Rupee Crisis : An eye opener

Rupee-vs-DollarNow Rupee has almost reached the level of 60 per USD and everyone is talking about what went wrong. The liquidity tightening in United States pushed the INR/USD exchange rate to new heights. Rupee depreciated to the record low level of 59.98 in the third week of June. India’s current account deficit is also above 5.5 per cent while external commercial borrowing is above 30 per cent of India’s foreign exchange reserves. Now everyone is talking about reforms, policy paralysis, liquidity trap and vulnerable macroeconomic condition. This is the right time to think on what went wrong.

India’s ECB level is rising because corporate can borrow low cost capital from foreign market. The ECB limit is already increased by the government so corporate can borrow more without thinking about the threat of rising debt. India’s current account is in deficit for last many years and now it has reached to unsustainable level. Our trade deficit is rising every year because we are importing more compare to our exports. This clearly shows that we are not investing more in building our capacities to export more despite huge borrowing from international market. Few months back everyone was forcing RBI to reduce the rates which they did despite the high level of inflation. But the question is that what we are going to do with the availability of low cost capital. We are using this money to grow our businesses on the basis of importing more from the global market. These kinds of business practices and government’s response to them are making the problem more complex. Inflation is high, borrowings are high. We are not able to supply properly to our domestic market as well as global market and that is why our inflation is high and our balance of trade is also in deficit.

If we continue with these kinds of practices we are definitely going to face the severe consequences in the near future. We are mortgaging future of our next generation for our present short term needs. And now this is the time to think about the solutions for the problems. We need to shift our focus for development and growth which is currently very much base on external funding. We need to boost our export units to build new capabilities. We need to develop our human capital to get returns in the future. We need to fund our requirements from our domestic resources. We can finance our business activities domestically if we focus on developing our internal financial system.

“I don’t think there is a need for any major shift in strategy except for addressing the trade deficit. If you are importing and don’t have enough exports to balance it, there will be problems. We need to resolve the current account deficit, or CAD, through a more sectoral and trade policy approach,” says former RBI governor Mr. Vimal Jalan. We need to focus on developing our internal financial system and boosting our manufacturing and production base with the help of infrastructure developments. These will results into bringing down the supply shock inflation, reduction in trade deficit and availability of low cost domestic sources of finance so low level of external debt.

I personally think the problems currently we are facing are the results of greediness of elite. We need to focus on our nation building with self-reliant strategies and we will gradually solve all the problems. The growth will only be justified if it’s a growth of all.



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