There appears to be no other suitable alternative but accept or introduce a dual exchange rate to be kept operational for a year at least
In the last six months, the rupee has lost 13.83% of its value and after touching a low of Rs68.85 against the US dollar, is slowly recovering. Its movement is still very uncertain though experts predict its return to anything between Rs55 to Rs60 range. The intrinsic value of the rupee is probably Rs57 to a dollar, which remains to be seen.
In the interim, exports in certain areas are picking up while major dollar expenses like oil, gas and coal have remained practically unchanged.
Both importers and exporters who took the defensive hedging mechanism have much less worry than the rest who did not foresee the possibility of this great fall.
Media reports indicate huge stock pipe of coal at the ports with importers unwilling to take delivery due to higher rupee element, as it has become costlier by 14% or so. Non-clearance will additionally impact them with demurrage that is being incurred.
Already, the ports are overburdened with more than 3.5 million tonnes of coal. Domestic production, which has increased, also has resulted in stockpiles at pitheads and elsewhere leading to a deteriorating situation. The international price of coal which was around
$85 a year ago has come down to $77, almost a 19% drop, due to lower Chinese offtake, but fall in rupee value has effectively balanced the advantage.
What should the government do to ensure the removal of coal at port and move them to the stockyards of power generators? If the power generators have to pay higher price, because of the increased rupee burden, surely, they will pass it on to the consumer. This is a vicious circle.
To resolve this issue speedily, all privately imported coal, of high grade thermal variety, be directly consigned to power generators with a specially fixed rate of exchange, to be determined by the Finance Ministry/ Reserve Bank of India, to nullify the devaluation effect. Perhaps, the rate of exchange, as was applicable (or available) at the time of opening of letter of credit for purchase, could be used a guideline. Effectively, we are thinking in terms of having a dual exchange rate to overcome the current impasse and manage the CAD (current account deficit) also.
In a likewise manner, all imports of oil, gas and fertilisers, whose import contracts are valid, be given this special rupee exchange rate, so that the government does not have to go through the usual process of subsidising the costs later. For the fertiliser industry alone, the total amount of subsidy runs to a staggering Rs30,000 crore.
Agriculture, which thanks to the monsoon, can expect a better kharif production has millions of farmers using diesel pumps in their fields and increase in fuel supply costs which is bound to happen due to rupee decline, will impact their livelihood and, ultimately, their production.
This rupee fall effect leads to a vicious circle that can be only slowed down by greater exports and reduced imports, supported by increased production and export of foodgrains and industrial products. Revival of export of iron ore would also help, apart from expeditious clearances relating to increase in production of oil and gas from indigenous sources.
At the moment, there appears to be no other suitable alternative but accept or introduce a dual exchange rate to be kept operational, for a year at least.
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)
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