Part 2- Strategising For Stronger INR: Navigating India's Economy Amidst Uncertainty
India and China both were at a per Capita GDP level of USD 200 approx in 1978. While China has now reached USD 13,000+; India is still at USD 2250+!
Subsidisation works in Make in India but not in services. By and large, a country doesn’t need physical Infrastructure for IT (Information Technology). However, increasing Manufacturing requires a strong currency because Raw materials and machines are imported, like Pharma API’s from China.
A Foreign investor can put in money in infrastructure, which generates returns in the long term. But since the Financialisation of Western economies, a large pool of investors like to put money in Stock Markets and the like, which generate returns in the short-term. This money is liquid, and as soon as markets become buoyant, the Foreign investor takes out the money back to his country. Money put in the Real economy has a multiplier effect but this is not true when invested in Financial markets! India gets mostly Foreign money in its Financial markets and not in long-term infrastructure investments!
India has always had a consumption economy and it cannot have a strong currency owing to its Trade deficits leading to Budget deficits – With China alone, we have an above USD 100 billion+ trade deficit!
In many cases, we import consumer-related items from China – Recent Government schemes like PLI (Production-Linked Incentive) scheme have created manufacturing industries in India like in Smartphone production, Toys and the like but it is proving difficult to wean Businessmen off China, as they seem to find it convenient to just import products from China rather than go through the hassle of running a manufacturing business in India! The recent move towards bringing out 4 Labour Codes, by reducing 29 Labour laws, is another move in right direction, but the fear of Indian Bureaucracy prevailing in Factory Managements is just too huge!
If you are a consumption led economy, and imports are more than exports, then unless you have truckloads of Oil beneath your country, you will have a weak currency!
A core area which bothers Foreign investors and hence hampers incoming Dollars into India is the state of Contract enforcement in India. The courts are mired by millions of pending cases. The situation is so dire that Foreign investors build in clauses to have London or Singapore as the jurisdiction of recourse to legal proceedings! But as recent Amazon-Future Retail case shows, having a legal watertight agreement is one thing, getting past the ping-pong played by various forums in India, is another thing! So, for a strong INR, Judiciary needs to be fixed first! Modi Government has been at it – telling Supreme Court to change its system of self appointing Judges and give the Government a greater say, but the My-Lords don’t seem to be playing ball!
A stable currency is also a byproduct of the productive economy, for which the soil is rich in India, with our Tech and IT exports!
But for “Make in India”, the Indian bureaucracy seems not yet aligned and seems to disallow FDI (Foreign Direct Investment) in Manufacturing projects in a large way! Nouriel Roubini said on 20th Feb 2023 - “What is happening in India is that the attraction of foreign capital is used as a more like an import substitution industrialisation, the restriction to tariff is on either raw materials, intermediate inputs or final goods, that imply that actually if you are a foreign firm wanting to produce for the global market if the imported inputs are expensive, you cannot exploit the global value and supply chains are part of an integrated production process.
Going in the direction of protectionism of domestic firms and of domestic industries as opposed to production for export-led growth may be a challenge and the fact that India has not recently joined either FTAs or regional trade agreements is a signal that you are doing something slightly not right.
The other dimension is that the comparative advantage of India is not in traditional labourintensive industries, not even in things like car, tractor, or locomotives. It is in high-tech, it is in IT and within IT, there are products like iPhones and other types of tech products. Some of those productions may not be as labour-intensive as traditional manufacturing but if you are going to give preference to subsidies to more traditional manufacturing, you are not going to exploit your comparative advantages with these Technologies I am of the view that overall there will be a process of de-dollarisation over time. Part of it is the structure of the share of the global economy of the US. It has fallen from 40% to 20%. It does not make sense for the US dollar to be two-thirds of all international financial and trade transactions, part of it is geopolitics. The US is weaponising the US dollar for national security and foreign policy objectives that, of course, makes the rivals of the US uncomfortable. But even some of the friends and allies of the US whether in the Middle East or even in Asia are a little bit queasy about that.”
Timing it right to make INR strong
INR has been a currency which trends down in the long term. Efforts were made during 1998 period when Vajpayee Government tried to boost its value. One can appreciate the currency but global situation should be benign. When interest rates are falling in India, FII’s put money abroad and vice versa. Global liquidity conditions play a major role in a Currency’s outlook.
India got opportunity 3-4 times in last 15 years, money came in and instead of taking money in Financial markets, India could have put that money in Infrastructure!
Currently, interest rates are under tightening by the Fed, so now is not a good time When international rates are benign, it’s a golden chance to appreciate the currency but then Indian IT exports would suffer!
China is a single Party Government and hence used its power to get things done! Modi Government also enjoys full power with 78 per cent approval rating and control in Parliament. PM Modi loves strong currency and sees it as a source of national pride, but has not been able to appreciate the INR. The primary problem seems that India is not ready to take foreign money in real economy and taking only in Financial markets.
Consider the Korean company POSCO - 18 years back it wanted to invest USD 12 billion to open a Steel plant in the Indian state of Odisha. But after 6 years of haggling to get land and other clearances, it pulled out. Consider FDI in Coal sector – Inspite of having huge Coal reserves, India’s biggest import is coal! There are so many moving parts for a Foreign investor and the impression is that the Bureaucracy doesn't allow foreign money in the real economy.
Appreciating the currency calls for a 2 to 3 to 5-year pain which short-sighted Governments don’t seem to take. Rather, the Indian currency over 30 years has depreciated by an average of 3.1% per year!
Vajpayee was one those rare Prime Ministers who decreased revenue expenditure and increased Capital expenditure. Now, Modi is doing the same and has hiked Capital spending on infrastructure – consider this – the Capex on Infra has jumped from the range of INR 4 Lakh crores in 2011 to INR 10 Lakh crores in this year 2023’s budget! Events like the 2G Scam of 2011 in which all major Telecom companies of the world got embroiled, create such bad press and image of the country! When 2G Scam exploded, everybody froze! CAG scared the Bureaucrats, Telecom sector became a mess - Things went down!
Now, under the present Government, India decided not to be a part of RCEP, the mega Trade block led by China. India didn’t join for the very reason of the presence of 800 Pound Guerrilla – China - in the room. India already runs a huge trade deficit with China and allowing it Free trade would have meant further erosion in manufacturing capacity of India. More so, Agricultural land holdings in India are small and cant bear cheap imports from Down under led by their huge capacity Farms!
4 India needs both Blue and Black collar jobs in Manufacturing to grow the sector. As seen in our case, when FDI comes in 3-4 years in real economy, we become complacent. Fiscally, we need to have a real interest rate of approx. 1.5% which is inflation plus interest rate Modi Government has been trying to build FDI by creating GIFT City in Ahmedabad, Gujarat – like Singapore is Financial gateway to APAC and London used to be for Europe – to attract foreign students and capital and an atmosphere shielded from the pitfalls and time wastage of Indian judiciary. This will bring money in hordes in India and also with a changed tax status like DIFC, Dubai
Currently, India is mostly attracting money for stock markets and not infrastructure – Because the money coming in infrastructure gives returns after 10 years and Foreign investor doesnt want to take that uncertainty! Consider this - FDI in India in 2022 was USD 85 billion out of which 25% went to IT, 12% to Services and 12% to Automobiles. Manufacturing got USD 22 billion, which is tiny for a country of the size of India. Out of this FDI, USD 50 billion came from Singapore, Mauritius and Switzerland, a lot of which is likely round-tripping of Indian money parked abroad. So the actual FDI was approx. 35-50 Billion, most of which went in short-term Financial markets!
Remittances have also crossed USD 100 Billion into India – the largest globally! Another factor in play is that at the time China boomed in last 30 years, the world was globalising – and now we are facing de-globalisation! “China+1”, “Minus China”, “Friendshoring”, “Reshoring” are the buzzwords. Vietnam and Bangladesh have been beneficiaries with a lot of trade barriers being put on Chinese companies. Even Chinese capital is exporting through Vietnam. Bangladesh per capita GDP has gone ahead of India! But investment opportunities are not there in Bangladesh because it is a small country. Global supply chains are getting reformed – A large part of Global trade will happen under Free trade RCEP. But India cant be in RCEP free trade zone because we didn’t establish a Manufacturing powerhouse in time with the wasted decade of 2004-2014! Other countries in RCEP are more productive and if we were a part of it, they would have dumped products in India and Indian industry would have vanished!
China builds everything at scale – It takes entire landmass, builds roads, hundreds and thousands of workers work at one place – the size of Shenzhen Special Economic zone (SEZ) is 493 square km’s. In India, SEZ’s are on an average under 2 square kms! Thinking big is easy, but executing to scale has been a consistent challenge for India. The recent building of big-ticket mega-infrastructure projects in India like grand Himalayan tunnels, ocean bridges, Dedicated Freight Corridors, Expressways, River-waterways, Rapid Rail, Bullet train – all give renewed hope!
Now, with current phase of India going good with all Guns blazing – the feeling amongst Foreign Investors is that if Modi loses, whatever reform is happening, will also vanish!
Foreign Investor sees that a country which came out with new “Farm bills” to reform its Agricultural sector, implemented the reforms and then had to take them back! This is what Foreign Investors saw. And this is what makes Foreign Investor say that “I will come but will buy HDFC Bank, Dr Reddy” - Basically put short-term capital and will stay away from patient Capital!
One move of Modi Government – PLI – Production-Linked Incentive scheme – is, however, proving to be a game-changer. Companies love getting cash back on the Business they generate by manufacturing in India and it is leading to addition in capacities! It is a runaway success like VGF (Viability-Gap funding) in Airport sector, which has opened up hundreds of new airports.
The time will come again for India to make INR strong! – The best time to do so would be when India can coordinate its monetary policy with Fed’s interest rate moves. Foreign Investor will be then ready again to invest dollops of money – and India should take that in manufacturing for job creation and not IT sector alone! IT sector absorbs limited workers and puts dis-proportionate pull on the Government to keep INR weak! India, then, would be better served to stay away from these demands!
Tushar Kansal is the Founder and CEO of Kansaltancy Ventures, a multiple-awarded Investment Management firm focused on providing Funding from its network of 750 Global Investors. Reach him at tk@kansaltancy.com
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