L to R: Dr. Sabyasachi Kar; Dr. Rajat Kathuria; Dr. Arunabha Ghosh; Mr. Ashok K Bhattacharya
Ananta Centre organized a discussion exploring the implications of the depreciation of the INR on the Economy, Trade and Energy Security and Dependency. As a topic of great contemporary significance, it was vital that a non-partisan and independent dialogue be held on this subject. The panel comprised of Mr. Ashok K Bhattacharya, Editorial Director, Business Standard, who was the moderator of the session. He was joined by Dr. Arunabha Ghosh, Founder CEO, Council on Energy, Environment and Water, Dr. Rajat Kathuria, Director and Chief Executive, ICRIER, and Dr. Sabyasachi Kar, Professor, Institute of Economic Growth.
The rich discussion brought out many interesting aspects of the issue. It was largely felt that political posturing often prevented a nonpartisan exploration of the economic consequences of the depreciation. For example, trade is expected to improve with depreciation through an upward impact on exports – but that has not happened. It would be a constructive exercise to find out the reason for the same.
Examining the macroeconomic implication of the rupee slide, the panelists felt that reasons other than just depreciation impact Current Account Deficit (CAD), these include fiscal deficit, an excess of private investments over savings and finally an excess of imports over exports. While both private investment and savings have been falling for the last two years, savings have fallen faster than the fall in investment. This puts pressure on the CAD.
Establishing the connect between Depreciation and Trade, the discussion threw up that
compared to other countries on a high-growth path, India is much more dependent on the world market. Other countries that have succeeded in the world markets have benefitted from embracing open and freer trade strategies, and India should also invest in opening the world markets wherever they are closed.
A part of the explanation why exports are not rising as they should lie in the fact that the price elasticity of demand for our exports is very low, so income elasticity was the dominant factor determining our export value. Since the global markets were reeling from a recession, this had an impact on pushing our exports down.
Another aspect is that competitiveness in the world market is not only a function of export price, but also the ease of doing business. To bolster the exports, and improve our balance of trade, then we have to support the ease of doing business and remove hurdles and handicaps in trade. We can become competitive by removing structural handicaps rather than merely trying to use the exchange rate as a tool to correct trends better addressed by other means.
On the issue of Energy security the discussion highlighted the fact that he maturity of our economy will depend on how we react to a period of oil crisis. Economic policy makers should factor in multiple concerns and be decisive when it comes to protecting the poor during the situation of high price rise. Oil price rise should also become an incentive to find and use alternative sources of energy. The oil price rise will definitely have short-term implications, especially with regard to our revenue. But, we should not lose sight of the medium-term and long-term structural changes in the oil and energy sectors.
The panelists stressed the need for a work plan that could help address challenges that emerge out of rupee depreciation with the least adverse consequences for the Indian economy. The message they wished to give policy makers was that they should focus on long-term structural improvements in the business eco-system of India, and make it robst enough to weather rough seas.