A multi-pronged strategy to shore up the rupee was widely expected and this is what Finance Minister P. Chidambaram announced on Monday. Three sets of measures by the RBI — the first one was on July 15 — have given only limited respite with the rupee falling relentlessly after a brief period of trading in a narrow range of between 59 and 60 to the dollar. However, going by initial reactions on Monday and Tuesday, the government’s new package might not yet succeed in stabilising the rupee. The time has come to view the rapid rupee depreciation in a larger perspective — as a highly visible symptom of a much deeper economic malaise represented by the burgeoning current account deficit (CAD), which, at over $90 billion, threatens macroeconomic stability. Through its latest measures, the government hopes to bring the CAD down to $70 billion, or around 3.7 per cent of GDP, a level it considers to be manageable at the present juncture. Towards that end, the new package seeks to address supply-side issues, curbing the import of gold, silver and a few “non-essential” items as well as oil. Tariff walls for gold and silver are being raised. The government ambitiously expects to shave off $4 billion from the gold import bill alone.
The other part of the strategy is to stimulate dollar inflows by further liberalising external commercial borrowings (ECBs), freeing interest rates on non-resident Indian deposits, and directing a few public sector finance companies to mop up dollars by issuing quasi-sovereign bonds. The government hopes to bring in $11 billion through these measures but will the new strategy pay off? The near term goal of calming the rupee might not be achieved but what ought to be the real test is the government’s determination to get a handle on the CAD. There are pitfalls to be sure. The government’s neat estimates of dollar accruals and savings might be embarrassingly wrong. For instance, despite previous hikes in import duties, gold imports have surged. Oil imports have been inelastic and it is not clear how bulk consumers will reduce their consumption. Further relaxations in ECB norms will not be an unmixed blessing. Hedging costs for the corporates have soared, and non-hedging is extremely risky. It is hoped that the proposal to issue quasi-sovereign bonds has been duly deliberated upon. Their timing at this juncture is apt to send wrong signals to overseas investors. Forced into a corner, the government has at last looked at the big picture. But that should not be an occasion for espousing short-termism or untested policies.