It has become quite fashionable in the world of economists to argue that excessive mineral wealth turns into a curse, which many times becomes a poison. The story of Croesus, who possessed gold mines and who at one time may have been the richest king in the world, but who descended into disgrace and defeat, goes back all the way to Herodotus. The easy mineral riches obtained from South America turned imperial Spain into a flabby economy that missed technological revolutions.
This writer is somewhat acquainted with Venezuela, which was a modestly prosperous country till the seventies and a net exporter of rice and meat. The oil bonanza of the seventies changed all of this. Venezuela turned into a country which imported everything and exported only oil. The curse of oil was not inevitable. It only happened because of soft governments that decided to bribe their citizenry with cheap imports. And these cheap imports occurred because of an overvalued local currency, the Bolivar. It is fascinating to note that this was the same period when countries like South Korea and Taiwan maintained an undervalued currency, which ended up being an automatic export promotion tool.
Sometimes in the history of countries, poisons other than mineral riches are possible. When we look at our own country, we are left wondering why we are such poor exporters of goods. After all, virtually every country to our east is an export success. We have tried everything. Central Planning till 1991; Liberalisation after that; and Sectoral incentivisation for the last few years. Nothing seems to work. Our export of manufactured goods remains tepid. We struggle to be competitive globally.
India’s drugs
Perhaps there is a drug that is causing paralysis and atrophy. Recently, when I was talking to my old friend, the eminent economist Rakesh Mohan, he mentioned that expatriate diaspora remittances may be the drug affecting us. Just look at the numbers—while our balance of trade in goods is invariably negative, our current account numbers look better because every year we have a very impressive remittance inflow. Remittances may be the oil that allows us to keep an overvalued currency and disincentivises us from imitating the South Koreas and Taiwans.
In recent years, the impressive performance of our service exports has been a secondary drug. The lesson we seem to have learnt is that we should not bother with exporting goods if our remittances and service exports can help us keep our current account deficit modest.
The result is that we import goods of every type: Toys, shoes, furniture, electrical goods, electronic items, chemicals, fertilisers, APIs for drugs, tunnelling equipment, earth-movers, aircraft, missiles, and so much more. Imports by themselves are not bad. The trouble is that we export so little. Why is this the case? We are frequently told that our dysfunctional laws and bureaucratic systems in the areas of land and labour, our erratic electricity situation, our roads, which while getting better remain behind the networks of other countries, mismatches in our skills and talent base—all of these contribute to our becoming uncompetitive in the exports sector.
While it is undoubtedly true that many of our self-inflicted problems hurt our merchandise exports, the biggest one may be our overvalued exchange rate. If we had a modestly undervalued exchange rate, imports would automatically become expensive, and we would not need tariffs and non-tariff barriers like Quality Control Orders. Indian entrepreneurs would start making more toys, shoes, furniture, electrical goods, electronic items, chemicals, fertilisers, APIs for drugs, tunnelling equipment, earth-movers, aircraft and missiles. And our prices can end up being competitive enough for us to export our manufactures.
Remittances, which really come from exporting our people, rather than goods, can continue. Service exports can also keep flourishing. But it is just possible that our merchandise exports will pick up.
An addiction can make us dependent. And that is risky. Till the nineties, we depended on Foreign Aid, and we were frequently required to humiliate ourselves in order for the pompously named Aid India Consortium to dole out pittances. Fortunately, those days are behind us. Even then, we could have avoided so many problems if only we had kept an undervalued exchange rate and not been infatuated with fake socialist sovereignty.
Also read: Rupee’s fall to 100 will be a harsh check on India’s ambitions
Turn the war into opportunity
The recent events in West Asia are ominous. The huge flow of remittances from our diaspora may drastically reduce, even if it does not completely disappear. The “visa wars” against us in North America may result in a considerable reduction of remittances from there, too. Our current account, instead of being relatively benign, may turn into a colossal problem.
To rely on capital account flows to bridge a large current account deficit is a prescription for a disaster. The recent outflow of Foreign Portfolio Investments, turning from a trickle to a flood, should be a warning to us. Short-term fixes can easily get stalled. Already, we can see that the miscellaneous committees for economic reform, which were active when Trump imposed a 50 per cent tariff on us, are going into hibernation. Once again, we are tempted to leave the work of “industrial policy” reform half-done. Why change our habit of eighty years?
It might be wise for us to aggressively pursue an undervalued currency strategy well before a remittance crisis arises and our national “drug shortage” starts. Our exporters will love it. Our importers will complain, but they will manage. Rich Indians who want to buy real estate abroad or who want to send their children to foreign universities will complain. We can feel sorry for them, but should the country really care? Unfortunately for us, these people are very influential, and they can lobby hard in Delhi and in Mumbai. While FDI investors who have long-term views may not worry too much, FPI investors, Foreign Permanent Establishment Investors and their friends will complain. These folks also have friends in high places. But given the demonstrably fickle nature of the FPI seasonal birds, perhaps we should be willing to face this problem head-on.
In recent times, our media analysts have been moaning about the depreciating rupee. This writer feels that the depreciation has not been fast enough and substantial enough. Our trade-weighted real exchange rate is definitely not undervalued. Reaching that utopian destination and imitating our eastern neighbours should be our goal. Will we have the anti-Croesus mentality? Will we for once stop setting up committees for economic reform and tinkering with industrial policy solutions and go for a simple price signal, which automatically helps exporters, incentivises importers to Make in India, dissuades rich parents from sending their children to foreign universities, encourages foreign parents to send their children here, gives FPI investors a short-term shock and leads us to the sunlit uplands of South Korea, Taiwan and even Vietnam?
The West Asia war may just be the crisis that turns into an opportunity for us. We missed this opportunity in the seventies during the Yom Kippur War. Perhaps we can grasp it now.
Jaithirth ‘Jerry’ Rao is a retired entrepreneur who lives in Lonavala. He has published three books: ‘Notes from an Indian Conservative’, ‘The Indian Conservative’, and ‘Economist Gandhi’. Views are personal.
(Edited by Theres Sudeep)