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ECONOMY,
EXCHANGE RATE
The
Gloom Could Get Gloomier
On
a more fundamental note, India is a net importer of products, which means
it pays more foreign currency for its imports than it earns through exports.
The gap has to be filled by investment or assistance inflows. In 1999-2000,
inflows totalled $10 billion. In fact, between November 1999 and March
this year, the RBI bought $3.5 billion to contain any appreciation in
the rupee. Not only did that fill up foreign currency reserves, it also
helped keep interest rates and inflation low through the financial year.
This year,
however, the inflows-both foreign direct investment and foreign institutional
investment -have been lower than last year. Says Ridham Desai, head of
research at JM Morgan Stanley: "India does not operate in isolation.
It is all about relative valuation at the end of the day. We do feel the
tremors of what is happening around us." In other words, the prospects
of a pick up in FII inflows (around $200 million since April this year)
aren't clear. And with lacklustre infrastructure reforms, delays in privatisation
and red tape there is little hope for a major fillip in FDI.
Adding gloom
is a rising oil and fertiliser imports bill- which is expected to climb
to $18.5 billion in 2000-2001 from $12 billion in 1999-2000. Uday Mulgaokar,
analyst with Kotak Mahindra Capital, believes these factors will weigh
on the future movement of the rupee: "We haven't yet seen the end.
The rupee's depreciation has still to run some distance. You could be
looking at a further 4 per cent adjustment in the next six to eight months."
But it is
not that the RBI has exhausted its armoury. Remember, it took the central
bank just 10 trading days to pull the rupee back to 38.2 a dollar from
40.08 in January 1998. The question though is whether it is required.
Conventional wisdom states that a depreciating rupee could hurt the economy.
But in the emerging global scenario, global competitiveness cannot be
achieved without a competitive exchange rate. Besides, this is not 1991
when India's forex reserves were in mere millions. It now has an over
$35 billion war-chest to meet any run on the rupee.
What is
required instead is better management of the internal economy. For instance,
the oil price-led inflation-the biggest problem, really-could be corrected
by adjusting excise (a proposal apparently already being considered).
The Government could also use the crisis-a phrase used to describe the
problem at last week's cabinet meeting-to correct fundamental fiscal flaws
and push through reforms. While FDI via privatisation may take time, the
opening up of the insurance and telecom sectors are great beacons of investment
that the Government needs to use. There are others too. DSP Merill Lynch
Chairman Hemendra Kothari says there is a huge potential in private equity
also. "There has never been so much attention on India. We must capitalise
on it." That is, if the Government is willing to walk its talk about
being a global player.
Top
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The
Government should target inflation and leave the exchange rate to the
market, says P. Chidambaram in 
Not
just Nayla, all villages can be easily e-connected, says INDIA TODAY Associate
Editor V. Shankar Aiyar in 
