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Buck lacks bang

10 May 2012 By Jeff Glekin

What’s worse than a policy which scares off much needed foreign investors? A scary policy that’s also ineffective. A new Indian rule requiring exporters to repatriate half their foreign currency manages to be both.

If the fear of a fast falling rupee had led Indian exporters to hoard large sums of cash in hard currencies, then the Reserve Bank of India’s (RBI) move might make practical sense. But by the RBI’s own estimate, this change will only bring back between $2.5 to $3 billion of capital. That’s loose change in comparison with India’s $185 billion annual trade deficit. To be fair to the RBI, the change will prevent exporters from building up even larger stashes of cash. Seen in that light it may be more prevention than cure.

The rupee is certainly under pressure. The ballooning trade deficit means it has to run just to stand still – without steady capital inflows, the currency will collapse. And without a steady currency, it is hard to attract foreign capital. Things keep getting worse, India’s exports for the month of March fell by 5.7 on a year on year basis. The first time they have declined since 2009. The Indian rupee suffered its biggest daily percentage fall in nearly five months against the dollar on May 9.

But constant tinkering with policy does more harm than good. Recent flip-flops over tax laws spooked portfolio investors. The rules have changed on cotton exports so often that no one can now remember if they are banned or being promoted.

If New Delhi really wants to tackle the trade deficit, gold imports are a much better place to look than industrial exports. The prime minister’s economic advisory council estimated that India imported $58 billion of the metal in the year ending March 2012. But a sensible decision to tax imports of gold has been partially overturned by India’s indecisive policymakers.

India needs imaginative policymaking to keep foreign investors keen and to tackle its twin trade and fiscal deficits. The latest tinkering is yet another example of counterproductive thinking.

 

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