Focus should be on the real sector and not on Rupee : T. C. A. Ranganathan , Chairman & Exim Bank

How do you view the crisis over the current account deficit and the falling rupee?

If you look at it in perspective this is not something that happened suddenly. It was building up over a period of time and in 2010-11 it was pointed out that current account deficit (CAD) was becoming unsustainably large and we need to focus on that.

This CAD is coming on top of our record export growth performance over the last 10-12 years, which is far higher than the world average if you see a period of 2000 to 2013. The world growth has been about 11-12 per cent while Indian exports have grown by a compounded annual growth rate (CAGR) of 20 per cent. So, the export performance has been strong, diversification has been strong and dependence on U.S. and Europe has come down from 60 per cent in 1999-2000 to less than 40 per cent today. Despite this the CAD has been growing.

While exports were growing at a 20 per cent CAGR, imports were growing at 25-28 per cent CAGR. What happened in 1991-92 was that the government deregulated and liberalised a number of sectors and allowed entrepreneurship to bloom. At the same time, it also conducted a huge amount of reforms in the financial sector. However, real sector reforms were not fully focussed on. Indian promoters went for quickest and fastest growth at lowest risk. One set of people went into low or medium technology, where deployment of capital was is not high. Others went to realty and service industries. Very few went into core middle manufacturing, which involves lot of capital, technology imports and tie ups.

So, you don’t have a middle sector in the Indian economy. And these are the real sector issues.

Exports rose 11.6 per cent in July from a year earlier while imports fell. Can this trend be sustained?

A figure of $25 billion of exports in July is okay but it will only take us to a target of $300 billion in the year. But imports are still at around $500 billion. Now exports keep on growing. We are trying to help Indian companies to diversify to other markets and we have carried out huge number of studies about penetration in Latin America and penetration in Africa. Potentially, there is a flow, but increase in capacity is also a challenge, because the scale economies are not there. Second, if you see how our exports are structured, the largest item today we have is the processed petroleum, which is about 18-19 per cent of our exports.

Second largest is gems and jewellery, these two constitute around 36 per cent of our exports. Next big item is agriculture products and it is about 8-9 per cent. After these come engineering, chemicals and textiles, each about 8-9 per cent.

If you see chemicals, there is a growth problem; not enough capacity is getting created. In the case of textiles, we don’t have much of the higher-end apparels, the value-added, superior textiles because those are constrained because of various issues.

In apparels, one of the challenges India faces is that it has not grown at a fast pace. In 2002-03, we used to export significantly higher than what Bangladesh was exporting. In eight years, the equation has completely reversed and now they export apparels worth about two-and-half times of what India exports. This has happened because of lack of attention to real sector issues; the challenges it poses, the constraints, which it imposes on the productive agents of the economy.

How much has the rupee’s tumble helped exports?

Rupee’s behaviour was not out of line compared with other currencies of emerging market economies. This is not because of what is happening in India but aggravated by what has happened because of the U.S. Federal Reserve’s decision to roll back its stimulus programme, which had an effect on the decisions of investors in emerging markets. The second thing was that as U.S. economic prospects revived, the attention which was fully focussed outside the U.S. is now partly converted to U.S. Its return flow and that is impacting.

One must bear in mind that despite whatever growth we achieved in the last 20-odd years India is a very small player in the world scene. Even though our export performance has been very good, our total contribution to world exports is only 1.57 per cent, this percentage is like a tiny boat in an ocean where there is a storm. It will be thrown about more and more.

What we need to do is to get our house in order and do not try to fight it. So the focus should be on the real sector and not on the rupee value. Whatever you may do the value would fluctuate because of the factors outside.

It is not different from what is happening in Brazil, South Africa, Australia and other emerging market countries. They may be slightly more there or slightly less here, that’s all. Normally, depreciating currency should be a source of some sort of relief because it makes your productive economy more competitive in the world markets.

Rupee’s tumble makes exports more affordable but there are two parts to it — one is existing companies, they find it profitable to export. But if those companies have a seller’s advantage then they make higher profits. But if they are not sellers if they are price takers, then they find prices getting bargained down. Many apparel companies are already saying that they are forced to give bigger discounts because of rupee depreciation.

But the long-term impact of rupee depreciation is that there is an inducement to produce in India which was not there earlier. When the rupee was 46 to a dollar and now 62 to a dollar, it is 25 per cent depreciation. So imports have become 25 per cent more expensive. So it would make it more profitable to produce in India. But this thing has to be capitalised upon by sending the right signals to prospective investors, Indian or non-Indian.

But imported inflation is likely to destabilise growth process?

It’s not imported inflation again. Inflation in India is rising again because we did not give enough attention to real economy. And this real economy needs to be tackled. And the source of the inflation is the supply-side issues, as in food inflation. This is despite the fact that we are the largest producers of food and vegetables, but the extent of wastage in India is abnormally high at about 35-40 per cent. Internationally, it’s a huge percentage.

This is because of insufficiency of supply chains, inadequacy of logistics. That’s where the sources of problems are. We need reforms in the real economy.

Second is the imported inflation of oil and third is the inflation in realty sector. Manufactured goods inflation is not too much whether it is in textiles or consumer goods, we don’t hear much about it.

But these three sectors’ dynamics have to be resolved. Inflation in realty is because not enough attention is being paid to B and C class cities being upgraded, it’s again an investment orientation issue.

In the case of petroleum the part of petroleum being imported will always be there. You can’t wish it away. But you have to see world players like Japan or South Korea, who are also completely import-dependent. It doesn’t rattle them. It rattles us because we are not able to pay for it. The only way to pay for that is manufacturing should be promoted. In India, very few states are aggressive in promoting manufacturing. When we deal with manufacturing, state governments are very important. For the real sector, state governments are the large ships. How many states are interested to make manufacturing conducive in their states and trying to create manufacturing jobs. That is the challenge we have to overcome.

As India globalises more and more, we have to fall in line with what other countries are doing. Our laws have to be similar to what other countries have.

India is importing huge amount of gold as demand for gold was shooting up. What are your views?

Gold is also something to which people gave too much importance. If people have got this desire to invest in gold, they will acquire it through legitimate channels or industrial channels. Why do they have desire to invest in gold? That is because of lack of investing or investible avenues. Why? Stock markets are stagnant in the last 5-7 years, because enough new companies are not coming to stock market, that is one thing. The Sensex has hovered around 16000-19000 in the last five years. So, equity investment is out. Mutual fund investment is also equally out. Inflation is there. So where does a person invest?

So, the root of the problem is that we failed to create investing avenues for the people. One thing the government talked about was Inflation Indexed Bonds, which did not fully take off. If inflation indexed products come, there would be some reduction in the demand for gold. That is not talked about by the media.

For many years now, India has relied on FII inflows to fund the CAD. This strategy has made India vulnerable to hot money flows. Shouldn’t India be focusing on encouraging FDI?

I completely agree with you. FDI and greenfield FDI will come when we have a real sector. India is at 132nd place in the World Bank index to do business and this is not a great place to be.

To bring it up, a number of measures have to be undertaken. If they are done, FDI will automatically flow. Until then, successful Indian entrepreneurs would look outside for growth opportunities. That is the challenge we have to face.