Curb non-essential imports to reduce trade deficit and falling forex reserves.
JUNE 2022 UPDATE
The Rupee continued its downward trend. The foreign exchange reserves managed to gain some ground but non-essential imports continued to rise for May the second month of the current financial year. The trade deficit during the first two months of this fiscal year doubled to $44.69 billion as against a moderate $21.82 billion during the same period a year ago.
And the culprit was not oil.
Oil imports rose by just 2% , as volumes slumped with low demand in May, against volatile oil prices.
It was non essential imports that spiralled, as the trade deficit rose to $24.29 billion during May As resident Indians pulled out money from the stock market that kept plunging and from real estate that is already in shambles, gold was the only safe haven to invest in. Gold imports jumped ten fold to $6billion as against May last year which was pretty unusual. The statisticians failed to read and check the trends. The imports of coal, coke and pet – coke briquettes also jumped fourfold ( cheap fossil fuel substitutes) which is ominous for pollution in the coming months. Other non essential imports rose by 40% during the month. We had seen this trend even in April -Nov 21 trade balance gap shared in graph below.
Also the ECB debt that accounts for around 37% of the foreign exchange borrowings have been rising which could also create problems for the Rupee. As per RBI data ECBs approvals had risen to $38.2 billion from $34.8 billion in FY21, so more Rupee shocks could be round the corner.
PUBLISHED IN MAY 2022
The Russia Ukraine war that disrupts food and energy supply chains may destroy the fiscal stability of many nations. For the first time in over a year, India’s foreign exchange reserves fell below $600 billion. India needs to clamp down on non-essential imports just because it has to buy oil at high prices. And most of the non-essential imports comes from China and Switzerland ( see graph below) . Also it has to repay short term debts of $256 billion maturing in the next twelve months. Though the situation is not grim it needs to be managed astutely especially because the Rupee has been continuously under pressure as the Federal Reserve tightens its monetary policy to control rising domestic inflation.
In Ten Years Rupee Plunged By 80%
Let us not try to look at the Rupees woes during the Russia Ukraine conflict of past two months. Instead let us gauge its journey over a decade . The Rupee started sliding soon after Manmohan Singh took office and moved faster south during the UPA II. In 2012 the UPA decided to enter the debt markets instead of opting for fiscal discipline to curb the rising deficit. You could see an oncoming currency crisis in late 2011. At that time you could exchange Rupees 46 for a US Dollar. I wrote a piece for The Economic Times on what could happen ‘ Don’t Push the Rupee to the Bin’
But the Manmohan Singh Govt kept the import floodgates open reducing duty on imported olive oil to luxury cars and Chinese power stations starving local equipment suppliers from BHEL to NGEF to Kirloskar. By the summer of 2013 the Rupee had crashed past the Rs 60 to a Dollar psychological barrier as the current account deficit financed by external debt soared. Easy money had arrived from China pushing the Trade Deficit north every other month. The RBI data from 2004 showed clearly how the forex debt had jumped three fold during the ten year rule of the UPA leading to the spectacular fall of the Rupee by the summer of 2013.
How India Fell Into the Chinese Tech Trap
But worse was to happen after the Modi Government came to power. The Chinese phone companies and technology companies swamped the Indian market and now have a stranglehold with over 70% market share. They used the Modi Governments interest in making India a manufacturing hub for electronics to swamp the market. They pushed in half a dozen Chinese companies like Xiaomi, Oppo, Vivo, and their contract manufacturers setting up base in Maharashtra, Telangana, Andhra Pradesh, Karnataka, Uttar Pradesh and elsewhere with easy credit to push small Indian brands like Micromax and large imported brands like Nokia and Apple into insignificance.
Broadly cheap items like chargers, phone covers and small components are manufactured in India while the technology products like PCBs, memory devices, storage units, processors, are imported against easy credit. Private debt to Chinese phone makers ballooned as did imports. Once the hardware was in place they supplied the compatible software without any issues. Here is a brief video from FBI that highlights China’s plan for dominating the tech world.
Chinese Phones Swamp Indian Market Through Easy Credit
In 2015 Indian smartphones had 20% of the domestic market. By 2021 that had dropped to 1% as the Chinese smartphones usurped the entire market while India’s policy makers looked on without clue. Easy credit free flowing bribes and money laundering pushed them to the top of the Indian market in just 5 years. Even if GOI did not fall into China’s easy credit trap like Sri Lanka or Pakistan, the private sector phone assemblers did. The Indian market was soon flooded with expensive Chinese smartphones - a nonessential luxury item. China’s market leader Xiaomi was recently caught in a Rs 5550 crore money laundering and royalty fraud scam that could be the tip of the iceberg. More skeletons could tumble out from Chinese phone makers if the same is investigated thoroughly. The Chinese are ready to lose some money in operations as long as they can make the Indian market dependent on Chinese technology. In short India was a perfect case study of China’s Silk Road Digital Policy white paper 2015 that it prepared for technology domination of 65 nations. The Rupee has meanwhile slipped to Rs 79 to a dollar making oil and gas imports more expensive and pushing down our forex reserves significantly.
