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How not to arrest the rupee's fall

It is not clear what items the government will treat as non-essential and if it will restrict such import through licensing or higher duties

Rupee
Rupee
TNC Rajagopalan
Last Updated : Sep 24 2018 | 5:30 AM IST
The measures to bring more inflow include review of the mandatory hedging conditions for external borrowing. Also, permission for manufacturing companies to raise up to $50 million (Rs 3.6 billion) through such loans for a minimum period of a year, as compared to three years earlier. Plus, review of the cap on exposure of foreign portfolio investors in bonds of a business group and exemption from withholding tax for ‘masala’ bonds (issued outside India but denominated in rupees). 

It is difficult to gauge how market players will respond to these policy tweaks over the next few months. It is not clear what items the government will treat as non-essential and if it will restrict such import through licensing or higher duties. In any case, the decision to do so is a throwback to the pre-liberalisation days, when the government exercised a lot of discretion on what should be imported and how, to protect domestic producers. Such a protectionist policy encouraged lobbying, corruption, smuggling, inefficiency and loss of competitiveness — it had to be phased out. So, the government must think twice before going through the protectionist route. If at all it decides to go ahead, it must be for a very short duration.   

In fact, India is already quite protectionist. We are the second highest user of anti-dumping, safeguard and anti-subsidy countervailing measures. Most of these are levied on primary and intermediate products that make the inputs for user industries more expensive. Consequently, the latter become more uncompetitive and import of value added products go up. For example, protective duties on iron and steel items might help large producers of these items but make the users of iron and steel less competitive.  

Recently, domestic producers of copper have filed a petition for levy of anti-subsidy countervailing duties on continuous-cast wire rods from Indonesia, Thailand, Vietnam and Malaysia. When these duties are levied, domestic copper producers will increase their prices, making the user industries pay more for inputs, making them uncompetitive vis-à-vis import. Thus, the user industries will lose market share to import and help worsen the current account deficit. 

Note, too, that trade flows do not influence exchange rates as much as capital flows. So, there is no point in targeting import to manage the exchange rates. In any case, the Reserve Bank of India has enough reserves and weapons in its armoury to tackle excessive volatility in the foreign exchange markets.  

The finance minister’s decision to encourage export is welcome. First, however, he must set right the wrongs his ministry has done. The decisions to impose pre-import conditions on import under advance authorisation, denying facility to fulfill export obligations through deemed export under certain notifications, denying refund under certain situations with retrospective effect, etc, have not helped exporters at all. The department of revenue intelligence is harassing them with outlandish demands and summons. It is time the minister has a meaningful dialogue with exporters, understands their problems and resolves these. 

E-mail: tncrajagopalan@gmail.com 
 

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