Prime Minister's flawed logic

At last the Hon.PM has condescended to speak out on the falling rupee. Economic Times quotes him as telling the Parliament, "To some extent, depreciation of the rupee can be good for the economy, as it helps to increase export-competitiveness and discourage imports. Inflation in India has been much higher compared to advanced economies, and therefore, it is natural that there has to be correction in the exchange rates to account for this difference".

Apparently, a statement of fact. This is like a surgeon justifying death of a patient on the operation table, saying that the unhygienic environment in the operation theatre has naturally resulted in the tragedy. Does this factually correct reason free the surgeon from his responsibility? Should he not ensure cleanliness?

Does the prime minister think he is not responsible for the galloping inflation? Yes, he thinks so because in the same statement he has also claimed he is not the custodian of files (and therefore he is not answerable for the missing files relating to coal allocation!). A very responsible prime minister, indeed!

Prime Minister's job is not to explain the cause-consequence relationship. Everyone knows the relationship. His mandate is to remove the causes that lead to adverse consequences like what has befallen our currency now.

We may expect the economist-prime minister to educate us anytime soon that uncontrolled inflation is good to some extent because we will then learn to live with greater challenges.

Ratan Tata has recently observed that India has lost the respect of other nations. When the opposition parties in the parliament lamented that Singh has lost the confidence of both domestic and global investors because of policy paralysis, the prime minister claimed he commanded respect of his ministerial colleagues. This fatuous response is incredible and makes us speechless.

Are we talking about "Prime minister's flawed logic" or "Flawed Prime Minister's logic"?

FOMC MEETING MINUTES AND RUPEE

Freefall in exchange value of our currency has forced analysts to look for clues on its future. One of the popular clues is the minutes of Federal Open Markets Committee (FOMC) meetings. Latest meeting took place on 30th and 31st July. Minutes were released yesterday (21st Aug.)

 

Analysts were mainly interested in hints on future pace of Quantitative Easing (QE) and  when it will be withdrawn. Markets in emerging economies benefited from the Federal Reserve printing dollars to purchase securities because the dollars found their way to EEs which offered higher yields. Indian economy was a significant beneficiary. Any letup in QE will reverse the movement of dollars. Ben Bernanke has already conditioned the world markets to understand that QE cannot go on for ever.

 

In this context it was to be expected that observers would look for clues from minutes of FOMC meeting with eagle eyes. They were also preparing to read between the lines. But the minutes have been so deftly drafted that , according to BBC, instead of providing clarity, the minutes have only added more obfuscation. Please read the following para and find out if you are any wiser:

 

"In their discussion of monetary policy for the period

ahead, members judged that a highly accommodative

stance of monetary policy was warranted in order to

foster a stronger economic recovery and sustained improvement

in labor market conditions in a context of

price stability. In considering the likely path for the

Committee’s asset purchases, members discussed the

degree of improvement in the labor market outlook

since the purchase program began last fall. The unemployment

rate had declined considerably since then,

and recent gains in payroll employment had been solid.

However, other measures of labor utilization—

including the labor force participation rate and the

numbers of discouraged workers and those working

part time for economic reasons—suggested more modest

improvement, and other indicators of labor demand,

such as rates of hiring and quits, remained low.

While a range of views were expressed regarding the

cumulative improvement in the labor market since last

fall, almost all Committee members agreed that a

change in the purchase program was not yet appropriate.

However, in the view of the one member who

dissented from the policy statement, the improvement

in the labor market was an important reason for calling

for a more explicit statement from the Committee that

asset purchases would be reduced in the near future. A

few members emphasized the importance of being patient

and evaluating additional information on the

economy before deciding on any changes to the pace of

asset purchases. At the same time, a few others pointed

to the contingent plan that had been articulated on

behalf of the Committee the previous month, and suggested

that it might soon be time to slow somewhat the

pace of purchases as outlined in that plan. At the conclusion

of its discussion, the Committee decided to

continue adding policy accommodation by purchasing

additional MBS at a pace of $40 billion per month and

longer-term Treasury securities at a pace of $45 billion

per month and to maintain its existing reinvestment

policies."

 

Not knowing how to interpret this mumbo-jumbo, Rupee is continuing its downward journey. Commercial banks hedge their transactions. Central banks hedge their communication.

 

India's Foreign Exchange Crisis

Rupee continues to be on a downward spiral. Finance Minister's expedient bravado that we are not helpless has few takers. Desperate steps taken by RBI indicate that the central bank also is at its wit's end.

RBI has initiated many steps to encourage larger inflow of External Commercial Borrowings. These are short-sighted and are likely to cost us heavily in the future. Similarly, various decisions on gold imports taken by RBI as well as Ministry of Finance are dysfunctional and are apt to lead to more smuggling of precious metals.

Government's inability to provide conducive governance for industrial progress and enhanced exports is the main cause for currency turbulence. Awkward manipulation of time-tested guidelines will only queer the pitch further. Lack of good governance adversely impacts the country's economy in diverse ways.