Policy watch: How come the Rupee wilted when the Aussie $ stood firm vs the greenback?

The markets appear to have been bowled over by Raghuram Rajan’s gentle reminders that India’s financials were not as bleak as many thought them to be.

His subsequent moves in creating hedges against further raids on the Indian rupee – some brokers were short-selling the rupee in non-deliverable trades in Hong Kong – helped convince people that maybe the rupee was actually worth saving. This was in sharp contrast to the studied silence of the finance minister  whose only explanation was that the Indian rupee was reflecting global realities.

It was Kaushik Basu, chief economist with the World Bank,  who came forth with figures at his conference in Delhi, to tell mediamen and the world, that India would not slip back to 1991, as was being forecast by some foreign institutional investors or FIIs. Not surprisingly, such reports stopped immediately thereafter.
To be fair, India’s figures are not all that bleak. Compares them with those of a country like Australia. India’s figures look better on seven out of nine numbers presented here (see table).

But if Australia’s numbers look bad, why has its dollar continued to stand firm against the US dollar? Conversely, why did the Indian rupee wilt? There are two reasons.

First, unlike India’s debt, much of Australia’s debt has gone towards enhancing that country’s production capabilities, especially in shale gas and mining, which will start generating export incomes within a couple of years.

India’s splurging has been on concessions and freebies which could hardly be called productive. Take the food subsidy bill, for example. Food may be paid for in Indian rupees, but the inputs for fertilisers and pesticides are paid for in dollars. Ditto with the proposed freebies of mobile phones and ‘Akash’ tablets.

India paid at least four times the price of gas to Qatar on-year, when the US got it from the same source at just $3 per million metric British thermal units or mmBtu. That was either collusion or incompetence, and both need to be remedied urgently. Else, they will continue to bleed the nation. The diesel and kerosene subsidy actually inflates demand because cheaper fuel gets diverted to commercial use. That needs to be addressed as well.

Second, unlike India, Australia focused on job creation and growth. It has 25 years of uninterrupted economic growth and has kept unemployment under 6%.
India, on the other hand, has encouraged destruction of jobs – especially farm labour – through its short-sighted MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act), and its environmental clearances – which many cynics call a “suitcase by suitcase” approach.

Result? Industrial activity shrivelled, proposed infrastructure expansion plans remained on paper, and, instead of creating jobs, India actually cut down jobs either through plant closures or by postponing project implementation.

Road-building that worked marvellously during the NDA dispensation, virtually came to a standstill, thanks to the same suitcase-by-suitcase approach on the one hand, and short-sighted land acquisition and environmental policies on the other. Instead, you had a government actually teaching honest people (the farmers) to become dishonest. It taught them that there was no need to repay bank loans.

The true story behind India’s not-so-dismal figures is far more scary than the numbers themselves. No other government has succeeded in pauperising a country as quickly as this government has. That is India’s misfortune and its shame.