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)