Why isn’t Modi govt making any effort to arrest fall of Rupee?

India’s rising trade deficit and continuing hot money outflow from the secondary market, courtesy foreign portfolio investors, are weakening RBI’s forex reserves and the Rupee’s exchange value

Why isn’t Modi govt making any effort to arrest fall of Rupee?

Nantoo Banerjee

The Indian Rupee (INR) is constantly depreciating against the US Dollar. If the trend continues, the exchange rate of INR vis-à-vis US$ may touch Rs 100 for a dollar before the end of this financial year. In this scenario, it would be a matter of great concern if India continues to import heavily from dollar trade regions.

Imports during April-August this fiscal grew by 45.74 percent to $318 billion. The trade deficit widened to a record $124.52 billion in the first five months of 2022-23 as against $53.78 billion in the same period last year.

The rising dollar did not help much to push exports. Moreover, India’s export basket is limited. Most economies are under pressure from high energy costs and domestic recession. Imports don’t figure highly in their economic agenda.

India is 86 percent import dependent on oil. While it can do little to compress the oil import bill immediately, it can certainly contain non-oil, non-essential imports, at least for the time being.

First of all, the country must severely cut imports of gold and precious stones, including pearls, which account for the second largest import expenditure after petroleum. In value terms, gold and precious stones imports constitute nearly 13 percent of the country’s total merchandise import as against oil import accounting for 21 percent.

India spent $55.7 billion on gold import alone in 2021. Similarly, a large amount was spent on importing precious and semi-precious stones, including pearls, last year. The imports were the highest before the Covid-19 broke out in 2020.

For unknown reasons, the country’s successive governments had encouraged gold and precious stones and metals imports to make a large section of the country’s bullion traders in Mumbai and Ahmedabad-Surat happy.

Ironically, the market price of 30 grams of gold is nearly Rs 160,000 as against India’s per capita net national income of only around Rs 150,000. The rich often use gold to hide their black money and protect their wealth against near constant INR devaluation.

Suspecting large-scale round-tripping of black money, the Comptroller and Auditor General of India (CAG), in its report tabled in Parliament earlier this year, said India's import of diamonds and pearls during 2010 and 2020 had been more than their global production which calls for serious scrutiny by the income tax and the customs departments. The imports of pearls have been three to ten times the average annual value of global pearl production.

"The imports of pearls in India being much higher than the global production of pearls is indicative of trade mis-invoicing and round-tripping of funds which have been flagged as critical concerns in respect of the gems and jewellery sector," CAG has said.

The major countries to mine rough diamonds are Russia, South Africa, Botswana, Namibia, Angola, Tanzania, Australia and Canada. "The irregular trends in imports and exports to countries such as UAE and Hong Kong have a probable risk of suspicious business transactions and tax evasion that need to be examined in coordination with regulating departments,” said CAG, raising concern over suspected round tripping of black money.

Interestingly, even the Switzerland-based World Gold Council, which has constantly supported India’s gold import, is concerned about the falling value of INR and rising US$. The council’s regional CEO (India) P.R. Somasundaram cautioned that the Indian government is watching the INR-US$ exchange rate and may act against gold imports if INR continues to depreciate against US$.

However, there is little sign as yet from the Indian government to restrict gold import in the face of fast rising US$ and depleting foreign exchange reserves with the Reserve Bank of India. The council estimated that India's demand for gold will be between 800-850 tonne in 2022 — 80 percent of it for gold jewellery and the balance in the form of gold coins. Last year, India’s demand for gold was about 797 tonne.

Another major area of import is consumer electronics and semiconductors. India must investigate growing deficits in the electronics trade, which hit an all-time record of $56 billion in 2021-22. Electronics have remained a major contributor to the country’s overall merchandise trade deficit, after oil & petroleum products. While electronics exports surged 41 percent last fiscal from previous year’s $15 billion, imports jumped 35 percent to $70.8 billion, according to the commerce ministry.

Earlier, the trade deficit in the electronics field had hit a record of $47 billion in FY19. The electronics trade deficit may increase to well over $60 billion this year. It may be time to restrict electronics imports wherever possible and step-up domestic production while seriously trying to ensure a speedy success of the country’s new semiconductor policy.

Contrary to the perception, India’s oil import bill appears to be still reasonable. Last year, India’s import of crude oil amounted to $122.45 billion. It was more than double the value of imports in the pandemic-hit 2020-21, dropping to barely $59.48 billion while the country’s gold import that year was worth $34.62 billion.

However, crude oil is one area the country will have to indefinitely put up with the import pressure. The recent OPEC+ decision to cut oil production should be a matter of concern for India.

Since the beginning of the year, the global oil price has narrowed to $90 per barrel from its peak at $120 per barrel. Paradoxically, the western trade and payment sanctions on Russia, resulting in price cut on crude oil export by Russia, has come as a big relief to India, the world’s third largest oil importer.

Recently, Finance Minister Nirmala Sitharaman said India's crude oil shipments from Russia jumped to between 12 percent and 13 percent of imports from all sources since February from about two percent earlier.

But for the Russian oil import windfall, the exchange rate of INR vis-à-vis US$ would have taken a much bigger hit. India's foreign exchange reserves declined to $553.1 billion in the week ended September 2, their lowest since October 2020 and down by $8 billion from the previous week. Forex reserves further declined by $4.9 billion to $537.52 billion at the end of the week ended September 23 for a ninth consecutive week.

Global rating agencies, including IMF, have cut their forecasts for India’s economic growth for 2022-23 to below seven percent. India’s rising trade deficit and continuing hot money outflow from the secondary market, courtesy foreign portfolio investors, are weakening RBI’s forex reserves and INRs exchange value. While the government and RBI can do little to bring FPIs back in the midst of the global financial turmoil, it can certainly contain avoidable imports such as gold, precious metals, cheap electronics and other luxury products for consumption of the rich.

It may be time to focus on the much neglected ‘Make-in-India’ initiative while expanding bilateral Rupee trade and currency swap to arrest the fall of INR and stabilise the economy.

(IPA Service)

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