The
Union Government is facing significant criticism because of the falling rupee.
It has fallen over 10 per cent against the dollar since the beginning of the
year. The Chief Minister of Delhi added another angle to the economic debate
this week by suggesting that images of Hindu gods be printed on currency notes
to improve well-being in the country. This is problematic and has been said
with narrow political objectives. India is a secular republic, not a Hindu
state. This is also worrying because political discourse seems to have shifted
to a point where everything is seen through the prism100 of religion. This is a slippery slope
and must be avoided. Political parties in general are expected to have a120 more informed debate on economic
management. Changing the currency notes or pictures on them will not help.
Generally, political debates140
on the currency are focused on its nominal value against the dollar, which
should also be avoided. Directly relating the160 nominal strength of the currency to the
economy has resulted in a systemic bias for a stronger rupee. All political
parties have adopted the same approach, depending on their position in
Parliament. There are a variety of reasons why the200 rupee has been under pressure and most
of them are not in India’s control at the moment. It is important to recognise
that India imports most of the crude oil it needs, and higher prices affect its
external position. Since240
oil prices are on the higher side and are expected to remain so in the near
future, India’s current account deficit will remain elevated, putting pressure
on the rupee. Apart from the oil and trade factors, there are other issues280 affecting currency movements at this
stage. The dollar is strengthening, which has resulted in a fall in most
currencies, including300 hard
currencies like the euro, yen, and pound. In fact, the rupee had fallen less
than a number of currencies,320
partly because of interventions by the Reserve Bank of India. Since the US
central bank is tightening monetary conditions at a faster pace than most
central banks, capital is flowing to the US. Since both importers and foreign360 investors are demanding more dollars,
its value compared to the domestic currency is increasing. As the US Federal
Reserve is likely to keep increasing rates, the pressure on the rupee is likely
to continue. It is worth recognising400
that depreciation in the currency is actually necessary. Not allowing the rupee
to fall when all other currencies are falling420
would affect India’s external competitiveness. A stronger currency would
benefit consumers and hurt producers. Also, it is difficult for a country dependent
on capital flows to defend its currency in such an environment. It could end up
creating bigger imbalances and financial stability risks. The foreign currency
reserves accumulated by the central bank should be used judiciously to contain
excess480 volatility as is the
stated position of the Reserve Bank of India. Therefore, it is important that
political debates about500 the
economy are informed and do not put unnecessary pressure on institutions.
Debates should focus on attaining higher growth with a balanced budget and
lower inflation. This would help ensure stability and prosperity in the long
run.
The
United Nations Framework Convention on Climate Change has released its yearly
summary of developments related to the climate commitments made by the560 various parties to the Convention. These
commitments were part of the compromise hammered out in the Paris
Agreement on Climate Change and are meant to be revised and strengthened on a
regular basis. The latest report mentions marginal progress being600 made over the past year. This has come
from almost 40 countries issuing new or updated contributions that enhance
their pledges. These new contributions, if fully put into practice, might lead
to emission levels over the coming decade being about640 5 per cent lower than in the previous
scenario. In addition, the overall picture suggests that global emissions might
now peak before 2030. The effort, however, remains inadequate to contain the
rise in global temperature to 1.5 degrees Celsius by the end of this century.
This report comes shortly prior to the 27th conference of700 parties to be held this year in Egypt.
It is natural to ask therefore how it impacts the negotiations to720 take place at that summit. Last year’s conference,
hosted by the United Kingdom in Glasgow, was preceded by frenetic diplomacy
intended to get several countries to sign up to “net zero” targets. In the end,
that diplomacy was largely effective, with Prime Minister of India himself
committing the Indian economy to carbon neutrality by 2070. Yet the conference
itself did not end with a sufficiently large number of countries updating their
commitments, as was envisaged in Paris six800
years earlier. Several countries are now being perceived as being left behind
when it comes to climate action. Several other issues, including compensation
for loss and damage, were pushed back to be discussed in the next conference.
It is especially840 worth
noting that even the most optimistic view of additional commitments relies on
there being sufficient support in terms of finance and technology. When Mr.
Modi made his net-zero commitment, he conditioned it on these two factors being
made available. The 2030 targets for renewable energy also vitally require that
greater amounts of finance and easier access to900
cutting-edge technology be prioritised. In other words, the developed world’s
responsibilities do not end with updating their own contributions. It is also
necessary that they live up to past pledges on green finance, and increase
those commitments to fulfil the legitimate needs of those developing countries
which are having to invest in new infrastructure to support tightening contributions.
On960 this aspect, there
has not been great progress in past years. At the very least a credible
recommitment to this980 target
will be required if the rest of the world is to make a real effort to not just
meet1000 but update existing
climate action efforts as expressed through their contributions. Developing
countries will struggle without the necessary financial support.
The
Union Government’s approach to disinvestment needs to be reviewed. Over the
years, it has been used as a tool to reduce the fiscal deficit, though the Government
has often failed to attain the target. Even in the current fiscal year, the Government
so far has not raised even half the targeted amount. It is nonetheless
confident of attaining the1080
fiscal deficit target of 6.4 per cent of gross domestic product for the year
because of the comfortable tax revenue1100
position. High growth in nominal terms because of higher inflation would push
up the size of the economy and also1120
contain the deficit despite significantly higher expenditure. Since the
pressure from the Budget is relatively low this year, it is a good time to
revisit the disinvestment process. Some of the suggestions made by Department
of Investment and Public Asset Management could be useful in this context. The
Department has suggested that since market realities kept changing, the target
should not just be one hard number. These arguments have merit and must be
discussed further within the Government. It should1200 give up the dependence on disinvestment
as an instrument for containing the fiscal deficit. The Government must pursue
the disinvestment programme to attain broader objectives. There is no reason,
for instance, why the Government should remain invested in so many companies
with a large number of them only accumulating losses. The Government in this
regard has done well to formulate1260
a clear public-sector policy, which envisages a limited presence of
public-sector companies in strategic sectors only. Since the Government rightly1280 intends to exit other areas, it should
proceed with a more systematic approach. Finding companies to divest after
having arrived at a target for the year will not help. It should instead have a
rolling list of companies to be privatised over a period of time. A ready list
will not only give the departments concerned much-needed clarity, but also
allow the markets to prepare for buying shares of such companies. The proceeds
can be used to finance important infrastructure projects. Depending on market
conditions and the quality of companies being divested, revenue collection
could vary significantly from one year to another. Therefore, the Government
can show the fiscal deficit number both with and without disinvestment
proceeds. For analytical purposes,1400
the target without the disinvestment figure can be used. Since the proceeds are
likely to be volatile, a mechanism can be devised to sustain the flow of
investment in identified projects. Given the nature of demands on the Budget,
disinvestment1440 can help
augment capital expenditure, which would help push up the growth potential of
the Indian economy. With global economic prospects looking dim, it is likely
that India’s growth, to a large extent, will depend on government expenditure.
However, since the government needs to reduce the fiscal deficit to a more
reasonable level in the coming years, the disinvestment push could help
maintain capital expenditure. Broadly, it is clear that the disinvestment
programme in its current form is not working as desired. It thus needs a
different approach.1528
