Exports

Busted: The ‘biggest’ myth about Indian exports

3D chrome Dollar symbolOne of the economic theories (I don’t know what else to call it) that often gets bandied around by almost anyone who has anything to say on the Indian economy, is that India’s economy is not as dependent on exports as the Chinese economy is. Honestly, given that China and the word “exports” are almost used interchangeably these days, it sounds true as well. Nevertheless, that is clearly not the case. While this may have been true in the 1990s, the most recent data does not bear this out.

Let’s look at exports of goods and services as a proportion of the gross domestic product (GDP, a measure of the size of the economy) of both these countries. In 1995, the Chinese exports to GDP ratio had stood at 20.4% of the GDP. The Indian exports to GDP ratio was around half of that of China at 10.7% of the GDP.

In 2014, the Chinese exports to GDP ratio had stood at 22.6% of the GDP. On the other hand, the Indian exports to GDP ratio was at 23.6% of the GDP. Hence, as a proportion of the size of the economy, Indian as well as Chinese exports are at a similar level. And that is indeed very surprising. It is not something that one expects.

As Rahul Anand, Kalpana Kochhar, and Saurabh Mishra write in an IMF Working Paper titled Make in India: Which Exports Can Drive the Next Wave of Growth?: “India’s exports have been increasing since the early-1990s – both as a share of GDP and as a share of world exports. Total exports as a share of GDP have risen to almost 25 percent in 2013 from around 10 percent in 1995. Likewise, Indian goods exports as a share of world goods exports have risen, with the share almost tripling to 1.7 percent during 1995-2013. A similar trend is visible in India’s services export – the share tripling to over 3 percent of world service exports during 2000-2013.” Computer services form around 70% of India’s services exports, which forms around one third of India’s total exports.

What these data points clearly show us is that the theory that India is not dependent on strong exports for a robust economic growth, is basically wrong, as exports now amount to nearly one-fourth the size of the Indian economy.

The Indian exports have been falling for the last nine months. In August 2015, the exports were down by 20.7% to $21.3 billion. Twenty three out of 30 sectors  monitored by the ministry of commerce saw a drop in exports in August 2015, in comparison to August 2014. Exports for the period of April and August 2015 stood at $111 billion and were down by 16.2% in comparison to the same period last year. Hence, there has been a huge slowdown in exports during the course of this financial year as well.

A major reason for the same has been a fall in commodity exports. As Chetan Ahya and Upasana Chachra of Morgan Stanley write in a recent research note titled What is Driving the Sharp Fall in India’s Exports?: “Persistent downward pressure from commodity prices has undoubtedly put pressure on commodity export growth (in value terms). Indeed, commodity exports (including oil), which account for 33% of India’s total exports, have been declining since Jul-14.”

Commodity prices have been falling because of a slowdown in the Chinese economic growth. China consumes a bulk of the world’s commodities.
Not many people would know that refined petroleum oil, much of which is exported out of the state of Gujarat, forms around one fifth of India’s exports.

Hence, while India benefits immensely due to a fall in the price of oil, given that we import 80% of what we consume, there is a flip-side to it as well.
Further, in India’s case, export of services, in particular computer services, has played a major role in driving up the exports over the years. The same cannot be said about India’s manufacturing exports. As Anand, Kochar and Mishra point out: “[India’s] services exports, as a share of total exports and in terms of sophistication, are comparable to high income countries, the share of manufacturing exports and their level of overall value content are still low compared to its peers, especially in Asia.”

The reasons for this are well discussed. They include an unpredictable tax regime (which the government keeps promising to correct), complicated labour laws and land acquisition policies, inspector-raj and a shaky physical infrastructure.

And this best explains why unlike China, India’s manufacturing exports are not a major part of its goods exports. As Anand, Kochar and Mishra point out: “For example, in 2013, manufacturing exports accounted for 90 percent of total exports in China, almost double the share during 1980-85. Indian exports have also undergone transformation during the decade of high growth, though to a lesser extent compared to peer emerging markets. The share of manufacturing in total merchandise exports has increased to 57 percent in 2013 from 41 percent in 1980.”

Also, given the problems an entrepreneur faces in India, in getting a manufacturing unit going, India’s share in global goods exports may have plateaued as far back as 2012. Data from Morgan Stanley suggests that India’s good exports as a proportion world goods exports has plateaued at around 1.7%.

As Ahya and Chachra of Morgan Stanley point out: “India’s market share in exports of goods for which we have monthly data has declined marginally over the last 12 months but has remained largely flat since 2012…The structural bottlenecks in the form of inadequate infrastructure, outmoded labour laws, a cumbersome taxation structure and systems, and poor ranking in terms of overall ease of doing business are probably making it harder to make gains in market share at a time when external demand has been weak and excess capacities in competitor economies have rise.”

And this is something that cannot be set right overnight.

The column originally appeared on The Daily Reckoning on Sep 28, 2015

In theory, Rupee at 72 to dollar is the solution to CAD


Gary Dugan 4
Gary Dugan is the CIO – Asia and Middle East, RBS Wealth Division. In this freewheeling interview with Vivek Kaul he talks about the recent currency crash in Asia, where the rupee is headed to in the days to come and why you would be lucky, if you are able to find a three BHK apartment, anywhere in one of the major cities of the world, for less than $100,000.
What are your views on the current currency crash that is on in Asia?
People are trying to characterise it as something like what has happened in the past. I think it is very different. It is different in the sense that we know that emerging markets in general have improved. Their financial systems are more stronger. The government policy has been more prudent and their exposure to overseas investors in general has been well controlled. I don’t think we are going to see a 12 month or a two year problem here. However, countries such as India and Indonesia have been caught out and the money flows have brought their currencies under pressure. So, it’s a problem but not a crisis.
One school of thought coming out seems to suggest that we are going to see some version of the Asian financial crisis that happened in 1998, over the next 18 to 20 months…
I totally disagree with that. The rating agencies have looked at the Indonesian banks and they have said that these banks are well-abled to weather the problems. If you look at India, the banking system is well-abled to weather the problems. It is not as if that there is a whole set of banks about to announce significant write down of assets or lending. The only thing could go wrong is what is happening in Syria. If the oil price goes to $150 per barrel then the whole world has got a problem. The emerging market countries would have an inflation problem and that would only create an exaggeration of what we are seeing at the moment.
Where do you see the rupee going in the days to come?
There is still going to be downward pressure. I said right at the beginning of the year, and I was a little bit tongue in cheek when I said that in theory the rupee could fall to 72. At 72 to a dollar, in theory, clears the current account deficit. I never expected it to get anywhere near that, certainly in a short period of time. But some good comes out of the very substantial adjustments, because pressure on the current account starts to disappear. Already the data is reflecting that. Where the rupee should be in the longer term is a very difficult question to answer.
Lets say by the end of year…
(Laughs) I challenged our foreign exchange market experts on this and asked them what is the fair value for the rupee? I ran some numbers on the hotel prices in Mumbai, relative to other big cities, and not just New York and London, but places like Istanbul as well. India, is the cheapest place among these cities. Like the Economist’s McDonald Index, I did a hotel index, and on that you could argue that the rupee should be 20-30% higher. But, if you look at the price that you have got to pay to sort out your economic problems, it is probably that the currency is going to be closer to 70 than 60 for the balance of this year.
One argument that is often made, at least by the government officials is that because the rupee is falling our exports will start to go up. But that doesn’t seem to have happened…
It takes a while. I was actually talking to a client in Hong Kong last week and he said that warehouses in India have been emptied of flat screen TVs, and they have all been sent to Dubai because they are 20% cheaper now. It is a simple story of how the market reacts to a falling currency.
But it’s not as simple as that…
Of course. A part of the problem that India has is that the economic model has more been based on the service sector rather than manufacturing. The amount of manufactured products that become cheaper immediately and everyone says that I need more Indian products rather than Chinese products or Vietnamese products, is probably insufficient in number to give a sharp rebound immediately. Where you may see a change, even though some of the call centre managers are a little sceptical about it, is that call centres which had lost their competitive edge because of very substantial wage growth in India, will immediately get a good kicker again. It would certainly be helpful, but I would say that it normally takes three to six months to see the maximum benefit of the currency adjustment.
What are the views on the stock market?
I am just a bit sceptical that you are going to see much performance before the elections. I always say it is a relative game rather than absolute one. If all markets are doing well, then India with its adjustment will do fine. Within the BRIC countries, India falls at the bottom of the pack, in terms of relative attractiveness, just because there is a more dynamic story for some of the other countries at the moment.
One of the major negatives for the stock market in India is the fact that the private companies in India have a huge amount of dollar debt…
It is definitely a reason to worry. It’s not something I have looked at in detail. But as you were asking the question, I was just thinking that people are dragging all sorts of bad stories out. When there were bad stories before, people were just finding their way through it. And India has a wonderful way of working its way through its problems and has been doing that for many many years. Remember that these problems come to the head only if the banks call them to account. I think there will be a re-negotiation. It is not as if a very substantial part of Indian history is about to go under because someone is going to pull the plug on them.
Most of the countries that have gone from being developing countries to becoming developed countries have gone through a manufacturing revolution, which is something that is something that has been missing in India…
It is. You look at the stories from the past five years, and the waning strength of the service sector in India, in th international markets, comes out. A good example is that of call centres that have gone back to the middle of the United States from India. A part of that came through currency adjustment. You can say that maybe the rupee was overvalued at the time when this crisis hit. But it is true, in a sense, that India has got to back-fill a stronger manufacturing industry and it has got to reinforce its competitive edge in the service sector.
What is holding back the Indian service sector?
A number of structural things. I talked to some service sector companies at the beginning of the year. And one of things I was told was that I have got all my workers sitting here in this call centre, but now they cannot afford to live within two hours of commuting distance. Why did that happen? That is not about service sector. It is about the broad infrastructure and putting people at home, close to where they work. There are lot of problems to be solved.
There has been talk about the Federal Reserve going slow on money printing(or tapering as it is called) in the days to come. How do you see that going?
Everyone has got to understand that the principle of quantitative easing is to generate growth. So, if there is enough growth around they will keep tapering, even if they get it wrong by starting to taper too early. They will stop tapering if growth is slow. Secondly, number of Federal Reserve governors are worried about imprudent actions of consumers and industrialists, in terms of taking cheap money and spending it on things that they typically do not need to spend on. A good example is speculation in the housing market, something which created the problem in the first place. So they want to choke such bad behaviours. They will probably start tapering in September in a small way. The only thing that may stop it from happening is if the middle Eastern situation blows up. The US didn’t think it was going to get involved a few weeks ago. Now it is.
Isn’t this kind of ironical, that the solution to the problem of propping up the property market again, is something that caused the problem in the first place…
That’s been very typical of the United States for the last 100 years. Evertime there is a problem you ask people to use their credit cards. Or use some form of credit. And when there is an economic slowdown because of the problems of non performing loans, then you get the credit card out again. So, yeah unfortunately that is the way it is.
Why is there this tendency to go back to the same thing that causes the problem, over and over again?
It is the quickest fix. And you hope that you are going to bring about structural changes during the course of a better economic cycle. So people don’t bring the heavyweight policies in place until they have got the economy going again and sadly the only way you can get the economy going again is to just to make credit cheap and encourage people to borrow.
Inflation targeting by central banks has come in for criticism lately. The point is that because a central bank works with a certain inflation target in mind, it ends up encouraging bubbles by keeping interest rates too low for too long. What is your view on that?
These concepts were brought in when central banks thought they could control inflation. If you look at one country that dominates the world at the moment in terms of product prices and in terms of the inflation rate, it is China. Your monetary policy isn’t going to change the behaviours of China. And some of the flairs up in inflation have been as a consequence of China and therefore monetary policies have no impact. Secondly, the idea of controlling inflation, the concept worked for the 20 years of the bull market. Then we got inflation which was too low. So we have changed it all around to actually try to create inflation rather than to dampen inflation. I don’t think they know what tools they should be using. The central banks are using the same tools they used to dampen inflation, in a reverse way, in order to create it.
And that’s where the problem lies…
For nearly two to three hundred years, the world had no inflation, yet the world was kind of an alright place. We had an industrial revolution and we still had negative price increases, but that did not stop people from getting wealthy.
Many people have been shouting from the rooftops that because of all the money that has been printed and is being printed, the world is going to see a huge amount of inflation, so please go and buy gold. But that scenario hasn’t played out…
Chapter one of the economic text book is that if you create a lot of money, you have got a problem. Chapter two is that there is actually another dimension to this and that is the velocity of money. If you have lots of money and if it happens to go around the world very very slowly it doesn’t have any impact. And that has been the point. The amount of money has gone up considerably but the velocity of money has come down. To date, again in the western world, there is little sign of the velocity improving. We are seeing this in the lending numbers. Even if banks have the appetite for lending money, nobody wants to borrow. Someone’s aged 55, and the job prospects are no wage growth, and the pension is tiny, I am not sure that even if you have gave him ten credit cards, he’ll go and use any of one of them. And that is the kind of thing that is happening in Europe and to some extent in the United States.
Yes that’s true…
The only money going into housing at the moment is the money coming from the institutional market, as they speculate. If you look at students coming out of college in the United States, they have come out way down with debt. There is again no way that they are going to go and take more loans from the bank because they have already done that in order to fund their education. So I do not seeturnover of money in the Western world.
There may be no inflation in everyday life but if you look at asset inflation, it has been huge.. That’s right. People just find stores of value. Gold went up as much as it did, in its last wave. If you look at Sotheby’s and Christie’s, in the art market, they are doing extremely well. The same is true about the property market. Places which are in the middle of a jungle in Africa, there prices have gone up to $100,000 an acre. Why? There is no communication. No power lines. It is just because people have money and are seeking out assets to save that money. Also, there has been cash.If you go to Dubai, 80% of the house purchases there, are in cash. So you don’t need the banks.
Can you tell us a little more on the Africa point you just made?
I did laugh when Rwanda came to Singapore to raise money for its first ever bond issue and people were just discovering these new bond markets to invest purely because they did not know what to do with their money. So someone said that I am building, you know in a Rwanda or a Nigeria, and people just ran with their cash, buying properties and buying up land wherever the policies of the government allowed. Sri Lanka again just closed the door on foreign investors because you start to get social problems as the local community cannot afford properties to live in. It was amazing how commercial many of these property markets became, even though in the past they were totally undiscovered. And as we have seen with many of them, you take considerable risk with the legal system. The world has got repriced. I always say that if you can find a three bedroom house below a $100,000-$150,000 in a major city, you are doing well anywhere in the world today.
In Mumbai you won’t find it even for that price..
Yes, though five years ago it was true. It is impossible now.
(The interview appeared in the Forbes India magazine edition dated Oct 4, 2013) 

With gold imports almost zero, trade deficit unlikely to fall further

goldVivek Kaul 
The trouble with being a one trick pony is that the trick stops yielding dividends after sometime. Something similar seems to have happened to the efforts of the government of India to control the huge trade deficit. Trade deficit is the difference between imports and exports.”
Trade deficit for August 2013 was at $10.9 billion. This is a major improvement in comparison to the trade deficit of $14.17 billion in August 2012. The deficit was $12.27 billion in July, 2013.
This fall in trade deficit has come through the efforts of the government to bring down gold imports by increasing the import duty on it. India imported just 2.5 tonnes of gold in August and this cost $650 million. Now compare this to 47.5 tonnes imported in July, 31.5 tonnes in June, 162 tonnes in May and 142.5 tonnes in April of this year.
In April 2013, the 142.5 tonne of imported gold had cost $7.5 billion and the trade deficit was at $17.8 billion. If there had been no gold imports, then the trade deficit for April would have stood at $10.3billion($17.8 billion – $7.5 billion). If the gold imports had been at $650 million (or $0.65 billion) as has been the case in August 2013, then the trade deficit would have stood at $10.95 billion ($17.8 billion – $7.5 billion + $0.65 billion). This number is very close to the trade deficit of $10.9 billion that the country saw in August 2013.
So the point is that the government has been able to control the trade deficit by ensuring that the gold imports are down to almost zero. As the Indian Express reports “Gold imports stopped after July 22 due to confusion over a rule issued by the Reserve Bank of India, which required importers to re-export at least 20% of all the purchases from overseas.”
The confusion has now been cleared. Also, with Diwali in early November and the marriage season starting from October, gold imports are likely to pick up in September and October. Even if it doesn’t, the imports are already close to zero. So, any more gains on the trade deficit front by limiting gold imports, is no longer possible. The Indian Express report cited earlier quotes a senior executive of the Bombay Bullion Association as saying “Imports may again rise to around 30 tonne in September, as jewellers usually start building inventory to cater to the requirement during the festival and marriage season.”
At the same time, the government hasn’t been able to do much about oil, which is India’s biggest import. In August 2013, oil imports stood at $15.1 billion, up by 17.9% in comparison to the same period last year. Oil imports formed nearly 40.8% of the total imports of $37.05 billion. There isn’t much the government can do on this front, other than raising prices majorly to cut under-recoveries of oil marketing companies and limit demand for oil products at the same time.
But that may not be a politically prudent thing to do. The commerce minister, Anand Sharma, warned that with the international prices of crude oil rising over the past 10 days, the oil import bill may go up in the months to come. And this may lead to a higher trade deficit.
As Sonal Varma of Nomura Securities wrote in a report dated September 10, 2013, “Looking ahead, a seasonal rise in imports during the festive season and higher oil prices should result in a slightly higher trade deficit in Q4 2013(the period between Oct and Dec 2013), relative to Q3 (the period between July and Sep 2013).”
But imports form just one part of the trade deficit equation. Exports are the other part. Exports for August 2013, went up by nearly 13% to $26.4 billion, in comparison to August 2012. In July, exports were at $25.83 billion.
While exports may have gone up by in August due to a significantly weaker rupee, whether they will continue to go up in the months to come is a big question. As Ruchir Sharma, Head of Global Macro and Emerging Markets at Morgan Stanley, and the author of Breakout Nations, told me in a recent interview I did for Forbes India “Exports are dependent on multiple factors, exchange rate being only one of them. Global demand which is another major factor influencing exports, has been weak. If just changing the nominal exchange rate was the game, then it would be such an easy recipe for every country to follow. You could just devalue your way to prosperity. But in the real world you need other supporting factors to come through. You need a manufacturing sector which can respond to a cheap currency. Our manufacturing sector, as has been well documented, has been throttled by all sorts of local problems which exist.”
This something that another international fund manager reiterated when I met him recently. As he said “A part of the problem that India has is that the economic model has been based more on the service sector rather than manufacturing. The amount of manufactured products that become cheaper immediately and everyone says that I need more Indian products rather than Chinese products or Vietnamese products, is probably insufficient in number to give a sharp rebound immediately.”
The other big problem with Indian exports is that they are heavily dependent on imports. As commerce minister Anand Sharma admitted to “45% of exports have imported contents. I don’t think weak rupee has any impact on positive export results.”
In fact The Economic Times had quoted Anup Pujari, director general of foreign trade(DGFT) on this subject a few months back. As he said “It is a myth that the depreciation of the rupee necessarily results in massive gains for Indian exporters. India’s top five exports — petroleum products, gems and jewellery, organic chemicals, vehicles and machinery — are so much import-dependent that the currency fluctuation in favour of exporters gets neutralised. In other words, exporters spend more in importing raw materials, which in turn erodes their profitability.”
Also, the moment the rupee falls against the dollar, the foreign buyers try to renegotiate earlier deals, Pujari had said. “As most exporters give in to the pressure and split the benefits, the advantages of a weak rupee disappear.”
What all these points tell us is the simple fact that the trade deficit will be higher in the months to come. And given, this the market, like is the case usually, is probably overreacting.
The article originally appeared on www.firstpost.com on September 11, 2013 
 (Vivek Kaul is a writer. He tweets @kaul_vivek) 
 

Rupee fall: Why India's struggle for dollars will continue

3D chrome Dollar symbolVivek Kaul
The question being asked yesterday was “why is the rupee falling against the dollar”. The answer is very simple. The demand for American dollars was more than that of the Indian rupee leading to the rupee rapidly losing value against the dollar.
This situation is likely to continue in the days to come with the demand for dollars in India being more than their supply. And this will have a huge impact on the dollar-rupee exchange rate, which crossed 60 rupees to a dollar for the first time yesterday.

Here are a few reasons why the demand for dollars will continue to be more than their supply in the days to come.
a) The United Nations Conference on Trade and Development (UNCTAD) recently pointed out that
the foreign direct investment in India fell by 29% to $26 billion in 2012. When dollars come into India through the foreign direct investment(FDI) route they need to be exchanged for rupees. Hence, dollars are sold and rupees are bought. This pushes up the demand for rupees, while increasing the supply of dollars, thus helping the rupee gain value against the dollar or at least hold stable.
In 2012, the FDI coming into India fell dramatically. The situation is likely to continue in the days to come. The corruption sagas unleashed in the 2G and the coalgate scam hasn’t done India’s image abroad any good. In fact in the 2G scam telecom licenses have been cancelled and the message that was sent to the foreign investors was that India as a country can go back on policy decisions. This is something that no big investor who is willing to put a lot of money at stake, likes to hear.
Opening up multi-brand retailing was government’s other big plan for getting FDI into the country. In September 2012, the government had allowed foreign investors to invest upto 51% in multi-brand retailing. But between then and now not a single global retailing company has filed an application with the Foreign Investment Promotion Board (FIPB), which looks at FDI proposals.
This scenario doesn’t look like changing as likely foreign investors struggle to make sense of the regulations as they stand today. Dollars that come in through the FDI route come in for the long run as they are used to set up new industries and factories or pick up a stake in existing companies. This money cannot be withdrawn overnight like the money invested in the stock market and the bond market.
b) There has been a lot of talk about the Reserve Bank of India(RBI) selling bonds to Non Resident Indians (NRIs) and thus getting precious dollars into the country. The trouble here is that any NRI who invests in these bonds will carry a huge amount of currency risk, given the rapid rate at which the rupee has lost value against the dollar.
Lets understand this through a simple example. An NRI invests $100,000 in India. At the point he gets money into India $1 is worth Rs 55. So $100,000 when converted into rupees, amounts to Rs 55 lakh. This money lets assume is invested at an interest rate of 10%. A year later Rs 55 lakh has grown to Rs 60.5 lakh (Rs 55 lakh + 10% interest on Rs 55 lakh). The NRI now has to repatriate this money back. At this point of time lets say $1 is worth Rs 60. So when the NRI converts rupees into dollars he gets $100,800 or more or less the same amount of money that he had invested. His return in dollar terms is 0.8%. The real return would be much lower given that this calculation doesn’t take the cost of conversion into account.
Hence, the NRI would have been simply better off by letting his money stay invested in dollars. This is the currency risk. To make it attractive for NRI investors to invest money in any such RBI bond, the interest on offer will have to be very high.
c) While the supply of dollars will continue to be a problem, the demand for them will continue to remain high. A major demand for dollars will come from companies which have raised loans in dollars over the last few years and now need to repay them. As the Business Standard reports “Beginning 2004, the central bank(i.e. RBI) has approved nearly $220 billion worth of external commercial borrowings and foreign currency convertible bonds (FCCB), at the rate of a little over $2 billion a month. Nearly two-thirds of this amount was approved in the past five years. Much of this ECB will come up for repayment this financial year, putting further pressure on the rupee.”
A lot of companies have raised foreign loans over the last few years simply because the interest rates have been lower outside India than in India. These companies will need dollars to repay their foreign loans as they mature.
The other thing that might happen is that companies which have cash, might look to repay their foreign loans sooner rather than later. This is simply because as the rupee depreciates against the dollar, it takes a greater amount of rupees to buy dollars. So if companies have idle cash lying around, it makes tremendous sense for them to prepay dollar loans. The trouble is that if a lot of companies decide to prepay loans then it will add to the demand for the dollar and thus put further pressure on the rupee.
d) India’s love for gold has been one reason behind significant demand for the dollar. Gold is bought and sold internationally in dollars. India produces very little gold of its own and hence has to import almost all the gold that is consumed in the country. When gold is imported into the country, it needs to be paid for in dollars, thus pushing up the demand for dollars. As this writer has argued in the past there is some logic for the fascination that Indians have had for gold. A major reason behind Indians hoarding to gold is high inflation. Consumer price inflation continues to remain high. Also, with the marriage season set to start over the next few months, the demand for gold is likely to go up. What can also add to the demand is the fall in price of gold, which will get those buyers who have not been buying gold because of the high price, back into the market. All this means a greater demand for dollars.
e) India has been importing a huge amount of coal lately to run its power plants. Indian coal imports shot up by 43% to 16.77 million tonnes in the month of May 2013, in comparison to the same period last year. Importing coal again means a greater demand for dollars.
The irony is that India has huge coal reserves which are not being mined. The common logic here is to blame Coal India Ltd, which more or less has had a monopoly to produce coal in India. The government has tried to encourage private sector investment in the sector but that has been done in a haphazard manner leading to the coalgate scam. This has delayed the bigger role that the private sector could have played in the mining of coal and thus led to lower coal imports.
The situation cannot be set right overnight. The major reason for this is the fact that the expertise to get a coal mine up and running in India has been limited to Coal India till now. To develop the same expertise in the private sector will take time and till then India will have to import coal, which will need dollars.
f) The government’s social sector policies may also add to a huge demand for dollars in the time to come. The procurement of wheat by the government this year has fallen by 33% to 25.08 million tonnes. This will not have any immediate impact given the huge amount of grain reserves that India currently has. But as and when right to food security becomes a legal right any fall in procurement will mean that the government will have to import food grains like wheat and rice, and this will again mean a demand for dollars. While this is a little far fetched as of now, but is a likely possibility and hence cannot be ignored.
These are fundamental issues which will continue to influence the dollar-rupee exchange rate in the days to come and do not have easy overnight kind of solutions. Of course, if the Ben Bernanke led Federal Reserve of United States, decides to go back to printing as many dollars as it is right now, then a lot of dollars could flow into India, looking for a higher return. But then, that is something not under the control of Indian government or its policy makers.
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Petrol bomb is a dud: If only Dr Singh had listened…


Vivek Kaul
The Congress led United Progressive Alliance (UPA) government finally acted hoping to halt the fall of the falling rupee, by raising petrol prices by Rs 6.28 per litre, before taxes. Let us try and understand what will be the implications of this move.
Some relief for oil companies:
The oil companies like Indian Oil Company (IOC), Bharat Petroleum (BP) and Hindustan Petroleum(HP) had been selling oil at a loss of Rs 6.28 per litre since the last hike in December. That loss will now be eliminated with this increase in prices. The oil companies have lost $830million on selling petrol at below its cost since the prices were last hiked in December last year. If the increase in price stays and is not withdrawn the oil companies will not face any further losses on selling petrol, unless the price of oil goes up and the increase is not passed on to the consumers.
No impact on fiscal deficit:
The government compensates the oil marketing companies like Indian Oil, BP and HP, for selling diesel, LPG gas and kerosene at a loss. Petrol losses are not reimbursed by the government. Hence the move will have no impact on the projected fiscal deficit of Rs 5,13,590 crore. The losses on selling diesel, LPG and kerosene at below cost are much higher at Rs 512 crore a day. For this the companies are compensated for by the government. The companies had lost Rs 138,541 crore during the last financial year i.e.2011-2012 (Between April 1,2011 and March 31,2012).
Of this the government had borne around Rs 83,000 crore and the remaining Rs 55,000 crore came from government owned oil and gas producing companies like ONGC, Oil India Ltd and GAIL.
When the finance minister Pranab Mukherjee presented the budget in March, the oil subsidies for the year 2011-2012 had been expected to be at Rs Rs 68,481 crore. The final bill has turned out to be at around Rs 83,000 crore, this after the oil producing companies owned by the government, were forced to pick up around 40% of the bill.
For the current year the expected losses of the oil companies on selling kerosene, LPG and diesel at below cost is expected to be around Rs 190,000 crore. In the budget, the oil subsidy for the year 2012-2013, has been assumed to be at Rs 43,580 crore. If the government picks up 60% of this bill like it did in the last financial year, it works out to around Rs 114,000 crore. This is around Rs 70,000 crore more than the oil subsidy that the government has budgeted for.
Interest rates will continue to remain high
The difference between what the government earns and what it spends is referred to as the fiscal deficit. The government finances this difference by borrowing. As stated above, the fiscal deficit for the year 2012-2013 is expected to be at Rs 5,13,590 crore. This, when we assume Rs 43,580crore as oil subsidy. But the way things currently are, the government might end up paying Rs 70,000 crore more for oil subsidy, unless the oil prices crash. The amount of Rs 70,000 crore will have to be borrowed from financial markets. This extra borrowing will “crowd-out” the private borrowers in the market even further leading to higher interest rates. At the retail level, this means two things. One EMIs will keep going up. And two, with interest rates being high, investors will prefer to invest in fixed income instruments like fixed deposits, corporate bonds and fixed maturity plans from mutual funds. This in other terms will mean that the money will stay away from the stock market.
The trade deficit
One dollar is worth around Rs 56 now, the reason being that India imports more than it exports. When the difference between exports and imports is negative, the situation is referred to as a trade deficit. This trade deficit is largely on two accounts. We import 80% of our oil requirements and at the same time we have a great fascination for gold. During the last financial year India imported $150billion worth of oil and $60billion worth of gold. This meant that India ran up a huge trade deficit of $185billion during the course of the last financial year. The trend has continued in this financial year. The imports for the month of April 2012 were at $37.9billion, nearly 54.7% more than the exports which stood at $24.5billion.
These imports have to be paid for in dollars. When payments are to be made importers buy dollars and sell rupees. When this happens, the foreign exchange market has an excess supply of rupees and a short fall of dollars. This leads to the rupee losing value against the dollar. In case our exports matched our imports, then exporters who brought in dollars would be converting them into rupees, and thus there would be a balance in the market. Importers would be buying dollars and selling rupees. And exporters would be selling dollars and buying rupees. But that isn’t happening in a balanced way.
What has also not helped is the fact that foreign institutional investors(FIIs) have been selling out of the stock as well as the bond market. Since April 1, the FIIs have sold around $758 million worth of stocks and bonds. When the FIIs repatriate this money they sell rupees and buy dollars, this puts further pressure on the rupee. The impact from this is marginal because $758 million over a period of more than 50 days is not a huge amount.
When it comes to foreign investors, a falling rupee feeds on itself. Lets us try and understand this through an example. When the dollar was worth Rs 50, a foreign investor wanting to repatriate Rs 50 crore would have got $10million. If he wants to repatriate the same amount now he would get only $8.33million. So the fear of the rupee falling further gets foreign investors to sell out, which in turn pushes the rupee down even further.
What could have helped is dollars coming into India through the foreign direct investment route, where multinational companies bring money into India to establish businesses here. But for that the government will have to open up sectors like retail, print media and insurance (from the current 26% cap) more. That hasn’t happened and the way the government is operating currently, it is unlikely to happen.
The Reserve Bank of India does intervene at times to stem the fall of the rupee. This it does by selling dollars and buying rupee to ensure that there is adequate supply of dollars in the market and the excess supply of rupee is sucked out. But the RBI does not have an unlimited supply of dollars and hence cannot keep intervening indefinitely.
What about the trade deficit?
The trade deficit might come down a little if the increase in price of petrol leads to people consuming less petrol. This in turn would mean lesser import of oil and hence a slightly lower trade deficit. A lower trade deficit would mean lesser pressure on the rupee. But the fact of the matter is that even if the consumption of petrol comes down, its overall impact on the import of oil would not be that much. For the trade deficit to come down the government has to increase prices of kerosene, LPG and diesel. That would have a major impact on the oil imports and thus would push down the demand for the dollar. It would also mean a lower fiscal deficit, which in turn will lead to lower interest rates. Lower interest rates might lead to businesses looking to expand and people borrowing and spending that money, leading to a better economic growth rate. It might also motivate Multi National Companies (MNCs) to increase their investments in India, bringing in more dollars and thus lightening the pressure on the rupee. In the short run an increase in the prices of diesel particularly will lead higher inflation because transportation costs will increase.
Freeing the price
The government had last increased the price of petrol in December before this. For nearly five months it did not do anything and now has gone ahead and increased the price by Rs 6.28 per litre, which after taxes works out to around Rs 7.54 per litre. It need not be said that such a stupendous increase at one go makes it very difficult for the consumers to handle. If a normal market (like it is with vegetables where prices change everyday) was allowed to operate, the price of oil would have risen gradually from December to May and the consumers would have adjusted their consumption of petrol at the same pace. By raising the price suddenly the last person on the mind of the government is the aam aadmi, a term which the UPAwallahs do not stop using time and again.
The other option of course is to continue subsidize diesel, LPG and kerosene. As a known stock bull said on television show a couple of months back, even Saudi Arabia doesn’t sell kerosene at the price at which we do. And that is why a lot of kerosene gets smuggled into neighbouring countries and is used to adulterate diesel and petrol.
If the subsidies continue it is likely that the consumption of the various oil products will not fall. And that in turn would mean oil imports would remain at their current level, meaning that the trade deficit will continue to remain high. It will also mean a higher fiscal deficit and hence high interest rates. The economic growth will remain stagnant, keeping foreign businesses looking to invest in India away.
Manmohan Singh as the finance minister started India’s reform process. On July 24, 1991, he backed his “then” revolutionary proposals of opening up India’s economy by paraphrasing Victor Hugo: “No power on Earth can stop an idea whose time has come.”
Good economics is also good politics. That is an idea whose time has come. Now only if Mr Singh were listening. Or should we say be allowed to listen..
(The article originally appeared at www.firstpost.com on May 24,2012. http://www.firstpost.com/economy/petrol-bomb-is-a-dud-if-only-dr-singh-had-listened-319594.html)
(Vivek Kaul is a writer and can be reached at [email protected])