The first thing to recognise is that the falling rupee is not the worst thing in the world. The Indian unit was overvalued for a while and therefore a correction was due, and had to take place. That is the first part.
This correction could have been brought about by the government and the Reserve Bank of India in a very phased and controlled manner. Since they have failed to do, the market has taken a sort of a charge of this.
The fear is that the rupee fall may continue and could convert itself into a free fall.
These are all symptoms of a deeper disease, which is the loss of confidence of the investing communities in the government’s economic policy. Therefore, it is the malaise that needs to be treated.
One does not need to try and control the rupee free fall or to strengthen it, but to instil confidence in the investor community. We have already seen that the measures taken to strengthen the rupee were all discounted by the market immediately, because they did not address the real issue.
This is basically the wrong diagnosis.
What, therefore, has to be done is to announce a set of measures which will show that the government is willing to take decisions that may be politically unpalatable, but important to get the economy back on track.
The following measures could be taken.
1. At this point of time, to pass the food security Bill is the worst thing to do. The right thing for the government to do would be would to shelve it for at least six months.
2. The government can abolish the Agriculture Produce and Marketing Committee Act in at least in the UPA-ruled states, as the Act causes a lot of problems in the distribution of non-cereal food. All the vegetables, fruit, poultry etc are controlled by the Act, which helps to cartelise the market and push the prices up, and poses a barrier to the movement. Food inflation has got nothing to with the cereals.
3. The government should release 70 million tonne foodgrain in the market at a cheaper price in the market for everybody to buy.
4. The government can completely disband the Coal India Ltd management and make sure that there is some way to increase the availability of coal for power sector. By putting an import duty on televisions, are you going to make up for the dollar outgo on imported coal?
5. The fifth measure would be to privatise Air India. Simply sell it off.
6. Another major thing is to take a final call on Vodafone. Whatever you have to do, just do it. It has been hanging for a year.
These are the measures the government needs to take to bring the confidence back in the market.
There is a vicious circle as of now. You cannot raise interest rates. By increasing the rates and siphoning the liquidity, you have seen that you have not achieved anything.
If you raise the interest rates even more, investments will come down even more, demands will come down even more and the growth will go down even more. And if growth reduces, the fiscal deficit will keep on increasing.
(As told to Ashutosh Kumar)