august 31, 2013

Between Industry and Finance

The government and the Reserve Bank of India seem to have suffered a loss of economic personality.

he sharp plunge in the value of the rupee on Friday, 16 August 2013 and the following Monday, and further as the week unfolded crossing Rs 65 to the dollar as we go to press is perplexing, particularly so since it follows the announcement on 14 August of the institution of some controls on capital outows. Why should the putting in place of restrictions on capital outows, applicable only to residents, have caused the nancial markets to panic? The Reserve Bank of India (RBI) now allows companies to invest overseas only up to 100% of their net worth compared to 400% of the same earlier, and resident individuals are now permitted to annually spend overseas only $75,000 compared to $200,000 earlier. Of course, the present episode of the depreciation of the rupee began two years ago, in August 2011, and the sharp fall in the rupees value vis--vis the dollar (and other major currencies) has been underway since 19 June this year, after the chairperson of the US Federal Reserve (the Fed), Ben Bernanke announced that the Fed would soon be winding down its easy money policy. And this expectation has led to depreciations of the currencies of other emerging market economies, especially those with signicant current accounts decits on their balance of payments. Nevertheless, the most recent sharp depreciation of the Indian rupee needs to be explained, and this in the wake of the government and the RBI instituting the capital controls that we just mentioned. No doubt, the Indian economy is in a bad shape and could get worse with a falling rupee, a sharp deceleration in the growth of real gross domestic product (GDP), a swollen current account decit on the balance of payments, and persistently high food ination. And, to add to its woes, the nancial distress of some large corporations in the private sector that had engaged in large external commercial borrowings on very favourable terms during the period of boom, but are now, in the wake of the slide of the rupee and the sharp deceleration of economic growth, nding it increasingly difcult to make interest and amortisation payments. Beginning 15 July, the government and RBI have taken a series of steps to prop up the rupee a signicant increase in short-term interest rates, restrictions on the trading of currency derivatives, an increase in import tariffs on precious metals and quantitative restrictions on their imports linked to their use as inputs in the exports of jewellery, more attractive returns on non-resident Indian (NRI) deposits in Indian banks, the easing of
EPW

foreign direct investment caps in various sectors, decision to sell the residual government equity stakes in Hindustan Zinc and BALCO with about half of the expected earnings in foreign currency, asking some public sector companies to oat tax-free bonds and seeking investment by sovereign wealth funds in those bonds, besides, of course, the capital controls. The government had earlier done everything it could to boost foreign portfolio investment (hot money inows), all the while assuring the credit rating agencies that it will do all it can to meet its scal decit target. What one discerns from the above set of measures by the government and the RBI is a combined effort to deal with the high current account decit on the balance of payments and the consequent fall of the rupee with an essentially conservative scal and monetary policy stance. Given the scale of the current account decit, and this, even as economic growth has decelerated so sharply and the manufacturing sector has virtually stagnated, the resort to further deationary scal and monetary policy has become untenable, what with some state assembly elections around the corner and general elections due next year. So the government and the RBI instituted some import and capital controls as part of its policy mix. But in doing so, they violated their basic commitments to neo-liberalism and nancial capitalist interests, and have therefore been punished by the nancial markets witness the capital ight of the foreign institutional investors, as also the moves of forex market speculators who seem to have made it increasingly difcult for the monetary authority to prop up the rupee with the sale of a few billion dollars of the forex reserves. What is really required in the present context are expansionary scal and monetary policies backed by import and capital controls, and a tax on international security and forex transactions. The governments piecemeal import and capital control measures in the midst of a deationary monetary and scal stance does not make any sense. Any government acting in the name of democracy needs to work to resolve the contradiction between industry, driven by enterprise and the promise of prots, and nance, propelled by speculation and the expectation of capital gains, in favour of the former. But this requires a different class orientation which neither the Congress-led United Progressive Alliance nor the Bharatiya Janata Party-led National Democratic Alliance has. The government and RBI seem to have tightened themselves in bizarre knots of their own making. 7

Economic & Political Weekly

august 31, 2013

vol xlviII no 35