The Indian Rupee Crunch..........(5)

The field of development fascinates many, in both depth and dimension from the perspectives of critical infrastructure, human capital, environmental sustainability, social inclusion, health, safety, literacy, regional/national competitiveness and others. The understanding is from as simple as feeder road construction with specific justification in the back-seat to a complex situation whereby one tries to catch-up with other -- nationally, regionally and even internationally -- looking into new prospects, untapped potentials, and even missed opportunities. More simpler the understanding of it, the lesser the chances of doing well! In my view, casual oversimplification dilutes innovative drive as well as development accountability. I am now wondering if we are suffering from this syndrome. Let me go on why it is this way.

Following the trend is creating value while herd-mentality is chasing profit. Former needs tracking “open interest” over a long period to detect subtle patterns and creating one’s worth, be it of a country or an individual. You create your niche and try and excel in it. "Those guys" don't put flashing neons for you to see in broad day light which will enable you to outclass them in their own game with start-up advantage. Or else the world would have seen many Steve Jobs by now.

And, with the herd-mentality drifting on intuition,  you will not even notice the world go by outside your window.  You will eventually reach the point where it becomes a cubicle black-mountain devoid of anything resembling real-world logic, and feel good about being grazed around.

In private sector, they moved in herds: constructing buildings the rates of return of  which cannot even hang onto elephant’s tail leave aside riding on top, buying tipper trucks of which you are not sure who the real owner is – the driver or you,  and excavators, resorts, Prados/Santa Fes, dealerships, shopping malls, and so on. So far so good, as long as the banks were flooded with cash and desperately trying to find sanity somewhere to park their deposits from across the fence. But to assume that the economic growth that is supposedly as a result of increasing capital investment will support long-term return on such investments is showing lack of passion and commitment. There is no problem in investing with such assumption if you are financially accountable no one. The people with passion and commitment are stylish, dignified, distinguished and civilized -- qualities sadly fading these days. They do not belong in the herd. They follow the trend.

In public sector, we have not moved much from doing things the way those were being done 20/25 years ago. Not much incremental value addition in gewogs. Nobody’s fault at the moment, I guess. There is no capacity to analyze resource potentials and local/regional/national competitive advantages, and make strategic plans that set the gewog visions to optimize their contribution to national development goal. So it is essentially service-oriented-inward-looking development model there. From strategic perspective, gewog is too small a unit to do anything creative with vision. The technical resources are too scare, both in quality and quantity, even for thin spread at gewog level. If the gewog is given authority and responsibility without resources, I have no idea where the accountability lies. Should we  believe in the same model, we will be repairing BHUs, rural water supplies, feeder roads that have neither technical values nor economic justifications for years to come and drawing satisfaction from the excuse that no substantive contribution to the economy could be possible from grass-root level. No doubt about it!

Nationally, it is the old institutional/organizational lust -- that reflects value, attitude, ethic, culture, discipline, strength, ability and pride – that has lost its way. Why would a government official tell me he was doing me a favor by coming to his office right after his official tour and processing my case that was pending for more than a week? It’s not the case that was pending is of concern; it’s his work attitude, ethic and culture that bothered me. Was it an isolated situation? I do not think so but you would have had your experiences too. What exists generally matter. In another situation I asked the director of an authority (autonomous organization), “do you know what you have to do?” “Yes”, he said. “Do you know the importance of your authority nationally and have clear idea with regard to its authority, responsibility and accountability?” He said, “no one has ever explained to me these.” I asked one more, “do you have full realization of your professional space within which you perform your tasks quite freely as an autonomous body and feel that it’s adequate to do your work well without interference?”  This triggered stories connected with ministries, RCSC, audit, ACC and other forces of thrust: each coming with their own version and understanding of the autonomous authority. How can the authority be result-oriented the way every autonomous body is supposed to be, I wondered.   


For true professionals, motivation need not be always in the form of benefits. It can be in the form of job satisfaction,  innovation, creativity, sense of being part of great team/product, being helpful to others in need, clear career path and others. It takes massive effort and time to build institutions/organizations with such values. But to destroy those values it takes few minutes. The Apple is the company where people are motivated to make great products: IPODs, iPhones, IPADs. So products, not profits, are real motivation for Apple engineers. The profit is inevitable result of their products. That's why it is $550 billion (equal to Google+Microsoft+Amazon) company today.  No country can expect to motivate its government staff to Apple-level. The point here is organizational capacity cannot be built without staff motivation. And, the bottom line: we have to improve organizational capacity of the economy, not only of the institutions!

Well, despite the above we are doing good -- the GDP was growing at 11.8% last year.  So far so good, everyone seems happy with status quo. So, we move ahead with the national philosophy and goals. Then swings the economic pendulum, the driver - rupee crunch!  The swing is almost from one end to the other. The rupee rationing followed by complete suspension of rupee flow, suspension of loans and import licenses, closure of non-resident foreigner accounts and so on. It’s like closing the household tap. Earlier the tap was full-open and water flooded the house. Now it’s closed-tight to let the flood dry.

Even with INR 9.7 billion plus INR 1.6 billion refill, we have to find more stable solution to the rupee problem. With no immediate opportunity for export increase, the inward way is to look into import substitution. The import substitution – the latest lead to improve productivity and ease rupee crunch – of shoes, vegetables, dairy products, and many. Great, if we can do it. But the fact is I find no one talking about economic and strategic rationale of import substitution. Will there be cost and quality advantage to importing those products? Will there be resource (say, emphasis on agriculture may take people back to villages for farming) imbalance in the economy because of such activities? Do we have capacity, technology, potential and/or infrastructure? Most importantly, does it fit into the country’s long-term development strategy? With the aim of import substitution in agriculture near-term, are we aiming for agriculture-based economy longer-term, more in terms of export earnings through vegetables and agricultural produces? What level market we aim at, organic level? Does it go hand-in-hand with other strategic goals? The import substitution is good provided these issues are cleared at the policy level. Then, we go all-out with no room for reverse future. Half-hearted attempt will not work.

 In late fifties when I was a little lad in the village, my family was self-sufficient except for clothes and salt. I wore no shoes. Can you apply that definition of self sufficiency in 2012 so that my requirements are met through import substitution? I guess not. Time does not move, it changes. And, we have to move with time, not backward but forward!

I strongly believe that no country can excel in everything, not even the US, China or India. The best strategy is to realize, in every sense of the word, what you are good at and focus fully on it with an intention to carve out your own space. It is by far the best development strategy rather than trying to spread your resources thin with an aim to cover near-term difficulties/short-comings without proper focus and longer strategic purpose. For this,  it is crucial to put the house in order, do homework, and change gears with an aim to enhance the lives of the total population through  resource-based economy. Change is the essence of life. We should be willing  to surrender what we are, for what we could become. We have to have vision!

You won’t get anything unless you have the vision to imagine it. – John Lennon

continuation under May.....................The Indian Rupee Crunch..........(6) 

The Indian Rupee Crunch..........(4)

In his book, Hamlet’s Blackberry, William Powers writes: “Our screens perform countless valuable tasks for individuals and for business and other organizations. They deliver the world to us, bringing all kind of convenience and pleasure. But as we connect more and more, they are changing the nature of everyday life, making it more frantic and rushed. And we are losing something of great value, a way of thinking and moving through time that can be summed up in a single word: depth. Depth of thought and feeling, depth in our relationship, our work and everything we do.”

This is the state of affairs of digital world with more and more connectivity causing information overload. I am not even sure if there is here information overload but it is certain  that information is processed through a tendency of graze, float, glide the surface and shortcuts. Why would a person work hard when earning is easy doing practically nothing through business fronting, tax evasion, illegal authentication, and by taking advantage of other loopholes at all levels of economy? Will the works get done properly through these processes? Do you create business value? People followed these paths because system, environment and work culture held up to it.

There is no shortcut to hard work! In a small country few things set the trend, which is good if the advancement is in right direction but if the trend goes in wrong way then the committed need of the hour is the paradigm shift. I say again every country has potential to do well. The potential is lost if its citizens’ days are spread thin. Is rupee crunch an opportunity for adjusting properly “the peg in the hole”? There's nothing wrong in making mistake, what is wrong is letting it stay as a mistake without the effort of making it right. Just one case: the certificate of origin issued for software export (not processed and produced in Bhutan) was a mistake from legal, moral and development perspective. The recent decision to stop issuance of certificate of origin is not letting the mistake stay: the early sign of paradigm shift, the signal of the baby opening eyes. There will be numerous others. Thanks, by and large, to INR crunch!  

Public-Private Partnership

While the system is loose and lets private entities take advantage of shortcuts and chase easy/quick wealth, the rent seeking is at its highest level. The system needs tightening and professional discipline and ethics enhanced in both public as well as private sector. In such an environment, the private sector takes pride in associating itself as a committed partner in the development process. When public-private partnership foster for good reasons, the rent seeking dies its natural death. “Frustrated contractors running from one office to another sweet talking the person in-charge to get bills cleared for an ongoing or completed government project is not a new problem,” one of the numerous condemnations in newspapers. The writing on wall is everywhere: payment delays; construction delays; procurement problems; poor quality works; lack of accountability, interest, commitment and so on. Almost everyone knows how and where the trend started but no one knows what to do about it. Now that the baby has at least opened the eyes, it is up to every one of us to make the toddler, that got some air through rupee crunch, grow stronger.

With regard to INR crunch Druk Holding and Investments (DHI) asked the Government: “ What can we do to help?” Because of the above reason I posted in Kuensel (April 4. 2012) the following comments:

“Royal Charter for Druk Holding and Investments takes, among others, “ into account the need to conscientiously lead and stimulate private sector development through a culture of innovation, creativity and enterprise, while preventing the spread of corruption and other undesirable activities.” It would be interesting to know what percent of DHI investment has gone into supporting private enterprises that create value. Does DHI recognize that the best way to lead and stimulate private sector development is to facilitate paradigm shift from the present government-centered private entrepreneurship culture to one that is value-based encouraging innovation, creativity and human industry? In the longer-term the shift will be DHI’s biggest contribution.”

Without public-private sector partnership in right footings away from the culture of “milking the system” (as some put it), achieving the goal of sustainable rupee reserve to fully support  BTN/INR peg at par will look far from reality, with or without the hydropower projects. 

Debt and Growth

The other issue is finance, foreign debt in particular. The debt can make a country effectively bankrupt. The total debt outstanding at the end of the fiscal year ending June 2011 was estimated at BTN 58.7 billion equivalent representing 80.9% (increase from 66.6% in 2009-10) of GDP of which 47% was rupee debt and 37.9% was foreign debt for convertible currency. The rupee debt was INR 34.1 billion including INR 7.9 billion [INR 3 billion Government of India (GOI) standby credit facility  and INR 4.9 billion (spread over 3 years) State Bank of India (SBI) overdraft (OD) facility] to support balance of payment with India. The rest of INR 50.8 billion was hydropower and Dungsam cement debt for seven projects (Chukha, Kurichu, Tala, Punachangchhu 1, Punachangchhu II, Mangdechu and Dungsam cement). These projects are self-sustaining projects with supposedly firm long-term sales contract. Nevertheless part of INR for these projects (BTN cost) helps build INR reserve.

The debt sustainability analysis (DSA) shows a moderate but still significant risk of distress as most indicative debt thresholds are temporarily breached. Based on the DSA, public debt is projected to exceed 110 percent of GDP in 2014/15. As in previous consultations, based on the LIC-DSA thresholds, these levels put Bhutan at risk of debt distress. However, in the staff’s assessment, the risks are mitigated by the concentration of debt in commercially viable hydropower projects, which account for about half of total debt and benefit from India’s strong energy demand. Other mitigating factors are important, including Bhutan’s strong project implementation record and good governance, as well as a comfortable reserve position. Also, operational risks for specific projects (including those related to natural disasters) are significantly reduced as debt repayments are stopped if electricity cannot be delivered to India.

-       IMF’s  Bhutan: 2011 Article IV Consultation-Staff Report (June 2011)

In 2007 the Asian Development Bank also observed that if the impact of Chukha, Tala, Kurichu and Basochu power projects were excluded from debt sustainability assessment, the debt situation would have become completely unsustainable because benefits from these projects (exports, revenue and GDP growth) constituted a significant portion. Therefore although these large power projects may cause additional financial burden in the short term, the benefits in the long term far outweighed the debt burden imposed on the country.

It is clear from  the ADB/IMF observations  that there is significant risk of  debt distress near-term as appropriate measures are not being taken. In longer-term the debt risks will be mitigated by the hydropower projects. It would be unwise to repetitively breach the “indicative debt thresholds” envisaging that the proposed hydropower projects will ease the near-term debt impasse as well.

And, the above assessments were before the sale of $200 million and the INR crunch. It is now clear that the rupee crunch has culminated into liquidity problem. The RMA closed accounts of non-resident Indians to ease rupee crunch. Prior to 15 March, the problem was of  “excess”  liquidity which compelled the banks to resort to  “loose lending” or “sub-prime lending”. After closure of  3,500 accounts  by 15 March, banks have stopped most of the lending. To ease liquidity RMA has, on 4 April 2012, lowered cash reserve ratio (CRR) to 10% from earlier 17%.

The near-term solution to the problems: borrow INR. So to overcome shortage in INR the Government has borrowed INR 9.7 billion, GOI standby credit of  INR 3 billion at 5% per annum interest and from SBI OD facility INR 6.7 billion at 10% per annum. The entire INR 9.7 billion will support BTN/INR exchange rate peg at par. While this is a costly measure, there is no immediate alternative to fill the gap created  after 15 March due to closure of accounts.

I am not sure if  withdrawal  of reportedly Nu 3.5 billion by Indian traders creates such severe BTN credit crunch while the total deposit liabilities of commercial banks, as of August 2011, was about Nu 44 billion (47% individuals, 28% government corporations, and rest by other sectors). The Bhutan National Bank’s CRRs of February 12 (Nu 3,305.0 million) and March 12 (Nu 1,912.0 million) should work out to withdrawal in March 12 from BNB alone in the amount of about Nu 3,765 million. On top of this there were withdrawals from BOB, Druk PNB, and T-Bank. The figure mismatch does not rule out the possibility of Indian black/grey money deposits in Bhutanese banks prior to 15 March, and withdrawal post 15 March. And we cannot also overlook the fact that there was Indian income tax raid in Jaigaon right after 15 March.

The dimension of rupee crunch and BTN liquidity seem deeper than it looks.  In view of this depth and the need to support BTN/INR peg at par (the corner stone of national economic policy and strategy); the GOI and SBI credits, and other external loans may drive “indicative debt thresholds” nearer leaving not much room for a secluded breach.

For the level of growth the big question now is can we sustain the debt? If not, it may be right time to go slow. Again, there's nothing wrong in making mistake, what is wrong is letting it stay as a mistake without the effort of making it right. Therefore first thing in the agenda should be to carry out debt sustainability assessment and regulate economic activities at affordable level giving priority to the following:

Near-term:

• Conduct debt sustainability assessment
• Tighten fiscal and monetary policies for slow credit growth
• Improve liquidity management
• Control current spending
• Increase taxes for non-essential items
• Work-out measures to facilitate systematic inflow (including supply chain, inventory, and cash flow management) of essential goods from India and abroad
• Work-out measures  to make INR available in the market for day-to-day use

Longer-term:

• Implement  reforms to strengthen regulatory and supervision capacity, and accountability in the government
• facilitate private sector development that aims at value creation with emphasis on innovation, creativity and enterprise in terms of both providing services and producing goods
• provide broad-based support to export-earning ventures with the aim to improve rupee reserve and diversification of economy

As of now, the signals are good but those have to hold with firm grip without slippage.

The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty – Winston Churchill



continuation.....................The Indian Rupee Crunch..........(5)

The Indian Rupee Crunch..........(3)

For one, Bhutan’s foreign exchange market is characterized by structural imbalances and there exists a severe shortage of Rupee liquidity even while there is an overall balance of payments surplus. This imbalance arises from the fact that our merchandise trade is dominated by trade with India which is in deficit, and Bhutanese residents need Indian Rupees to settle trade with India. At the same time, capital inflows, largely official flows in the form of loans and grants from various governments are substantial and flow into the country in currencies other than the Indian Rupee. In other words, the Indian Rupee reserve level in Bhutan is a good mirror of the convertible currency reserve build up. Therefore, to tide over temporary and periodical shortages in Indian Rupees the RMA borrows Indian Rupees from the State Bank of India at an interest rate of 10% per annum. While this is an extremely costly measure, we are compelled to do so in order to support and safeguard the integrity of the exchange rate peg with India, as the latter remains the cornerstone of national economic policy and strategy.

-- Statement by the Governor, Royal Monetary Authority, Annual Report 2010/11 (January 2012)

From Bhutan most of capital outflow is to India in INR through private sector credits. So, trade balance with India is the key indicator for formulating appropriate fiscal and monetary instruments.  The negative balance of payments (BOP) with India has been increasing from BTN 27.8 million in 2007-08, to BTN 278.6 million (2008-09), BTN 4,933.6 million  (2009-10), and colossal BTN 15,160.0 million in 2010-11.

During the period the banks saw unprecedented growth of bank deposits. The total bank deposits increased from BTN 22.04 billion in 2007 to BTN 43.75 billion by June 2011 with increased private sector share of deposits from 65.7% in 2007 to 72.4% by June 2011. While there were fluctuations in current deposits in percentage terms, there was sizeable yearly growth rates of saving deposits and time deposits from 16.4% (2007) to 44.3% (June 2011) and (-) 14% (2007) to 42% (2010) respectively. When the banks have such deposits, the obvious thing is credit growth. The commercial bank lending in FY2010-11 touched BTN 35 billion.

The World Bank’s summary Doing Business 2012 data for Bhutan showed improvement by 4 ranks from 146 in 2011 to 142 (out of 183 economies). The improvement of 4 points is fully attributed to considerable 44 points improvement in “ease of getting credit” from rank 170 in 2011 to 126, while rest of the indicators fell below 2011 levels.

The writing was on the wall. The RMA seems neither closely monitoring the details of deposits that caused high liquidity, regulating the robust commercial lending necessitated by such deposits, nor closely analyzing BOP with India for appropriate and timely fiscal/monetary interventions. They now continue to take sweeping measures which, in addition to earlier ones,  include the following:

28 March 12

RMA advises all financial institutions not to pay dividends and bonuses fearing impact on their liquidities.

29 March 12

RMA suspends effective today item 2 of its Circular On Foreign Currency dated 8 March 2012 until further notice: “2.  Access to Indian Rupee i)   Cash from the Commercial Banks Release of Indian Rupees (INR) in cash to Bhutanese nationals by commercial banks shall be limited to INR 10,000 (ten thousand) per day with a maximum monthly limit of INR 50,000 (fifty thousand) per person on production of citizenship identity card; OR ii)  Credit Card/Debit Card and Pre-Paid Card Transactions The INR withdrawal shall be permitted up to 10,000 (ten thousand) per instance subject to a maximum limit of INR 50,000 (fifty thousand) per month.”

First, because RMA was not able to anticipate aftermath of the sudden closure of about 3,500 non-resident foreigners’ accounts, it invited on 22 March 2012 Indian businessmen to deposit BTN back in Bhutanese banks. Why Indian traders had to withdraw BTN in so large amounts at the account closure that caused BTN credit squeeze is anybody's guess. Have they deposited all that was withdrawn then? The financial institutions only have the answers. Also, the argument that no country allows non-resident foreigners’ to have bank accounts is far from truth.

Second, RMA has shut the daily accessibility of INR, that was already rationed, completely. The RMA reasons that during INR rationing significant amounts were being drawn to hoard INR, and that INR was being sold across the border at a premium to Indian traders distorting BTN/INR peg parity. What is again surprising is that RMA could not anticipate these obvious repercussions before issuance of 8 March circular.

The complete suspension is extreme even if it is to be interpreted in terms of feverish effort to support BTN near-term. Let us hope that RMA measure to suspend INR accessibility is mainly because it wants to buy time till they receive/borrow INR in new Indian FY2012-13. While it may be good in macro-term, the repercussions of complete suspension is proving severe on two main accounts:

            (i)      It fails to foresee the day-to-day problems of the people including small business people, retailers, travelers, students, patients, and poor residents in border areas. The severe suffers are the poor. What good is the measure when people are not able to get INR 1,000 to save life.

On 2 April 2012, Rigzhung wrote in Kuensel Online Forum titled “Is  RMA Sleeping. Requests Dzongdags to intervene.”

“The INR crunch has hit hard in Samtse town. With no medical shops, people have to go down to India to buy essential medicines.

People usually come to bank for INR but The BOB Manager refuses them by saying RMA has ordered not to pay INR anymore. The doctor prescribes medicines which is not available in the hospital and the people has no other options than to go to India for medicine. The Shopkeepers at India asks INR for medicines. The situation has gone to crisis level. We request higher Authorities like Dzongdags to look into this matter and make BOB pay INR. INR as little as 1000 should be paid to common people to buy medicines in emergency. We look forward for RMA to wake up early before it is too late.”

It is distressing  to read such posts. It is not one of its kind. The Kuensel also had many coverage with head-lines “The majority feels the pinch most, say some economists”, “INR hysteria hits Gelephu”, “Will a border exchange counter solve the problem?”, “The crisis comes home” and so on.

(ii)   When INR is available, it is not clear how RMA is going to release it in the market without disrupting peg parity.  Will RMA devise regulatory framework that will stop hoarding INR and/or people selling INR across the border, given the financial environment created by its measures and the realization that how important a role INR plays in peoples’ daily life?

In addition to working out systematic INR availability for day-to-day use, RMA has to carefully regulate the deposits and credit growth protecting BTN’s exchange rate peg (the cornerstone of national economic policy and strategy) in close coordination with the Ministry of Finance’s action on public expenditure control and tax increase on non-essential imports in line with the JUDGEMENT NO.SC(Hung 11-1)  of the Supreme Court of Bhutan  on 24 February 2011 which states:

“Based on Findings No. 21, the Court hereby rules that:

22.6.1 All taxation measures, be it direct or indirect, intended to  impose new or alter the existing taxes structure must be introduced as a Bill as per Article 13, Section  2 of the

Constitution;

22.6.2 Taxes as revised or imposed thereof must be done only through the procedure of passing of Bills under Article 13 of the Constitution; and

22.6.3 The raising of revenue and introducing taxation measures merely along with the budget violates the constitutional mandate of introducing it as a Bill.”

Till then let us be positive and give individual support!


continuation.....................The Indian Rupee Crunch..........(4)