Last Wednesday, the rupee depreciated to over 68 a dollar; the Reserve Bank of India
(RBI) intervened to help it gain some strength and it closed at 67.35 on Thursday. On Friday morning, however, the rupee slid to 68.01, resuming a weakening trend that started about six months earlier.
Its fall might help, for now, exporters whose import intensity is not high. Demand for price-elastic imported goods might go down, helping bridge the current account deficit. However, it might have an inflationary impact that might warrant higher interest rates.
The immediate trigger for the fall was the rise in crude oil prices
to about $80 a barrel and expectations of a hawkish monetary policy in the America that impelled foreign investors to cut their stakes in Indian bond markets, where yields rose sharply. The underlying concern of slippage in the fiscal and current account deficits, and further rise in oil have contributed.
There is little the government or RBI can do about global oil prices
or US monetary policy. However, the government can cut down on populist giveaways in this election year. Many states have opted for farm loan waivers and like schemes, without corresponding gain in revenues or cut in other administrative expenses. At present, they are assured of compensation from the central government to make good the fall in Goods and Services Tax (GST) collections. This is, however, bound to reflect in central finances.
RBI has the option of floating non-resident bonds as it did a few years before or raise interest rates to stem a further fall of the rupee. I do not think non-resident bonds would be a good idea, as the crisis is not a temporary one as had followed the ‘taper tantrums’ in 2014. It is more of a structural problem.
In the past five years, export growth has been rather discouraging. In 2014-15 and 2015-16, the growth was negative. The government could get away by blaming global growth rates. But, in the past two years, India
has failed to take advantage of the healthy growth in global trade. Export growth, though in positive territory, has been barely around 10 per cent in the best of months.
In recent years, the government has not paid adequate attention to representations from exporters. The GST regime denied exporters the upfront exemption of Integrated GST (IGST) on inputs required for export production. When these were grudgingly restored, the unrealistic conditions imposed severely constrained operational flexibility. Project costs of exporters went up due to denial of IGST exemption on capital goods imported under the Export Promotion Capital Goods scheme. When it was restored reluctantly, the flexibility to fulfil export obligations through deemed export was denied.
On procurement through deemed export, the exporters were initially made to pay GST and claim a refund, rather than take upfront exemption, and subject to unreasonable conditions. The process of refund of GST paid on export goods and on inputs used in export production is complicated. These flaws need to be corrected quickly.