Nation's honour not at stake because of rupee fall

Highlights

Since May, in particular, every day has been bringing a new hope in the forex market but the hope has been giving place to despair by sunset. So, the question everyone is asking these days is: will the exit of Duvvuri Subba Rao from the helm of country’s monetary policy bring happy times?

Ram Singh Kalchuri

Since May, in particular, every day has been bringing a new hope in the forex market but the hope has been giving place to despair by sunset. So, the question everyone is asking these days is: will the exit of Duvvuri Subba Rao from the helm of country’s monetary policy bring happy times?


Noted economists like Prof Arvind Panagariya consider Rao’s innings as one of the worst periods for our monetary policy. His take is that the RBI under the Telugu bidda made a ‘huge mistake’ in not building up dollar reserves in 2009-10. It was the first year of UPA-II. It was also the period when the rupee had appreciated sharply. Now the war chest is small and it limits the elbow room for the RBI.

No surprise, therefore, the incoming RBI Governor Raghuram Rajan says he has no magic wand to check the continuous fall of the rupee. As the Chief Economic Advisor to the Finance Ministry, the Bhopal-born Rajan is a party to the fight the Mint Street has been waging in the rupee-related issues.

Whatever be the public perception, Subba Rao and the government were working together with some advice from the old economic warhorse C Rangarajan. This is not to say that Rao and the finance minister Palaniappan Chidambaram have been on the same page. They were not. The outgoing Governor has cut his teeth in managing the finances of Andhra Pradesh when it was running huge overdrafts. PC, on the other hand, is a lawyer, and for him winning the case for his client is important. The dream budgets he had delivered are a case in point.

Now, what is the problem vis-a-vis the rupee? Simply it is that our imports like crude oil have become costlier because it takes Rs. 60 to get a dollar worth. We do not have enough dollars in the RBI vaults to buy whatever we want in the international market. Why did we land in this situation? Could not our Prime Minister foresee the problem? What about the economists and administrators and, above all, political pundits in the Congress party and in the government?

We have it on the authority of Prof Panagariya himself that the country has suffered a break in the growth “momentum” of the economy. He blames three persons: Jairam Ramesh when he was the environment minister, Jayanthi Natarajan, the current environment minister, and Congress President Sonia Gandhi. He doesn’t spare Subba Rao, of course, saying that the RBI’s errors had compounded our rupee’s misery.

The economist may be right. But the fact of the matter is that the rupee’s problems have their genesis at the political level. As monetary authority, the RBI has limited weapons in its armoury and these primarily relate to interest rates, and the amount the banks can keep with themselves and the amount they should park with the RBI. These weapons are no substitute to policy initiatives which are in the government’s domain. Also, these weapons are ineffective to deal with inflation.

Unfortunately, successive governments have been turning to the RBI for handling inflation. As Finance Minister, Manmohan Singh followed this time-tested route. It is because of a mindset that dates back to our obsession with socialism. If the price of any commodity goes up, we should increase the supply of that particular commodity or its substitute. This is supply side management from an economists’ point of view. This tract demands more supplies, say of onions and potatoes when these are in short supply. And it is beyond the capacity of our government since its expertise is limited to managing shortages.

So, the government, the ruling party and the politicians turn to the RBI to check money supply. Once it sucks money out of the marketplace, it leads to another shortage. It brings us face-to-face with a situation where there is no money for investment -- old factories are idle and the new factories refuse to materialise. The fall in industrial activity translates into fewer jobs.

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