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/

Thinking Big: Scale, Ownership & Results

Shyam Ponappa / October 06, 2005

We'd do well to borrow from the Dutch model of public-private partnership

If we look at infrastructure systems, we find there are different ways to achieve good results. Today’s mantra is that privatisation makes for good outcomes. Do we really think privatisation can cure all our ills? Or is it just a management and/or financial fad? Let us consider some examples to see the effects of scale and ownership associated with good results.

Their experience suggests that the urge to privatise per se may be misplaced. Their focus is on integrated aims and objectives, with organisation and systems to keep people on track and deliver results, unfettered by ideologies such as private or public ownership, or the curse of fragmented efforts. Holding back in scale is like regressing to the licence-permit raj.

Consider two very different examples, China and the Netherlands. The common features we find are that:

1. Scale is essential for results.

2. Ownership is less relevant than a combination of aims, organisation, and result-oriented execution.

3. Integrated, well-managed systems that reflect reality have good outcomes. Economics, technology and management (organisation, finance, project management) combine to drive results. There is no wishful thinking such as giving away free electricity, which misuses resources and undercuts good economics.

Scale & Effectiveness

For a variety of reasons, we do even large projects in a fragmented way. The national roads project/s, for instance, is awarded in tiny pieces. When the building of the Bangalore-Mysore Highway was announced in the 1990s, the head of a major US engineering-and-construction company in India asked to see the area, as their strengths included highway construction.

His conclusion was that the projects awarded would have to be far larger to justify his company’s participation. The reason: it would cost too much to bring in the heavy equipment required, and then move the machines around for small contracts, idling them between jobs.

China: For scale, ownership, and effectiveness, look at divergent ways the Chinese and the Dutch go about it. China, with its top-down approach and public ownership, has manifest proof of performance in infrastructure. Enough said.

The Dutch experience: What of the Netherlands? Here is a small nation (pop: 16 million), with monumental projects—their dykes and surge barriers, such as the 32-km Afsluitdijk in the north (see http://www.rdij.nl/rdij/ijsselmeergebied/afsluitdijk/index_uk.htm) and the Delta Project in the south (http://en.wikipedia.org/wiki/Delta_Works), are truly noteworthy; they also have excellent infrastructure.

Schiphol airport got 42 million passengers in 2004; Rotterdam port handles over 50 per cent of EU imports. For years, Schiphol has been considered among the best airports, with highly rated facilities. While it does not quite exude the Asian luxe flair of Singapore’s Changi, nor the sleek elegance of Copenhagen’s Kastrup, it is highly functional in a forthright way.

This, combined with Dutch enterprise in running the airline hub for KLM, explains those 42 million passengers who went through Schiphol last year, compared with 30 million for Changi, 37 million for Hong Kong, 38 million for Bangkok, or 37 million for New York’s JFK.

Conclusion I—Ownership is irrelevant

The Schiphol group owns a number of airports in the country and abroad. It is owned by the Dutch government (75.8 per cent), the City of Amsterdam (21.8 per cent), and the City of Rotterdam (2.4 per cent). State ownership has been an oft-debated-but-not-yet-resolved feature since the 1990s.

Conclusion II—Grassroots collaboration around water

The Netherlands is impressive for its sheer collaborative organisation, quite different from a top-down approach. This began almost a thousand years ago, with their water management. Their district water boards are like local councils. Dating from the 12th century, they are among the world’s oldest-functioning democratic entities.

The Dutch treat water management as a complex issue, recognising that many aspects of life have an inseparable water component. Therefore, public and private collaboration enables people to live with water, rather than to fight it. By building a system with zero tolerance, issues are resolved within the system without the risk of personality (or “caste”, however you describe it, or whatever other label you substitute for it) conflicts.

Conclusion III—Unitary organisation

A single ministry of transport, public works, and water management covers shipping, rail, civil aviation, as well as roads and all aspects of water usage: drinking water, irrigation, inland waterways and ports. Another surprising fact: there were 2,700 water boards in 1940; these have been streamlined down to 37.

Their pragmatism helps. Accepting that people will look for free rides on collective goods, this bastion of individual freedom uses systems with tough penalties to ensure a public-private partnership to sustain collective goods, and resolve issues in the public interest.

Works Councils—‘The Reformation’ for Employees

Their unique concept of “works councils” is the collaborative approach extended to employee organisations. The legislation from the 1970s is a prime example of their ability to build institutions to suit evolving needs.

The works council is a body open to all employees in a company. It must be consulted by the board before significant decisions, and it can go to court. Resolution and convergence are aided by the practice of open debate and consensus before decision making, known as the Polder Model (a polder being a piece of reclaimed land surrounded by water and protected by dykes, and all residents being stakeholders).

The Dutch themselves sometimes deride their slow processes, but from a management perspective, this is an organiser’s heaven. Their institutions help people agree on aims, commit themselves to agreements, and maintain and adapt the rules over time and to changing circumstances.

Summing up—Organise for Results

The fact is that in both China (despite its power shortages) and the Netherlands, different forms of effective organisation with public ownership or public-private partnerships operate on a scale that produces the bijli-sadak-pani paradise we seek.

We cannot transplant Polder Politics to India any more than we can transplant China’s monolithic pursuit of infrastructure. But we can learn from them, just as others have applied elements of our successes (e.g. handicrafts organisations in Bangladesh and Thailand, or Air-India’s early training to Singapore Airlines).

Of particular relevance to us is scale independent of ownership, with systematic organisation, including public-private partnerships. This should help us build systems that work and endure, bringing order to our higgledy-piggledy progression.

It comes down to the quality of results, i.e. like Deng Xiaoping’s cat, it must catch mice.


Shyam Ponappa