Background
Of late number of jokes is floating around the web
on the falling Indian Rupee. One of them is this –
Our nation’s Prime Minister heads India Cricket
Team. He was asked what he will like – To bat or to bowl. He said “None”. But
he said he liked the process of the “Toss”. He was asked - why? He said this is
the only time the rupee (the coin) will go up. This is a joke. But there is a
reality as well. Does the rupee face a bottomless pit? Where will it go? Why?
The Reasons:
All of you should note that Rupee started at 1 Rs =
1 USD in 1947. Today it is nearing 1USD = Rs.70 – Why?
Rupees Vs Dollar
The rate for a currency is determined by the demand
and supply, the rate of inflation in a country and so on. Why India’s currency
went up briefly in the period 2003-2005, stabilized during the phase 2003-2011
and why suddenly falling drastically.
The USA connection
In the 1970’s, the Fed Governor (Equivalent of RBI
Governor) of USA said, ‘It is our currency (US Dollar) and your problem’, when
he was asked about the newly printed US Dollar spreading to other parts of the
world.
Since 2008, to get out of sub prime/property driven
economic crisis, USA started pumping money by buying bonds every month – today
at 85 Billion USD per month. According to Keynes, the greatest recession
economy specialist, an injection of 1 USD printed note can create 3.50 USD in
the market. He was justifying deficit financing for the world war shattered
economies.
These days we prefer deficit financing for
escalating the animal sprits of consumerism – the aggregate consumer demand is
the GDP – we are measuring GDP in terms of consumerism.
Here is this story from USA. One of the rich
tourists walks into a tourist island in USA. The whole country was in
recession, there was gloomy outlook, the town was deserted. The tourist went to
a hotel. He deposited USD 100 note at the counter. He said he will go up to the
fourth floor room and see, if he likes it, he will take it. If he does not like
he will go back. He went upstairs.
During this time the hotel manager used the currency
of 100 USD for paying the meat supplier. The meat supplier in turn used this
100 USD to pay his dues to energy supplier. The energy supplier in turn used
this 100 USD note to pay back his dues to the Hotel for the rent he owed.
Now hotel owner got back the same 100 USD. Meanwhile
the tourist came back to the cashier and said he did not like the room, got
back his 100 USD note and walked out.
Nothing changed – but this 100 USD note discharged
the debts of three stakeholders and everyone’s credit limit got restored.
Everyone was happy.
This is how business was done in the various so
called, “developed nations”.
The nations confused between motional progresses.
A Rocking Horse moves but does not progress. Nations
thought the debt movements were progress, but they were only motions. Net
result was a economic chaos. USA had to bail out their economy. They started
printing USD Dollars. US Dollar once was linked to gold. But today 1 USD can
buy only 0.02 gram gold.
When they printed money and pumped into the market,
(even today @ 85 billion USD/month) the market was flooded with currency, the
people’s pockets were filled with money to bail them out. When this money
circulation was more, USD started looking for higher returns outside. The
excess money printed, instead of just creating jobs in USA market, flowed out
to emerging markets like India. This created an illusion of affordability to
Indians on various foreign luxury goods.
The US Dollar started flowing into India chasing –
stocks, bonds, properties and Indian currencies. Our prices started going up.
We were living in the illusory world (The Maya) of rising property prices, strong
Rupee and we thought we were growing – but we were only moving not progressing.
Today, USA started signs of growing, their national
debts crossed 100% of GDP. They are planning to stop the US Dollar printing
& pumping money @ 85 billion USD per month. (Since 2009 this was flowing,
now the tap is going to be closed?)
Since USA is showing signs of recovery, their
domestic money pumping tap getting closed, the US Dollar already came to
emerging markets started a reverse flow. The result – Carnage in the currency
market of emerging markets.
India leading the pack with 20% drop (since 2013
beginning), Brazil 15%, Indonesia 12%-13% , Philippines 7%-8%, Vietnam by 10%
and so on. India led the pack – why was it severe on India? Some currencies
like that of small countries South Korea & Taiwan – appreciated, why? Are
we so bad?
Balance of Trade
deficit
That brings us to this Balance of Trade. The
difference between trade export & import is the trade surplus/deficit.
South Korea, China, Taiwan are all trade surplus countries. In spite of good
software exports we have a trade deficit of nearly 120 billion USD. It was as
high as 6% of GDP last year. Up to 2% of GDP is reasonable – we are a 1.80
Trillion USD economy. 2% 1800 Billion USD is about 36 to 40 Billion USD. Still 70 to 80 Billion USD is an excess trade
deficit.
Our deficits are high since energy (Oil) & Gold
constitutes the major source. India has sentimental value attached to gold. We
import 900 tones every year, the largest in the world.
Also post 1991, in the name of reforms. We preferred
foreign goods. Owning a foreign good is considered as a status. On the cheap
goods front, China destroyed our manufacturing sector. The share of
manufacturing sector on GDP declined heavily. 80% of populations (Rural
Towns/Villages) give 20% of GDP while 20% populations (Cities) give 80% of GDP
(Service sector).
By skipping manufacturing, we migrated to service
sector, preferring foreign manufactured goods. Net result – imports increased –
or foreign owned goods were manufactured in India.
Oil price crossed 110 USD per barrel, gold going up,
free flow of imports caused huge Trade deficits on India. How did we finance
these deficits – through short term Forex sources – hot money. This financing
of trade deficits with hot money create havoc when the foreign money is
withdraw from India – Result: Nose
diving Rupee.
Foreign Investors
Losing faith on India policy paralysis
Government policy paralysis has killed the
confidence of foreigners on India. We created retrospective tax amendments on
foreign investment two years back. Many FDI projects have pulled off from
India.
There are many goof ups on FDI policy. Like opening
up retail to foreign companies, many goof ups have happened. FDI’s are supposed
to be welcome on area where we have no expertise. Take for example real estate
sector FDI.
Private Equity friends have to leave shore now -
Private Equity investments drove in hordes after opening of
Foreign Direct Investment (FDI) in real estate sector in the year 2005.The high
structural growth story of India attracted a lot of private equity
Capital the in real estate industry during the year
2005-2012, with major inflows coming in the Year 2007-09. Close to $US 20 billion
of inflow came to into real estate & construction business, which has put
the prices on steroids.
However, with the average life of private equity fund being around
7-8 years, the Year 2013 marks the beginning of private equity returning back
to shores. The imperative is to see down inventory and return the capital back
to investors.
During our
discussion with RE industry veterans it emerged that most of Real Estate funds
have been deployed at an average $/Re parity of 45 while the exit after seven
years is likely to happen at more than $/Re 60 , a loss of around 30% in
current itself. The current situation indicates losses for the fund shareholder
at various ends like depreciation of rupee with conversion of Forex, slow down
of sales in residential projects, steep losses in commercial development
ventures and impediments in exits of projects to others. The exit of private
equity, a fair weather friend of developer, is going to create distress sale
situation in real estate industry, shortly. This would lead to further
depressing of the Indian Rupee.
POPULIST SCHEMES
As we near
elections, we have populist schemes – Food Security Bill, the latest-instead of
creating Jobs, we start feeding pulses and grains. The Onions and vegetables
are not affordable, we offer Rice/Wheat at Rs.2 & Rs.3 per Kilo.
We have a
new situation – low growth, High inflation, High deficits – perfect recipe for
a bad economy.
Who will bet on India now?
The so
called ‘inclusive theory’ pundits castigate the ‘growth theory’ guys as
ruthless capitalists. We need compassionate capitalists – the one who generates
wealth in a fair way and distributes the same fairly to all stakeholders. You
can not steal from one stakeholder and do charity to the other. We need growth
but with self respect to all. ‘If you feed fish for a day to a villager – it is
charity. But if you teach them how to fish – it is empowerment’
We need
empowerment and not charity. The populist schemes should create a sustainable
living for people than making them as a beggar and a Loyal Vote Bank.
Can we not
do a SWOT (Strength, Weakness, Opportunity & Threat) Analysis of each
village and enable each village to make a living out of their strengths? Can
the district collectors facilitate the realization of strength of each village
by the village councils? It is empowerment.
But we are
far away from this. These populist schemes have promoted rating agencies to
caution on India.
Result – the investors are fleeing from India.
Where do we go?
We may
reach 70-75 Rupees levels. In the short term, we have to
accept low/moderate growth rates, cut down our illusory ambitions, learn to
accept Indian products.
The RBI
and government continue to fight the rupee with various measures such as
sovereign wealth funds (SWFs) would be allowed to invest in tax-free bonds
floated by state-run infrastructure finance companies, public sector oil
companies would be permitted to raise addition funds through external
commercial borrowings (ECBs) and trade finance. The RBI has also liberalized
deposit schemes for non-resident Indians, lowered over seas remittance by
locals to $ 75000 a year from $ 200000 and prohibited investment in various
overseas properties by resident Indians.
Medium Term
Structural reforms which may be politically
difficult to achieve – such as fuel subsidy reforms – are being under taken,
and these should help to shore up public finances over the medium-term,
potentially supporting domestic savings and, ultimately reducing external
deficits. The rating Agency S&P has cited that recent measures announced by
the government to restrict capital outflow have also increased uncertainties
among investors. It has also cited that high fiscal deficits and a heavy
government debt burden remain the most significant constraints on sovereign
rating on India. According to Moody’s, flows are unlikely to accelerate unless
growth outlook improves and Fiscal policy is the weakest aspect of Indian
economy.
Around 558 tonnes of gold is held by the RBI, making
it the 11th largest official owner of gold in the world, according
to data from the world Gold Council. Gold is also held by households and
individuals, in their homes or bank vaults, and by Indian temples, which have
historically received gold bars, coins and even jewelry as donations from
patrons. Indians attach sentimental value to gold and not just for investment
to hedge against inflation. India’s consumption this year is expected to be
lower than last year’s 860 tonnes as the government is trying to curb imports
and reduce its trade deficit. India hiked import duty on gold for a third time
in August 2013 to 10 percent. In 2009 RBI purchased 200 tonnes of gold from the
International Monetary Fund (IMF) at an estimated price of around $ 6.70
billion, under the IMF’s limited gold sales programme. With the widening or our
current account deficit and falling rupee, options such as leasing of gold
bought in 2009 from IMF or monetizing the gold lying with RBI may be looked
into. Steps are on to monetize the domestically available gold in order to curb
imports.
Long Term
- Shed
the populist schemes, consider empowerment than charity.
- Promote
Indian manufacturing sector – Don’t dilute this sector giving excessive
preference to service sector.
- The employment generation of manufacturing
project is much higher than service sector projects.
- Monetize
Gold, people should realize that gold is an unproductive investment – if it
exceeds the basic levels.
- Shed
unproductive Govt., expenditure, bring Fiscal deficits down.
- Promote
solar energy – Give subsidy for solar antennas for each home, make the house
use 50% Solar
- Power from their solar antennas and only 50% power on grid power.
This will reduce energy imports. Solar subsidy is better than food subsidy!
Rupees Vs other
currencies:
What is said of US Dollar’s is applicable to Euro,
Sterling Pound and Japanese Yen. Few variations Japan has started printing
their notes like US Dollar, even though they have national debt at 125% of
their GDP. To shed a decade of recession, they started this theme of pumping
more currency. Even this newly printed Yen came into other markets like USD and
Rupee strengthened against Yen due to this for a while.
The Europe/UK economies are still down, the Rupee
depreciation against these was not as alarming at 20% level like that of US
Dollar. Still we had depreciation of Rs. against these as well, since they are
inter- linked with US Dollar.
To sum up – Realize our true potential and play the
game to our potential and deploy foreign funds for revenue generating assets
and not use the foreign funds to finance our animal sprit driven luxuries. The
FDI should be encouraged in sectors, where India lacks the expertise.
Good Luck Rupee! See
you shining soon!
We have heard of the emperors and kings
roaming around in disguise on the streets of their kingdoms in olden days. They
used to do this to know more about the status of living of their citizens. 
