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Rising debt, falling rupee – and the country feels fine?

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By Rakesh Dubey

The Indian rupee is in a freefall. Our foreign exchange reserve has dwindled by $ 52 billion. As of now India’s total external debt is over $ 620 billion and out of this, $267 is to be repaid in the next nine months. This ratio of short-term debt has reached 44 percent, which is disturbing.  Yet the government in power says that the country’s fiscal health is robust. This reasoning from the rulers is beyond anybody’s comprehension.

The depreciation of INR against USD continues. Imports bills are constantly on the rise compared to export earnings.  However, India has a manageable foreign exchange deficit, which could be just around two percent of the GDP.  On an average the deficit is below $ 50 billion and it escalates when the import considerably exceeds the exports. This shortfall is generally compensated by foreign investment in the stock market, foreign debt, private partnership or bond purchases and it is an ongoing process.

The Reserve Bank of India (RBI), the custodian of India’s foreign exchange fund, has also given a caution. Even if luck favors and $80 billion flows to India this financial year, still there will be a shortfall of $40-45 billion in the balance of payments account. The country’s current account deficit is likely to cross $ 100 billion, 3.2 percent of the GDP.

The country’s foreign exchange reserves will not be able to meet this additional fiscal pressure, so the RBI has given some relaxation to attract deposits in dollars from NRIs. The Central Bank has also made it easier to take foreign debt and the limit on foreign ownership of Government of India bonds has also been increased. Will such measures attract more Dollars?

In the present situation some stern measures are needed to tackle the swelling current account deficit and the amount of foreign debt to be repaid this year.   To deal with the fiscal situation private companies taking loans will either have to take fresh loans or withdraw money from India’s currency reserves. Since the second option is not desired as the reserves are depleting and that needs to be increased to maintain our fiscal fitness. The first option will not be easy as the dollar is going to the US instead of going to the developing countries. In any case, India will have to pay more interest on the new loan, which will increase our financial constraints in future.

Import duty on gold has been increased to 12.5 percent. India is the largest importer of gold in the world due to high domestic demand. The increase in duty may reduce demand, but the duty hike could possibly increase smuggling. There should be some restriction on non-essential imports so that the outflow of dollars is restrained.

However, the management of foreign exchange and exchange rate is the responsibility of the RBI. Right now the stock market is under tremendous pressure due to the ever increasing  oil prices, apart from the departure of foreign investors.

In a country like India , the full burden of oil and fertilizer prices cannot be passed on to the consumers. Therefore, to meet this additional financial burden, the government has imposed export tax on the profits of steel and refining companies. Revenue collection of more than one lakh crore rupees is expected from this tax. It is an indirect way of dealing with the impact of depreciation of rupee.

Export tax is an exceptional measure and it can be justified only when oil prices have increased significantly.  The state governments are also burdened by their debt and the fiscal situation of 10 states has reached an alarming level, which could lead them to bankruptcy. To somehow reduce the fiscal deficit, it is necessary to control expenditure and increase tax revenue. Higher revenue requires incremental economic growth and boom in employment.

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