilitation, not contention. Contention reduces productivity, as do all impediments and shortcomings in infrastructure.

Higher Productivity = Higher Growth = Stronger Currency

Longer term, after recovery, is the declining rupee a foregone conclusion? Yes, if we continue with business as usual. Instead, if we work systematically towards focussed changes for growth through productivity, while dealing with emerging market realities of agricultural shocks and wage-push inflation, this could help build a solid recovery and better long-term prospects. Radical improvement in infrastructure will probably enable breakthroughs in productivity. Equally radical changes in organising human resources, and markets (i.e. second-order infrastructure) could further accelerate growth. However, these require choosing appropriate objectives, disciplined teamwork in design and execution, and no disruptive political developments. If we are successful, we will grow faster and the rupee will strengthen.

Infrastructure And The Currency

The rupee will continue to depreciate unless we become more productive and grow faster. India is lagging so badly even among emerging markets that we have to think of doing things differently. 

Krishna Kant, 2020:

https://www.business-standard.com/article/economy-policy/india-s-10-year-growth-one-of-the-biggest-laggards-in-asia-em-peers-120113001325_1.html). 

Impro­ved infrastructure is a way to achieve better productivity and higher productivity and growth.Some of our difficulties stem from efforts to contain the pandemic, but the obstacles of poor logistics, power, communications, water and sanitation, have to be surmounted for growth. These services will also enable pursuing higher standards and skills for manufacturing, processes, and emissions control. Poor services and standards are major deterrents to transnationals looking to set up in India or to relocate here.² For pharmaceuticals, the government has announced a policy for bulk drug parks and for domestic manufacturing of import-dependent APIs. While additional steps such as anti-dumping duties and targeted manufacturing incentives may be needed, similar systemic initiatives are required for industries such as chemicals, machinery, automotive components, and electronics. All of them need smooth inward and outward logistics for good results.

Illustration: Binay Sinha

In addition, another serious deterrent for transnationals is the unpredictability of policies, and the hurdles encountered by large international investors in India, for example, Vodafone, Amazon, Walmart, Cairn, major automobile manufacturers, and so on, including in resolving contracts and disputes.

Targetted steps are required on the lines suggested in the previous citation and in the next,³ such as global anchor investors for priority industries, in the way that Suzuki was to automobile manufacturing, with nodal government coordination, not harassed and impeded, but nurtured to ensure success. Such initiatives need to be explored and evaluated, and if feasible implemented for select industries. Exports cannot be successful without imports at low tariffs, because of global value chains. There is also the issue of finance including scale, and finally, purchase orders, especially for manufactured products. Government’s enthusiasm for start-ups is not sustained at the next phase with purchase orders and funding for commercial scale, once start-ups are past venture rounds. This leaves promising manufacturing enterprises floundering, and unable to scale up.

Export capabilities need to be developed and built on scale, adapting policies in other emerging economies such as Bangladesh and Vietnam. While Vietnam has the advantage of proximity to China, its steps to build capacity need study and consideration, as also for Bangladesh. We should aim to build India’s export capabilities over time, to contribute to a strong economy and more stable currency.

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Shyam dot Ponappa at gmail dot com

1: a) Remya Nair, 2020: https://theprint.in/economy/its-not-just-food-prices-covid-pandemic-has-also-helped-push-inflation-to-7-6-in-india/546473/

b): Dharmakirti Joshi & Adish Varma, 2020: https://www.crisil.com/content/dam/crisil/our-analysis/views-and-commentaries/quickonomics/counterintuit­ive-inflation.pdf

2: Hetal Gandhi & Isha Chaudhary, 2020: https://timesofindia.indiatimes.com/blogs/toi-edit-page/factory-of-the-world-how-india-can-be-a-plus-one-destination-while-reducing-dependence-on-china/

3: Ajay Srivastava, 2020: https://timesofindia.indiatimes.com/blogs/toi-edit-page/from-start-to-port-a-nine-steps-framework-for-making-india-a-great-investment-destination/

Unlock = Open, not Choked!

Don't let a virus stall initiatives and weaken the economy.

Shyam Ponappa  |  June 4, 2020

A recent column in this newspaper juxtaposed the way smart, experienced people have high expectations, only to be disappointed by our weak state’s predictable failures (Strong expectations from a weak state, May 25). Is there justification for any optimism, or at least hope? Here is an exploration of reasons for persisting in the face of continued odds, and pushing for economic recovery. Why should one persist with constructive efforts? Because a rising tide lifts all boats, and one’s contribution can affect outcomes. And because attempts at partial opening will not suffice.

There could be new economic opportunities by way of capacity, logistics or markets, or a wider array of sustainable consumer choices, whether for manufactured goods, services, or activities. Think back, and surely you have witnessed government action extend beyond the grind of just keeping everything going.

One instance of major change that affected the economy was in 1990, when the secretary of the Department of Electronics N Vittal worked in close consultation with industry. This resulted in path-breaking reforms, such as the setting up of “high-speed” links (of a mere 64 kilobits per second at the time) between Information Technology (IT) companies in Indian software technology parks and their international clients, and various tax incentives that followed much later. The offshore services industry gathered strength, and later expanded to cover IT-enabled services with call centres and business processing, extending to knowledge processing.

Likewise, telecommunications reforms began in 1990, when prime minister Chandra Shekhar led a shaky government for a brief period. The telecommunications ministry was looking for a private sector consultant. Through an invisible network, an investment banker who had been a management consultant in San Francisco was asked to look into telecommunications reforms. This led to the setting up of the Athreya Committee and its recommendations: On separating policy-making from operations, corporatising the Mahanagar Telephone Nigam as an operating company for Delhi and Mumbai, and Bharat Sanchar Nigam for the rest, while recommending access to private sector operators. All this was not smooth and painless, and took years, but did happen eventually, although the separation remains untidy.

By 1998, telecommunications operators were in a situation similar to the predicament some months ago, of weak revenues and a debt overhang, with some differences. There were many operators with heavy debt because of government charges and limited revenue generation capacity, because of smaller networks and less clients. This is the “winners’ curse” of auctions, when exorbitant amounts are paid to government for auctions, with nothing left for building and running networks and enterprises to generate the revenues to justify those payments. There are exceptions, as in the social democrat Nordic states, or state-controlled allocations as in China, or in Japan for a number of years.

Key people in government grasped this. The Prime Minister’s Office consulted with industry and external consultants, and took action. This resulted in the New Telecom Policy 1999 (NTP-99), whereby the major change was converting up-front licence fees to revenue sharing, although the policy was uneven because of cherry-picked recommendations. Initially, the government set the percentage share too high. It took years to reduce and trigger rapid growth. This came about through reduced government charges, calling party pays (which cut call costs), and a price war, brought on by the stealth entry of a new technology (CDMA) network, which the authorities allowed despite incumbent protests. Mobile services then grew exponentially from 2004, until the 2G spectrum scam surfaced in 2011.

A stream of articles advocated extending revenue-sharing to spectrum fees as for licence fees, and for shared infrastructure including spectrum. In 2011, a senior official in the DoT was sufficiently impressed to explore the possibility of evaluating alternatives using simulation models. But the 2G scam broke after the first few meetings of DoT officials, and this process was aborted. Instead of major changes based on simulations, a mere statement of intent about spectrum pooling and sharing made it into NTP-2012.

There were other incredible developments, although with no apparent results (yet). For instance, in 2013, a non-governmental organisation, the Centre for Internet and Society in Bengaluru, arranged for the former chief technology officer of the US Federal Communications Commission, Jon Peha, who had pioneered changes in America, to meet with top officials of the DoT, the Telecom Regulatory Authority of India, and some IIT professors. The latter conducted successful trials using TV White Space spectrum for the Ministry of Electronics and Information Technology. The details are many, but the point is that constructive advocacy can have an impact.

Reviving the Economy Now

We are in a difficult situation, with our economy and society battered by the lockdown and much else. We will need to do everything possible to recover, and it will take years. Attempts at partial opening will not suffice. Systemic revival calls for unrestricted flows of money, people, activity, and goods and services.

While reactivating the economy, we will need to be cautious through the pandemic (through “social distancing”, using masks to reduce infection, avoiding close contact with outsiders, and so on). But survivors have to live with this virus, as with other strains of viruses and bacteria, and other threats.

Consider traffic accidents, which average over 145,000 deaths annually (data 2013-2017: https://ncrb.gov.in/sites/default/files/chapter-1A-traffic-accidents-2017_0.pdf).  Extrapolating, this means a million fatalities in seven years, yet we don’t shut down all traffic. By comparison, Covid-19 had about 6,000 fatalities since January.

A proportion of the medical fraternity opines that (a) there is community spread of Covid-19, and (b) with many cases milder than the expected severity, that most patients need home care rather than hospitalisation. If these continue, our health systems will not be overwhelmed with severe cases. Also, so far, India has had a relatively low fatality rate of 2.8 per cent (see chart).

Source: Data - https://ourworldindata.org/coronavirus

As long as these factors hold, our priority has to be unfettered economic activity. Countries with higher fatality rates, including Sweden, China, Japan and Germany in the chart, have open economic activity (with tremendous productivity). We will weaken and our problems will escalate if we are held back.

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Shyam (no space) Ponappa at gmail dot com