The Indian Rupee Crunch in Macro Perspective

The macroeconomic fundamentals including GDP growth, trade balance (surplus/deficits), interest rates and inflation levels determine the value of country’s currency. The Bhutanese Ngultrum (BTN) pegged to Indian Rupee (INR) has been serving us well even though it forced local interest rates and inflation to follow those in India. This will happen even if the local economy is completely out of sync with the Indian. For times to come it is beyond my intellect to envision Bhutanese economy being out of sync. So the scope and effectiveness of monetary policy to achieve macroeconomic stability has very little space. That leaves GDP and trade growth to improve INR liquidity, leave aside strengthening BTN. The best (longer-term) option for improving INR reserve is export-led GDP and trade growth with proper fiscal and monetary instruments in place. The near-term measures could be spending cut on uneconomical/unaffordable programs/activities/items both in public and private sectors, and the last and somewhat easier than above two is to increase standby credit, development grant,  “swap” arrangement, increase taxes (doubtful), plug loopholes etc. The last two have immediate implications on both public and private sector expenditures that eventually reflect in GDP.

The import-driven internal consumption-based growth model tends to dance at the dangerous economic threshold, the current INR crunch shows. This is not conducive to leading the country towards the national philosophy of Gross National Happiness (GNH). China is aggressively shifting its economy from production-based export model (presumably considered not very sustainable longer-term in changing geopolitical environment) to internal consumption with priority on indigenous innovation (reverse engineering as part of the process has being having its controversies) while India emphasizes on internal consumption with inclusive innovation for its economic growth. Economists know better! So, economic growth model determine the investment/expenditure pattern. The sound strategy for us should be to strongly support production base for export of goods and services, and improve balance of payment – a slow shift towards export-led growth model (from current import driven economy, characterized by high credit growth and internal and external imbalances) focusing more on agriculture and manufacturing sectors than services sensing wind of  opportunities.

Crystallizing the above, my main concern is in soundness of our investments/expenditures. On 13 Feb 2012, Reuters correspondent asked Premier Win Jiabao, during his final National People's Congress (NPC) news conference, how China will deal with local government’s massive debt accumulation on account of central government credit, and capital raised through bond and stock markets. The Premier replied that China was closely monitoring the local government debt and confident that the debt will not destabilize Chinese economy mainly because local government investments were more on revenue generating areas and less on government asset formation. In line with Chinese strategy to shift growth model mentioned above, the operative words are “monitoring”, “local government”. “revenue generating areas” and “government asset formation”. Banking skeptics may argue government asset generates economic return. But the fact is financial return on investment (ROI) is required to service commercial debt (short-term). Asset formation is good provided it is related to affordability entrenched in sound socioeconomic development framework. The soundness of an investment rests on channeling appropriately commercial vis-à-vis development finance (longer-term, 25 years and above). Generally former triggers the crisis!

The commercial lending for asset formation (capital investment) with little/no ability to service debt with ROI may be categorized as sub-prime lending, meaning making loans to people who may have difficulty maintaining the repayment schedule. One does not need to dig deep to classify the following loan portfolios of commercial banks in FY2010-11 into prime/sub-prime category:

	Sector	Amount (BTN billion)	Percent
(a)	Building & Construction	8.4	24%
(b)	Personal & Other Loans	6.7	19%
(c)	Manufacturing	6.7	19%
(d)	Trade and Commerce	5.3	15%
(e)	Service & Tourism	4.6	13%
(f)	Transport	2.8	8%
(g)	Agriculture	0.7	2%
	Total	35.1	100%

Source: Royal Monetary Authority of Bhutan, Annual Report 2010/11, January 2012

The commercial bank lending in FY2010-11 increased  by BTN  9.0 billion (34.5%) to BTN 35.1 billion accounting 98% of banking sector credit to private sector.  The robust commercial lending -- a sign of  high liquidity  due to all kinds of bank deposits known to monetary and banking authorities -- seems to have been driven by banks' short-term profit motive while the borrowers seem to have devised credit risk protection presumably through over-valued mortgaging and construction quality/cost undercutting to leave cushion for crisis – a dangerous trend for high credit  and internal/external imbalance environment.  “Ordinary entrepreneurs chase profit. Remarkable Entrepreneurs create value (and profit is the inevitable result),” says Robin Sharma. Even Alan Greenspan conceded failure in allowing the self-regulation of commercial banks  in sub-prime lending in the US. Therefore, bank deposits and sub-prime lending principles emanating through strong fiscal/monetary measures combined with  commercial bank’s self-regulatory discipline and private sector education/awareness may be best option to streamline commercial banking and nurture “remarkable”  entrepreneurs.

In the above context, it would be pertinent to see the Government measures undertaken/proposed so far to ease INR crunch, which include:

       

1. increasing standby credit line with India from INR 3 billion to INR 6 billion from April 2012;
2. stage releasing INR 100 billion development grant aid by the Government of India;
3. undertaking “swap” with Reserve Bank of India under SAARC Finance framework from April 2012;
4. treating  INR as foreign currency;
5. limiting INR cash or credit card access to  Bhutanese nationals by banks to INR 10,000/day with a maximum of INR 50,000/person/month;
6. not allowing banks to keep deposit accounts by non-resident foreigners  from 9th March 2012, and closing existing deposit accounts by 15th March 2012;
7. allowing resident foreigners (RFs) with valid Bhutanese business licenses and work permits to hold BTN accounts in banks;
8. allowing RFs with valid Bhutanese work permits but without  bank accounts  to remit/pay INR upon employers’ validation;
9. allowing INR transactions (subject to submission of documentary evidence including but not limited to proforma invoice/invoice/tax receipts etc.), until further notice, for: (i) government and public sector corporation payments ; (ii) import of capital goods, spares, raw materials and other inputs for industries (manufacturing and services);  (iii) import of oil and fuel products; (iv) medical supplies and equipment; (v) import of construction materials for approved housing constructions as on 8th March 2012; (vi) import of goods excluding transport/vehicle goods (except for public transport buses) by individuals/business entities; and (vii) education/training and medical treatment expenses in India; and
10. carrying out export related transaction through the banking channel with 91 days from the date of export.

The fiscal and monetary measures look uncoordinated, disorderly and bit of macro/micro hotchpotch with somewhat little consideration to immediate impact on business, and in streamlining policies, regulations and procedures to improve medium- to longer-term socioeconomic performance. The comments in press following government’s fiscal/monetary measures to deal with INR crunch are equally fragmented, at times misleading  and often lacking in substance. In view of the above and your own analysis, you may see for yourself where we stand in terms of resolving INR crunch notwithstanding immediate unfavorable bearing on business, in managing bank reserves, on commercial lending and in streamlining investment/expenditure pattern.

My experience in China says that when it says local government credit is safe means it is more than safe reflecting its strong ability to deliver, major difference between China and most countries. Can we repeat Premier Jiabao’s words for our BTN 35 billion lending last year? We cannot escape from the reality that our ability to manage finance,  among others, is directly related to our capacity to produce and deliver goods and services that reflects in performance figures annually. Every country has potential to do well. The potential is lost if its citizens’ days are spread thin. The country’s ability to deliver requires core structural strength including institutional and individual capability to perform, more specifically, in this digital age, ability to perform with creativity and innovation. This cannot happen if the able professionals are under ignorant elites (exploiting linkages for their hierarchical legitimacy) and/or bean counters in government/corporate chain of command. It has never happened anywhere and will never happen. We need, in my view, not only rational reform but paradigm shift as well!


continuation  .......   The Indian Rupee Crunch........(2)