Ajay Dave
Rise of the Rupee Decline
This article originally appeared in CRI content has now been subsumed in The views expressed here are personal and do not necessarily reflect those of the editors of

Brief History

Though it was Dr. Manmohan Singh (MMS) who presented the overrated 1992 budget which was hailed as the savior of India and secured economic-independence; it was Dr. Subramanian Swamy who actually saved Indian economy. During the Gulf War (August 1990 to February 1991), the United States (US) was facing one hardship – finding a refueling base. We had already run a phenomenal bankruptcy inducing deficit.

At that time, Dr. Swamy convinced the then Prime Minister (PM) Chandrashekhar to briefly change India’s foreign policy – back then India did not allow armed foreign missions any landing or refueling base in India and voting in favour of US Gulf War action – a departure from the non-aligned-movement principles. Dr. Swamy negotiated a deal with the US securing $ 2-billion no-conditions-attached loan from the International Monetary Fund (IMF) in exchange for allowing US aircrafts to land in Bombay for refuelling and voting in favour of the resolution. That saved India in the first place. Ensuing negotiations in Davos and 1992 budget is well known.


The Model of deficit financing

For long we have been following the model of deficit financing. The problem is not the model or the method adopted but is in the deficit in vision and in the lack of ground action.

For that genesis of the policy, policy makers need to be checked. Most planning commission members, finance ministry bureaucrats, Reserve Bank of India (RBI) Officers and Dr.Manmohan Singh himself subscribe to superficial concept that stabilizing rupee is the key to fiscal management including inflation. Incidentally, most of them share same brainwashed background – IMF and World Bank (WB) stints where developing economy nominees are impressed upon to keep the currency stable. This can be easily achieved by Foreign Institutional Investor (FII) and Foreign Direct Investment (FDI) foreign-exchange-currency (Forex) inflows.

I will come back on FDI later. But the easiest way out, undisputedly, is FII inflows. It is nothing but ‘Hot Money’. Every sane economist and his dog will understand that.

Herein lies the problem. One of the main causes – the gap between imports and exports, with imports dominating, leads to rupee depreciation which upsets fiscal deficit as most developing nations are net importing countries and it adds inflationary pressure.

The correct and harder way to address this ‘net import gap situation’ is to strengthen manufacturing and services export sector. This in medium to long term would ensure a rise in baseline of net forex inflows, bringing down reliance on forex inflows from FII and FDI. In fact, there could be a situation achieved where a range bound appreciation or depreciation would be healthy for the economy. This can only and only be achieved by investing in the road,the railways, the port, communication, water supply, and storage / warehousing and power infrastructure.

Even after the 1992 budget, the country remained clue-less till the year 2000. Between 2000 and 2004 huge number of road, rail, port, Special Economic Zones, storage and power projects were started. Communication including internet penetration was well achieved. Dedicated rail and sea freight corridor reduced the assets / goods delivery time, and the consequential reduction in demurrage charges which entities had to suffer. Road infrastructure was started with the intention to again reduce the movement time and reduce the transport / fuel costs. The ten-lane north-south-east-west corridor and the 8-lane golden quadrilateral progressed at 11.5 kms per day!

River interlinking study was re-initiated. SEZ and power projects were started with all good intentions. Point is all this was with a focus to create a ‘Real’ economic growth – an environment conducive to propel manufacturing and services export growth. Though it happened along with related corruption(alleged), the net real benefit gave a stable boost to the economy with forex reserves at record high since independence.

Post 2004, all infrastructure projects came to stand still and there was the sudden influx of FII money. Large funds flew-in via P-Note route. Markets – both stocks and bullion – scaled record heights, which was very predictably not sustainable even without 2008 global crises. Sustainable or not, as per the prudent and rational economic assessment, it is generally contrary – there is a flight of money outwards when infra spend touches near zero in any country.

Consequently and again repeating – predictably, has lead to a sustained and gradual withdrawal of FII money leading to continuous rupee depreciation. The misadventure of not adequately investing and improving the infrastructure has also reflected in the recent downward trend in Index of Industrial Production (IIP) growth rate (though government keeps revising the past data by blaming error on some random junior officers).

Blaming Vodafone tax change (which was a step in the right direction and United Kingdom (UK) also followed the suit in charging Vodafone in other tax evasion case there) and coalition alliance partners does not change the ground reality that there has been almost a decade of absence in net infra spend.

My conclusion of infrastructure propelling industrial production growth (including export production) holds good as there is at least one state government i.e. Gujarat, which has invested huge money in the last decade in creating the infrastructure and arranging conducive industrial environment, that it beats national averages on the most economic parameters.

Coming to FDI, it is just one of the methods to boost investments in manufacturing and services sector. Under fair investment environment, both domestic and international investors / entrepreneurs would grab every opportunity to join ‘real growth’ story. But as discussed above, there has been downward growth in the real economy.

Then how come FDI is attracted? That only indicates, FDI entities are given the massive unreasonable concession to invest in India further hurting domestic manufacturing and services sector as it gives an unfair advantage to FDI entities. Which again brings me back to my conclusion that FDI is invited at regular intervals giving unfair benefits to them only to ensure forex inflow to stabilise the rupee in a short term.

Under-achievement in creating an adequate infrastructure, rampant corruption in every government ventures (adventures), gross mismanagement of the economy, doling out sops/money via socialist schemes like The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), Direct Cash Transfer, Loan Waivers, Food Security Bill, et al are all unproductive government expenditures, such socialist schemes devaluate the rupee consistently (which greatly impacts India as it is a net importing country). They have impacted  grassroots level negatively- spiralling production and labour costs. The most immediate impact is on and victims are the domestic industries – this is more of a policy deficit than industry cyclical phenomenon or on the account of global-crisis.

Rupee was doomed in 2004 itself when by December that year, the road-layout (North South-East West Corridor & Golden Quadrilateral) progress dropped to 11 kms per year from 11 kms per day! Rest is history – the decline in infra and illogical rise in stock & bullion markets.

To over-simplify, the short-term funds i.e. the annual revenue generated was used-up for long-term purposes like loan-waiver, defence equipment purchases, scam-outflows, parking in offshore accounts, etc. And funds raised for long-term projects purposes like infrastructure projects, etc were used-up for short-term purposes like subsidies, MNREGA, cash transfers, 5th-6th pay-commission salary rise, etc. Result is a mismatched messed-up economy, which is struggling to stay afloat by committing hara-kiri of sorts.

Of course, in today’s world there are exotic monetary products to manage economy like subscribing to T-Bills of US and other countries, rate-cuts, reducing gold-imports, surrogate financing etc.. all of which can be justified or blamed…. but the raw fact remains that only export of goods and services ensure steady forex flows and reduce reliance on these fancy-named exotic fiscal management measures.


An interesting extract

An extract from ‘My friend turned foe turned friend: Chandrashekhar’ by Dr. Subramanian Swamy (Chapter V): (Read here)

When we first met as a government in November 1991, Chandrasekhar told the cabinet that there was a great economic crisis particularly in petroleum and foreign exchange looming. After some discussion, it was decided by the PM that I should, for controlling the crisis, explore some informal steps to obtain crude oil on barter i.e., in exchange of sugar, or engineering goods, and also get $ 2 billion (Rs.6000 crores) IMF loans (and without conditions).

That is, the PM wanted me to act as Finance Minister as well! Chandrasekhar had denied me the Finance Ministership when the Cabinet was formed because, he told me my free market philosophy would “embarrass” his “socialist” image. But the real reason was (in my opinion) I, as Finance Minister, would go after the Swiss bank accounts of politicians, and as a consequence, many political leaders would go to jail. (There is Rs.3,20,000 crores deposited illegally by Indians in Swiss banks). Therefore when the Cabinet was being formed, there was near hysteria at the prospect of my becoming Finance Minister. Chandrasekhar was bombarded by these frightened friends, saying “please bring the devil as Finance Minister, but not Swamy”.

When the Cabinet meeting was over, Chandrasekhar asked me to come with him to the airport (he was going to Varanasi). In the car, sitting next to him I taunted him: “you denied me the Finance Minister, and now you want me to do the work of the Finance Minister as well?” “Arre Baba!” he exclaimed in Hindi, the economy is the on verge of collapse and you can only think of your grievance”. “‘Why should I do this task?” I persisted. After all, Commerce and Law, was my portfolio, and therefore why should I have to work for another Minister? “Listen” said Chandrasekhar “No one else in the Cabinet has your contacts abroad, in USA, Israel, and China etc., so use it for the nation’s sake”.

We sat quietly till the car reached the Special VVIP airport, and out to the tarmac where the IAF Boeing reserved for the PM was parked. As he climbed the stair case to alight the plane, I told him when he returned, I would have a proposal on how to tackle the financial crisis. “To hell with the Finance Ministership,” I said to myself. “CCPA membership is more prestigious”.

The foreign exchange crisis had been caused by the large number of short term loans (3 -5 years repayment) taken from Europe by the Rajiv Gandhi government (1985-89) mostly to pay for defence equipment purchases abroad. These loans became due for repayment during V.P.Singh’s tenure as PM (who as finance Minister sanctioned it), but he slept over it. So when we came to power it coincided with non-payment, plotting to declare India as a defaulter or bankrupt. It was a Mexican type situation.

We needed $ 2 billion to tide over this, and save our reputation. We could, like Mexico, straight away have applied to the IMF for a “crisis loan”, but then the IMF would have strapped us, like Mexico, with humiliating conditions. When I spoke to Rajiv Gandhi about this crisis, after returning from the airport, he said flatly that the Congress party would not support any Mexican type conditionality. So our government was in a fix: “No conditions, No loan from IMF; no loan, no economy!”

But I knew of one possible escape route. The IMF is dominated by the Americans, who control 87 percent of the voting power in the Executive Board of the IMF. Despite popular impressions to the contrary, Americans are very simple people if you have a deal with them on a give and take basis. If you want something from an American, offer him something in return which he needs. Then he will respond fully.

Americans in the past were irritated with us because we took their aid, and yet voted against them in the UN. Americans are straight forward, contractual minded people, whereas we are highly moralistic people who do not like to reveal our mind. Americans are much like me in the character: blunt and open in thought, but a typical Indian is more like Narasimha Rao: soft in words, but covert in action.

So when Chandrasekhar returned to Delhi, I received him at the airport, and told him of Rajiv Gandhi’s refusal to support an IMF conditions-prone loan. I then told him: “There is one way out. Ask the Americans to help. They will help, if you offer them something in return”. “What can be possibly given them that they do not have already?” asked Chandrasekhar. I had no answer. I just kept quiet. Chandrasekhar said “We are running out of time. Think of something”.

Soon after sometime, the opportunity came. The US Ambassador came to my Commerce Ministry office to tell me that the US was planning to support a UN declaration of war on Iraq, and US will conduct the operations. He said that the Indian government should support the war effort of the US.

With IMF on my mind, I asked the Ambassador: “What will India get by doing so?” The Ambassador was taken back. He said it was a moral imperative for the world, since Kuwait had been crushed by Iraq’s invasion. I laughed at the US ambassador. I told him “Listen Excellency, ten years in the US as a student and as a professor has made me more American than you. You keep your moral imperative, but give me a deal”. I explained our problem to him. He was very sympathetic. As I expected, he immediately responded. Thereafter President Bush and Chandrasekhar were in touch with each other. The $ 2 billion arrived without any conditions! We, of course allowed the US to refuel their planes flying in from Philippines to Saudi Arabia. Nowhere will it be recorded as a “deal”, but the truth is this. In the history of the IMF, such a large loan has never been given without conditions. Ours were the exception.


Solutions are always there, we need will and courage to implement them.