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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.

Key Takeaways

  1. The Political Economy of Rupee Depreciation
  • Without a doubt, the rupee has depreciated significantly over the recent months, and this slide has been a significant and large one – the sharpest since 1991.
  • The rupee should be seen for what it is – a currency – and not as a tool for political posturing as a way to show off robustness, growth and masculine leadership in India. In doing this, proper exploration of the economic benefits or disadvantages of rupee depreciation gets sidelined.
  • To this end, we should aim for a non-partisan and technically motivated discussion on the matter. For example, trade is expected to improve with depreciation through an upward impact on exports – but that has not been the case. A rigorous and independent study needs to find out the reason for the same.
  1. The Macroeconomic Implications of Rupee Slide
  • On the issue of fiscal outlook and Current Account Deficit (CAD), there are distinct features of our economy that impact CAD – it is not only depreciation and the like. Firstly, there is the government sector – when it runs a high fiscal deficit, the CAD goes up. Secondly, an excess of private investment over savings puts upward pressure on the CAD.
    Thirdly, when industry or the trade sector maintains an excess of imports over exports, CAD goes up. Lastly, CAD grows if international financial flows are very excited about India and large inflows happen in a short period. This may have nothing to do with the fundamentals of the Indian economy.
  • Another trend of importance is that 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.
  1. The Linkages between Depreciation and Trade
  • Compared to other countries on a high-growth path, India is much more dependent on the world market and on other countries. 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. Unfortunately, in India, there are lots of handicaps to 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.
  1. Implications for Energy Security
  • Energy security is not only about balancing the budget, it is also about fueling the economy. In this context, rapid rise in energy prices is grappling the Indian economy. Oil prices have gone over 100 dollars per barrel only a few times during 2008 and 2011-2014. In both the situations, high demand led to rise in prices. However, now it is limited supply that has led to increase in prices.
  • Asian emerging economies like India, Sri Lanka, or Vietnam are more likely to be more sensitive to rising oil prices and its impacts. Much of what is happening with the oil market around the world has a lot to do with local politics such as riots in Iraq and Libya. Fall in oil prices in November 2017 has also impacted current oil prices. Further, oil production has halved in Venezuela, a major oil producing country. These domestic policies impact the behaviour of oil traders.
  • The 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.

Regarding the question of how rupee is going to impact trade, economy and the energy sector, not much can be said as there are many factors simultaneously at play. However, a work plan can be created through which the challenges that emerge out of rupee depreciation can be faced with the least adverse consequences for the Indian economy.

If there is a message to be given to policy makers and if exports are indeed a key to the framing of policy, it would be to focus on long-term structural improvements in the business eco-system of India.

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