The only way to save the rupee and to prevent its free fall is to start practising swadeshi all over again. Yes, you read it correctly. As a nation we are living beyond our means and you can’t continue doing so unless we want India to crash (and not the rupee alone). That is exactly what is happening: the crash of the rupee is a symptom of the problems that ail the economy. Although sarkari economists et al are trying to explain away the problem by changes in the Fed rates in the US and a revival in the US economy this is a very shallow explanation. Just because the Indonesian rupiah, the South African rand and the Brazilian real have been competing with the rupee in depreciating against the US dollar, there is no reason to wish away our problems.
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Gresham’s Law in Present day India
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Next time you bite corn produced in Australia, oranges raised in California and apples from god knows where, think deeply whether as a nation we can afford this. Maybe middle class and upper middle class consumers can afford these imported fruits at an individual level, but certainly not as a nation. When India’s foreign exchange earnings are not enough to cover our imports, it is a no-brainer that we cannot. Stopping such imports and also of other edibles like cheese is not going to make any one worse off. The question that we should ask ourselves is: cannot good quality fruits be grown in the country that we have to spend precious foreign exchange to import them?
In the good old days, students used to travel abroad for higher studies after they completed their MA to take admission in PhD and other such programs in top universities. The learning in these top universities would be far superior to what could be had in high institutions in the country. But things have changed in the last two decades: these days you can find parents sending their children abroad to do their undergraduate degrees. Why? This is possibly because it has become a fad to send children abroad. Parents say that they have the money so they will send their children abroad. While this may be true, the fact of the matter is that as a nation we cannot afford precious foreign exchange to spend on children studying at the undergraduate level and doing basic technical courses. A pertinent question to ask is whether the education infrastructure is so poor that there are no colleges in the country to impart a basic degree. So the issue is why this fad for a foreign education?
However you would not have seen any economist or politician who waxes eloquent on TV holding forth on the rupee speak anything about all this. Most of their conversation revolves around the tight monetary policy of the RBI and the decline in growth impetus, etc This misses the real issue. The fact of the matter is that the process of liberalization that was kick-started in 1991 is so lopsided that it promoted the culture of consumption without any breaks. (Editor's comment - i.e. the Kerala model, but Kerala has the advantage of foreign remittances to pay for the consumption culture.) True, before liberalization the economy was in shackles and the consumption in the country was artificially restricted. This was by way of import curbs and by the process of licensing. Thus things like washing machines were treated as luxuries although in reality it was a great boon for families especially those with working women.
Liberalization provided a great opportunity to break the shackles and set up a modern, efficient manufacturing base in India. Well that really did not happen adequately. Had that happened India would have become a major exporter of manufactured goods that would have been enough to take care of India’s import requirements (of which oil imports is a major component). But India continued to be an exporter of raw material. For example till the ban in exports of iron ore, the country was exporting iron ore to China. A country which is focused on its growth (like China is) would have instead tried to manufacture steel from this iron ore which could have been exported instead. This would have resulted in more foreign exchange earnings. But India had no such strategy in place.
Instead of exporting manufactured goods, India has become an importer of raw materials. A good example is coal that is imported into the country for fuelling thermal power stations. This is in spite of the fact that India sits on reserves of billions of tons of coal reserves. India spent $18 billion in coal imports in the last fiscal year 2012-13. This is by no account a small sum.
But while exports did not go up, imports of not only coal and petroleum products (valued at $169.25 billion in the last fiscal year) but other consumer goods also went up.
World class manufacturing facilities did not come up in India due to many reasons. But primarily the culprit is the policy paralysis in the country for many years that resulted in inadequate infrastructural facilities whether it was electricity generation, port facilities or proper roads. Bureaucratic hassles and widespread corruption in granting permissions played a none-too-insignificant role in this process.
Entrepreneurs finding a bleak scenario soon realized that realty was a booming sector where large profits could be made without much hassles. As a result entrepreneurs of all hues and colors turned to realty. This includes top names in the Indian corporate sector. Even many IT companies started dabbling in real estate. With politicians joining in the game, realty became the name of the game. Thus the high growth evidenced in the country in the period 2000-2009 and especially between the years 2005-2008, is nothing but an indication of the rapid growth in the real estate sector that led to bourgeoning cities (never mind the poor infrastructure). But the increase in the growth of the realty sector is an artificial growth that may add to national income yet doing nothing to increase India’s exports. A huge middle class, which has earned moolah through direct speculation in realty or by working in companies whose profits have soared due to their investments in real estate, started feeling empowered. And this empowerment was reflected through increased consumption. This has led to spiralling imports. It may not be out of place that India’s savings rate has plummeted in the last five years. From 36.9 per cent in fiscal year 2007-08, it tumbled to 30.8 in 2012-13 and is expected to go down to 30 per cent by the end of fiscal year 2013-14.
The rupee may have tumbled in the last two weeks, but the signals were there for anybody to see for the last few months. In the last fiscal year India’s imports of gold soared to $50 billion. This was not due to the proclivity of the Indian consumers to own the yellow metal. Rather it was a signal from the market that the rupee could not be trusted to hold its value. Gold was being imported, because people preferred to hold their savings in the form of the yellow metal than in the form of the Indian rupee in banks or investments.
Whether it is an individual, household or a nation, nobody can live beyond their means. You have to cut the coat according to the cloth that you have. Thus there is no other way for India and as Indians we have to learn to live within our means. The time has come to reduce to zero the imports of inessentials and restrict the imports to the essentials. The control raj came with a lot of ills, but independence also comes with responsibilities. From 1991 to 2013, the pendulum has swung from one extreme to the other. It is time to restore balance in our lives, think in terms of age old concepts like import substitution and check the rampant spread of this consumerist culture. Otherwise doomsday is not far away.
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