Over the last few weeks the Rupee’s value has declined by Rs. 6 per US dollar. It has sunk to Rs. 60 per US$ from Rs. 54.
The Union Finance minister says there is no reason for panic as the government is taking steps to push growth. The economic advisor to the Prime Minister, Raghuram Rajan says that this not unique to India as dollar is getting stronger vis-a-vis Asian currencies. Though some currencies are getting weaker, decline of rupee cannot be attributed to the strength of dollar.


The reality is somewhat different. Actually, it is fast increasing Current Account Deficit (CAD) in Balance of Payment and the resulting foreign exchange crisis, that has led us to this situation. CAD is rising because of huge and constantly rising Balance of Trade (BOT), due to big and fast rising import bill and lagging exports.


For the last so many years, the government has implemented such policies which have promoted imports. Though petroleum products traditionally have been major item of our import bill comprising nearly one third of our imports, precious metals like gold and silver never used to be of great importance earlier.


Similarly, telecom, power plants etc. never used to carry much importance in our imports. However, in the recent years their share has gone up. The import of gold and silver has increased from $22.8 billion in 2007-08 to $61.3 billion in 2011-12. There has been a recent spurt in imports of these items.


For instance, during the last three years our trade deficit with China has gone up to $40 billion in 2011-12, from nearly $27 billion in 2007-08 as there have been massive imports from China. Major reason for spurt in imports from China is an increase in demand for telecom and power plant equipments, project goods and continued imports of electronic and electric goods.


Our trade deficit with rest of the world is also rising fast. Amidst this scenario of sinking rupee, the government is finding itself completely helpless. Government and RBI both fear that any intervention to stem fall of rupee may deplete of foreign exchange reserves.


According to RBI Bulletin, June 10, 2013, our trade deficit has crossed US$ 191 billion and CAD is also expected to be near $100 billion. It is notable that in this era of globalization, our imports have been rising at record pace hence steep increase in import bill from $24 billion in 1990-91 to $492 billion in 2012-13. In terms of percent of GDP, imports were hardly 8.1 percent of GDP, which went up to 28.3 percent in 2012-13, whereas exports have not grown proportionately.


CAD: A serious crisis
Current Account Deficit, which was $9.44 billion (3.3 percent of GDP), even in the most difficult year of 1990-91, is likely to increase to nearly $100 billion in 2012-13. In the third quarter of the year 2012-13, it was 6.7 percent of GDP. In 2008, our foreign exchange reserves, which were sufficient to finance 3 years of imports, are now capable to pay for only six months of imports. Because of increasing CAD, external debt increased from $224.5 billion to $374 billion between March 2008 and December 2012. This debt does not include loans raised by Indian business houses from overseas. Balance of Payment on current account is the net amount of foreign exchange payable (in case of deficit) or the amount receivable (in case of surplus) by the nation from rest of the world, due to current transactions, arising out of imports and exports of goods and services.


Savings and investments
We have suppressed interest to boost stock markets. Indians have traditionally invested in banks – but banks pay 7% when inflation is 9%. Therefore investment has shifted to gold – a traditional hedge against inflation.

Surely capital market is one investment avenue. But despite the hype surrounding the same, the fact remains Rs 5,904 crore got invested in IPOs in 2011-12 and Rs 6,043 crore in the first nine months of the fiscal 2012-13. (Source: Economic Survey 2012-13 Page 120)


Interestingly, as the government clamours for more financial sector reforms the Indian households have been extremely cautious. What else would explain the decline of the share of financial savings vis-à-vis physical savings in recent years?


Financial savings, it may be noted take the form of bank deposits, life insurance funds, pension and provident funds besides investment in capital markets. Interestingly, financial savings accounted for around 55 per cent of total household savings during the 1990s. This declined to 47 per cent in the previous decade and it was a mere 36 per cent in 2011-12.


Of course, investment into bank deposits has been another traditional avenue. But thanks to the myopic policy of the UPA Government and mispricing of the interest rate regime for the past few years, Indians have been shying away from investing even into Banks.


In fact, household financial savings were lower by nearly Rs 90,000 crore (Rs 900 billion) in 2011-12 vis-à-vis 2010-11 (Source: Economic Survey 2012-13 Page 15). And it is this money that gets invested as gold and real estate – assets that economists within the establishment term as unproductive yet found lucrative by the ordinary Indians!


What about other items of Imports?
But the issue of current account deficits is no longer restricted to gold and crude. Remember, as mentioned above, inflation is caused by shortfall in domestic production too. For instance in 2011-12, we imported Rs 100,911 crore (say $20 billion) of “sensitive” items as compared to Rs 70,656 crore in 2010-11 – a spectacular rise of 43 per cent!


Clearly, these imports add to the current account deficits while simultaneously robbing employment opportunities to Indians. This includes mundane items like milk and milk products, fruits, vegetables, pulses, edible oils, rubber, spices, toys and other sundry items that could easily be produced or manufactured in India.


For the first nine months (April-December 2012) of 12-13, imports from China exceeded $41.3 billion while exports were a mere $9.7 billion. This implies a huge trade gap in excess of $40 billion for the entire year.


Surely, this lop sided trade is unsustainable. Let us not forget that these imports from China do not include much of hi-tech items. Importantly, such huge imports of such items have a debilitating and cascading impact on semi-skilled and unskilled employment within the country.


Balance of Payment Surplus during NDA Rule
Between 2001-02 and 2003-04, it so happened that our Balance of Payment deficit turned into surplus, continuously for three years. This was the result of efficient handling of external and internal economic affairs of NDA regime. This was the first time in the history after independence that our BOP turned into surplus for continuously for three years. Our external debt stabilized, and as a result rupee got stronger. At the end of March 2004, exchange rate was rupees 43.75 per US$.


However, after 2004, our CAD did not stop rising and by 2012-13, it has crossed all limits. Between 1990-91 and 2000-01, our average CAD was only $4.4 billion annually. However, in 9 years, between 2004-05 and 2012-13, CAD has reached $37.4 billion (which is 8.5 times of average CAD in 1990s). Whereas, total balance of trade deficit in ten years between 1990-91 and 2000-01 was $103.56 billion, between 2004-05 and 2012-13, the same were $988 billion.


NRI Remittances are more reliable
Remittances made by NRIs have been highest as compared to Diaspora of any other nation. It is notable that NRI remittances were $13.1 billion, whereas foreign investment was only $6.8 billion in 2000-01. According to the recent data released by RBI, during 2011-12, once again NRI remittances have beaten FDI. During 2011-12 NRIs remitted $63.5 billion, whereas total foreign investment into the country was hardly $39.2 billion. FDI of $22 billion and portfolio investment of $17.2 billion made this sum of $39.2 billion. More important than this is the fact that not only quantitatively NRI remittances are more; they are more reliable than foreign investment, as upheavals in foreign investment are normal, whereas NRI remittances have been consistently increasing in leaps and bounds. For instance during 2008-09 (year of US crisis), foreign investment inflows were down to only $8 billion, whereas NRI remittances stood at whopping $44.8 billion even in that year (higher than immediate preceding year). Thus we can say that NRI remittances are not only much more than receipts from foreign investment; its reliability is also much better.


Clueless government
To avert the crisis, Finance Minister has hinted that raising of commercial borrowings may be pursued. But this remedy would be worse than the disease itself. Increase in external debt again involves repayment of interest and principal in future. Compulsion to raise external commercial borrowings may also further reduce our credit rating. It is notable that total outgo on repayment of interest and principal in 2011-12 was $31.5 billion. Foreign investors were also not behind in remitting funds abroad in the name of interests, dividends, royalties, salaries etc., and sent $26 billion in 2011-12. Studies reveal that much larger amount of foreign exchange is remitted abroad illegally by foreign companies by way of transfer pricing and circumvention of law of the land. Under these circumstances, we find that the nation is heading towards a deep foreign exchange crisis. For a long time, all our efforts to increase exports are not fructifying, while imports are increasing by leaps and bounds. Today it is imperative for the government to encourage domestic manufacturing, especially of consumer goods, telecom, power plants and other project goods and also farm -allied sectors, capabilities of producing which exist in India. Restoration of the trust of the people in governance so that they can prefer the bankable investments is the need of the hour.