The Future of Indian Economy


The Indian rupee is currently trading in the range of Rs 61-62 per 1 US dollar. It was trading Rs 51.62 on Oct 5, 2012 and shot up to Rs 68.85 on Aug 28, 2013. The RBI intervened in the market by buying rupees and selling dollar, using the limited foreign exchange reserves the country has. What created this volatility and the deep depreciation? Who is responsible for creating this volatility? What needs to be done to prevent this from happening? How well is our government prepared to deal with such volatility in the future? are all questions that needs to be addressed with all seriousness

This violent volatility has created immense fear in the minds of all stake holders. For example companies importing new material or machinery will not know how to predict the output cost as it depends upon the exchange rate. A student going abroad or already there will face severe anxiety about the affordability of the education travelers going abroad may find the expenses overshooting the budget because of rupee depreciation

Let us look at some data. This will reveal as to how the problem has come about. Clearly this must be due to increasing trade deficit. Look at the following tables

Merchandise imports and exports 2002 to 2013 ($ billion)

Year

Exports

Imports

Net

2012 – 2013

307

502

-195

2011 – 2012

310

500

-190

2010 – 2011

256

383

-126

2009 – 2010

182

301

-119

2008 – 2009

189

309

-120

2007 – 2008

166

258

-92

2006 – 2007

129

191

-62

2005 – 2006

105

157

-52

2004 – 2005

85

119

-34

2003 – 2004

66

80

-14

2002 – 2003

54

64

-10

 

 

 

 

 

 

Oil imports and exports 2002 to 2013 ($ billion)

Year

Imports

Exports – Petroleum Products

Net Oil Imports

2012 – 2013

169

60

109

2011 – 2012

155

56

99

2010 – 2011

106

41

65

2009 – 2010

87

28

59

2008 – 2009

94

28

66

2007 – 2008

80

28

52

2006 – 2007

57

19

38

2005 – 2006

44

12

32

2004 – 2005

30

7

23

2003 – 2004

21

4

17

2002 – 2003

18

3

15

 

Gold Imports – 2002 to 2013

Year

$ billion

2012 – 2013

53.7

2011 – 2012

56.3

2010 – 2011

40.5

2009 – 2010

28.6

2008 – 2009

20.7

2007 – 2008

16.7

2006 – 2007

14.5

2005 – 2006

10.8

2004 – 2005

10.5

2003 – 2004

6.5

2002 – 2003

3.8

 

Clearly the culprits are staring at us.

Our trade deficit which was $10 billion in FY 2003 has been steadily mounting up and has reached $195 billion in FY 2013. This clearly is not sustainable. Granted the size of trade has increased from $118 billion in FY 2003 to $809 billion in FY 2013, but we need to pay the deficit sooner or later. Next in line is the oil imports and exports. The reader can clearly see that the net import has jumped from $15 billion in FY 2003 to 109 billion in 2013. We needed to import so much oil to meet the society needs where will we find the dollars to pay for it.

Next the Indians know that putting money in the banks is inviting trouble. The interest paid by the banks has never even covered the inflation rate not to think of interest to be paid for risk and productivity Indian government is in perpetual budget deficit with empty promise that they will control it in the future. The Indian citizens understand intuitively that the purchasing power of rupee will continue to dwindle and the only hope is to buy gold. The data shows that we imported $3.8 billion worth of Gold in FY 2003 and has gone up to $53.7 billion in FY 2013. The price of gold is currently around $1325 an oz. It has gone up nearly 70% in the last 10 years in US dollar terms. With the rupee depreciating the return on gold investment has averaged more than 15 percent over the last decade. A true hedge against inflation.

Indian companies and individuals have always toyed with the idea of investing overseas. Until recently every Indian citizen was allowed up to US $200000 per year outside India (recently changed to $75000) and our external commercial borrowings stand at $146 billion dollars which needs to be repaid. Also our long term borrowing stands at 218 billion as of 2012-13 and increasing and our short-term borrowing stands at $170 billion. Our reserves stand at 277 billion US dollars as of date and we have this obligation of returning this $170 billion during the course of next 1 year. If not reborrowed or restructured our reserves will drop to 2-3 months of imports. Our current reserves only cover about 73 percent of the current liability. This indeed is a serious situation. The following data from RBI will clearly reveal the trend.

Year                       Forex Reserves ($ mln)                 External debt ($ mln)

FY 2003                 $ 76, 100                                               $ 104, 914

FY 2004                 $ 112, 959                                            $ 112, 653

FY 2005                 $ 141, 514                                            $ 134, 002

FY 2006                 $ 151, 622                                            $ 139, 114

FY 2007                 $ 199, 179                                            $ 172, 360

FY 2008                 $ 309, 723                                            $ 224, 407

FY 2009                 $ 251, 985                                            $ 224, 998

FY 2010                 $ 279, 057                                            $ 261, 036

FY 2011                 $ 304, 818                                            $ 306, 448

FY 2012                 $ 296, 688                                            $ 334, 947

Current                                277000(Est)                                         400.000(Est)

Clearly this is not sustainable. We need to either augment the reserves or reduce the external debt substantially or both. There is a tendency to blame the foreigners and the global market for our predicament.

The question facing our government is what needs to be done to stop the further depreciation of rupee. Some suggestions are

  1. Protecting foreign reserves is a priority. At any time the reserves available must at least meet 10 months of import. In other words we need to find another 100-150 bln dollars
  2. Rationalise imports. Import substitution should become a priority. We import so much of food items in the form of Dal and cooking oil. Efforts must be made to produce it here. This probably needs some more land to be brought under cultivation
  3. Even if we are not able to get the foreign currency balances stashed away in Switzerland we can at least ask them to remit with holding taxes on the interest earned by the Indian depositors. Britain has successfully done this.
  4. Explore for more natural gas in India. This can be a real substitute for expensive imported crude oil.

Finally India is capable of building very good relationship with countries like China, Germany, Saudi Arabia who all have huge trade surpluses. With their backing and shrewd austerity measures we can come out of the mess we have created. If our commitments are strong we will certainly ride over the situation and come out strong.

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