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Saurav Jha
Wednesday, August 28, 2013 at 17 : 10

Indigenization is the only way forward for the Rupee


Amidst the rupee's recent decline the most disturbing news item that I read recently was about India renewing iron ore exports. This is clear indication that we are at a very dismal point in the investment cycle and the UPA government is now looking at resource exports to support a flagging currency. People would do well to note that such a predicament is invariably associated with economies that supposedly follow a leveraged growth program of shallow deficits coupled with imported resources to build and export value added products but fail to implement the second part of the program. With resource prices now rising all over the world the temptation to sell rather than have them as a cost to the economy are growing.

But it need not have been this way. With its massive pools of young manpower, large agricultural sector and still viable river basins, India could have easily produced many of things that it unnecessarily imports today in addition to all the foreign energy that it consumes. At one end, India is now so devout that even Chinese Ganeshas will do, and at the other end so security conscious that the IAF feels the need to bring in 12 imported VVIP choppers worth only four thousand crores.

Indeed, the last decade, has seen a phenomenal increase in imports across the spectrum. So India has basically caught the 'American disease' a little ahead of schedule. The UPA has been rather content in letting people subsist on handouts while foreigners do the work of supplying India with goods. Might sounds great to the NGO types, but unfortunately the rupee is not a reserve currency backed by seven worldwide military commands and the largest dirty tricks department in history. We cannot simply inflate away our foreign commitments. Neither can America really but that is another story.

On the other hand, India does have a surfeit of natural resources. Resources that in one capitalist scheme are preserved for later as you try to run your economy by drawing in resources from elsewhere. This scheme is sustainable as long as a country uses 'greenfield' advantages to build and export stuff that more than pays for the imported inputs through the value multiplier associated with manufacturing. With an urbanization level of around 35 per cent, India still has plenty of greenfield advantages. However, if exports flag and imports keep increasing due to skewed policies, as has been the case in the last ten years very soon pressure mounts on the local currency via difficult to finance current account deficits (CADs).

At this point, two currents start emerging, one more vocal than the other. A currency crisis invariably leads to overt calls to further 'liberalize' the finance and insurance sectors, as if such flows can compensate for persistent CADs. 'Geek at Large' has of course dealt with this issue in a previous post. A more below-the-radar development that takes place is the approval to export a whole host of natural resources that are now fetching a much higher price in the international market. Of course, this doesn't quite remain below-the-radar as tribal populations get displaced, forests get denuded and the same NGO types get another issue to croon about and (get federal funds in the process as well). Of course the 'aam admi' whose interests they claim to espouse finds himself battling stagflation in the cities and ruthless displacement in the countryside or the forests.

Naturally displacement will happen in the course of industrial urbanization and every country has to use a certain percentage of its domestic resources for development anyway. But what percentage that will be and what it will be used for is a matter of utmost importance from both the perspective of sustainability and equity. Extractive industries aren't particularly known for either.

Nevertheless, every crisis can be turned into an opportunity. And the time for that has now come. Indigenization should begin with the most worrisome element of our foreign dependency - military imports. Modern weapons on the international market at the best of times register 10-15 percent inflation year on year in dollar terms. With the rupee declining the way it has, I don't think massive military imports of expensive systems are viable any longer even on the 'I need the best basis'. What is the point of having the 'best' if you can't affordably operate it? A foreign weapon system will need foreign spares. With the rupee's current decline the projected life cycle costs of all foreign weapon systems have gone up commensurately. With India's CAD being what it is, I wonder how the government is planning to finance future imported spares.

On the other hand, a major push to indigenization will result in more Indian jobs, a smaller CAD which will boost the rupee, and further development of India's industrial base. Do remember, despite the spectacular import push of the last ten years, India's Navy continues to wait for new conventional submarines with delays in the Scorpene project, and the Army for artillery equipment that has seen endless rounds of trials as foreign suppliers have competed to hurl allegations against one another. It is time that India actually showed some real growth rather than financialize itself, only to see the 'gains' inflated away by a weaker rupee.


More about Saurav Jha

Saurav Jha is an author and commentator on energy and security affairs who writes regularly for numerous publications including The Telegraph, World Politics Review, The Diplomat, Le Monde Diplomatique and Nuclear Engineering International. He has degrees in economics from Presidency College, Calcutta and Jawaharlal Nehru University, New Delhi. His first book, The Upside Down Book of Nuclear Power (HarperCollins India) was released to critical acclaim in 2010. His next work on sustainability issues due for release in late 2015 and tentatively titled The Nexus (Hachette India) explains how the nexus between energy, food and water pushes urbanizing economies towards stagflation. He has also co-authored The Heat and Dust Project (HarperCollins India) with wife Devapriya Roy, chronicling a 16000 km long backpacking trip through India on an extremely tight budget.