Opinion A good rate

How did this happen,and how can a similar phenomenon take shape in India? Let’s examine the implications of the undervalued Chinese currency. Instead of exporting cars to China,the US,Europe and Japan found it economical to set up plants there. The exchange rate acted as a tariff barrier with the result that the manufacture of autos,white goods,home appliances and computers within China received a tremendous boost thanks to a large inflow of foreign direct investment (FDI). Low wages,subsidised capital costs,a growing middle class with a high propensity to consume and a booming export market combined to make China the workshop of the world.

Conditions in India may not be identical to those in China,but we have a lot going for us. Our entrepreneurial base is large and growing. Though our manufacturing capacity is smaller than China’s,our output to capital ratio is higher,giving us a cost advantage. We have a robust financial sector. Further,with a rising trend in China’s wage rates and a depreciating rupee,we should be able to push our advantage to the hilt. There is a rider here. The slide in the rupee must be arrested at a point which gives us long-term gain. China pegged its currency to the dollar. We may be reluctant to follow suit,but there are ways to keep the rupee afloat at the desired level.

A depreciated rupee will make India an attractive destination for FDI,provided our policies become more investment friendly. To take three areas,there is pending legislation on FDI in retail,in insurance and in airlines. To open these up to foreign investment will signal a change in the government’s mindset and is sure to trigger a much-needed inflow of capital.

Then there is the longstanding bugbear of inflation. Despite a steady rise in interest rates in the last three years,there has been negligible impact on overall inflation. To me this indicates a lack of clear thinking. There are three major components in our inflation basket: industrial products,oil and food. The first is impacted directly by high interest rates and more so now because of the depreciating rupee,which has raised the cost of imported raw materials and equipment. But industry has absorbed much of this by a squeezing profits despite raising productivity and exporting more. Thus the prices of manufactured goods have barely gone up. The second,oil,hits the consumer hard on account of the depreciating rupee but remains volatile because of fluctuating international oil prices.

The third,food inflation,falls into three broad categories. The prices of cereals are controlled by the Food Corporation of India and have hardly risen. Pulses,which have risen considerably,are non-perishable and should be brought under FCI. As for perishables like fruits and vegetables,their prices can stabilise only if we have a proper supply chain comprising of refrigerated transport and storage. This is where the importance of FDI in retail comes in. Multinationals the world over have ensured the delivery of non-perishables like grains and pulses at higher prices to the farmer and lower prices to the consumer. Are we therefore fencing with imaginary ghosts?

The interest rate rise to combat inflation has ultimately brought about a profit squeeze on industry,a slowdown in investment and a rise in unemployment,which together have contributed to a decline in the GDP growth rate. While this story unfolded in India the world has been overtaken by the crisis in the eurozone. Let us make the rupee depreciation a turning point in our growth story.

The writer is an industrialist and economist