Is P. Chidambaram Sleeping……?

Is P. Chidambaram Sleeping……? (21st November 2007)

“Trade Deficit dips to seven month low”; and am talking about U.S. and not India. Since the last few months all the news that is catching my attention is the rising rupee and the steep rise of the share market indices, both gaining heights unimaginable till the beginning of this year. This rise has stirred up much of euphoria in the trading sectors with the FM starting to feel the heat only recently. Such a meteoric rise is unwarranted and is not because of the strong fundamentals as Mr. Chidambaram has rightly pointed out. It is because of an external stimulus so strong that it can break the very flow of the growth path that India has charted on. The rise of the rupee has already started to take its toll on our economy, and the markets are all treading a path to a massive showdown and a brutal correction.

The Indian economy is mainly fuelled by the service sector and the manufacturing is still very much in the back seat. The economic model that we follow is mainly internal consumption based with the funds for the same coming from abroad, mainly the US in the form of revenues from the service sector. All those in the software, BPO business earn big money which is used up in the consumption of goods and services in India giving stimulus, however small to other sectors. The rising rupee, though is something many people are happy about, is not so good if it continues to rise this way.

What I feel is that it is a big political gimmick by the U.S. of A to stifle the growth of countries and make money none the less. Most of the oil companies in the west Asian region are owned and controlled completely by US or US has a major stake in them. This applies to almost all the companies operating from there except the national ones. Not only west Asia but wherever there is oil the US companies have stake in it. The recently inflated oil prices have more than added to the US’ kitty. Even though it shows a huge fuel import bill, US is primarily circulating the money amongst its own and making more of it on the high ruling oil prices. The more the oil prices rise the more it earns and more clout it can have in the various markets around the world.

These petro-dollars are invested heavily in the world markets, especially of the Asian region. This heavy investment drives up the markets and when they have got the profits they wanted they can simply pull off without any remorse, leaving the markets disillusioned of what happened. This pouring in of money results in excess liquidity in the markets, and the extra money that is there in the system jacks up the currency threatening the very core of our economic growth engine. Also the sudden meteoric rise of the markets fuels speculations and sucks in money from other potential investment avenues, leading to a sudden rush of all in one direction. This aggravates the situation as everyone wants to earn money from the rally and in the end it will be just the collusion of the foreign funds that had parked there money here who will be laughing back home.

The weak dollar is one of the ways by the US to counter its burgeoning trade and budget deficits that had spiralled out of its control. The weaker the currency the cheaper is that country, and the export led model that US works on will give it more than a thrust to help improve its situation. Already the results are showing in the form of the falling trade deficits, and a budget deficit that dropped almost 50% of its present value of $162 billion. This has resulted in a rise of exports by the US, though miniscule by the current standards (the rise is just 0.4%). And this rise is mainly because of the rise in the farm produce, industrial supplies and the consumer goods sale. Also the weak dollar will make the imports to the country more expensive giving rise to usage of more domestic products affecting the countries dependent mainly on the US for their markets, India being one of them. The US import bill actually dropped (.4%). The trade deficit with the Chinese dropped by 5.3%, a huge figure considering the trade volumes between the two countries. The annual trade deficit is also down 6.7% for the US.

How a weak dollar is affecting us is anybody’s guess. We deal mainly in dollar terms and lower the value of the currency the more it is a problem for us. The top lines are getting eroded and the bottom lines are in red for our service industry. The more the rise is there the more we are going to get hurt. Because of our model, what it has come to be, is the main problem for us. We are happy chirping our growth songs as long as we keep on getting money from US, once this stops, we are all in for a toss. The US is investing heavily in the markets dependent on it for the sole reason of the congress elections being round the corner and it has to present a clean sheet to its citizens. And India is one of the biggest losers in this power game. The more this trend continues the more we will be pushed back. Already some 500,000 people of the service sector have lost their jobs and this number can just go on increasing if the trend continues. For our economy, this is the right time, actually we are late, to shift to an export led model in this flat, fast globalising world. Only Indian demand cannot fuel our growth to time infinitum.

China, our neighbours are also living in the same world but they have not been affected by this fall in the dollar, on the contrary this year their trade gap rose 56% to $23.9 billion this month with the total of the first nine months of this fiscal at $185 billion already way ahead of the last fiscal results. One of the reasons of this is the fixed Yuan which is not affected by the falling dollar; on the contrary this fall may prove to be beneficial for them as they are able to maintain their cost advantage vis-à-vis the US markets and the businesses just keep on slipping from our hands to their shores. If this continues and the Chinese learn to speak English then we are doomed and may well again be a land of elephants and snake charmers. Also China along with some major mineral producing countries is shifting from dollar to more stable currencies like the euro to lessen the damage. Why are we still too-tooing the dollar is something not understandable. Is it because we are so sub-servient to the US politico’s whimsical attitude that we have put our country on the back burner and blindly following what US says, or is it that a shift will affect our businesses for a short term and this is not warranted with the people already talking of a mid term polls in the India, again a situation of keeping India on the back burner. China too may be involved in this game so as to regain its clout as the only major country in this region. The Chinese have a geographical motive is what everyone knows since the 60’s. China has never been our friend and even now it is friendlier with our enemies, so deeming china to be a Buddhist lama is not the right thing to do. It was, is and will remain our biggest competitor. We took away its pie in the service industry and it will do anything to get it back. The falling dollar along with the fixed Yuan is a double trouble for the economy. The weak dollar is eroding our wealth and the fixed Yuan is taking away new orders. A double whammy India has to counter. Unlike India the Chinese growth is fuelled more by the external stimulus rather than the internal demands, which again are very high. The Chinese exported some 2.2 billion pairs of shoes, whereas India just a measly 250,000. In India the internal consumption forms a major revenue source where as in china it’s just to augment the already booming growth.

Our economic policies have more or less remained the same then how come all this is happening. The extra liquidity in the markets has led to a problem of surplus. The money is just being pumped into the system, with no outlet and this may lead to an explosion. The high ruling interest rates are another deterrent to help mop up the extra liquidity that has come in. The high interest rates are stopping us from using the free flow of money that has come in. a reduction in the consumer interest along with the reduction in CRR would help us. Also the policies for the funds may be changed to something more inline with our interests than those of the funds that are coming in. Investment in stock markets may be restricted to those funds that buy into our bonds and the money hence raised may be used to fuel or infrastructure and public needs. This will help us getting the much needed cash in the right direction and also the money that comes in will get time to work for the Indian economy instead. The money invested this way cannot be retrenched as fast and as damaging a way that it can be from the markets. The rupee rise this way will be helpful as we will be funding the basics to fuel our economy. The FII should be taxed at par or even more than the Indian funds to gain from their profits and allow only the genuine funds to flourish. The fall in interest rates will make more people to borrow money and the banks would be forced to raise more capital. This would help fuel growth and mop up extra money that is there in the system.

Along with these we have to take care that the people don’t take advantage of this opportunity and invest in speculation. Also shifting from a predominantly dollar based basket of currencies we should shift to more currencies so as to de-risk our profile. This would take some pressure off us and buy us some time to shift to more areas other than just service. Also in software we should try to move to higher end jobs and enter the designing arena rather than just staying in the BPO testing sphere. The government should give more thrust to areas of research and development and help improve the literacy level of the country, not just on paper but in real term to make use of the huge human capital that we have. This alone would help us survive in the long run. Also a push to the manufacturing sector is necessary so as to gain an edge in that sector too. We need to learn a lot from our neighbours: China and Japan. Both these Asian giants took up a model not dependent on the internal demands and have used it to leverage their growth to high and sustainable levels. We should try and not get trapped in the politics of the US and try not use the nuclear carrot that they are dangling in front of us. And our politicos should get a bit more realistic and see that this nuclear deal will not nuke us, not only on the security front but also on the economic front while trying to please US. We should clearly mark our policies so as to help our economy rather than please US for fulfilling the political fiasco by the Indian politicians. As of always our basic goal still remains roti, kapda aur makaan rather than a nuke bomb for everyone.