Welcome commitment to hold the rupee

Welcome commitment to hold the rupee

Government’s grip on the fiscal deficit credible
The government has done well to try and address concerns on the rupee. The most credible and reassuring statement is that the government would not allow the fiscal deficit to go above the target. A large fiscal deficit creates excess demand that reflects itself as price rise and widening of the current account deficit. What gives credence to the stated commitment to rein in the fiscal deficit is, apart from GST collections and the audit trails to direct taxes GST creates, the politically difficult decision the government has taken not to slash central taxes on fuels. The central government replaced excise duties on fuels with cesses that it does not have to share with the states. As rupee depreciation and global oil trends keep the rupee price of oil high, the government rakes in revenue that will help it contain the fiscal deficit.

The easing of norms for capital to flow into the debt market is welcome. The government would do well to scrap the securities transaction tax that makes hedging the assorted risks accompanying foreign currency inflows into the debt market unduly expensive. Allowing flood-hit states like Kerala to issue variably priced rupee bonds, some prices reflecting concessional intent that prompts the investor to price these bonds higher than pure market considerations would warrant, is an option that could fetch a few billion dollars of inflows.

However, it is strange that the government’s stress is more on curbing imports than on promoting exports. Exporters have outstanding input tax credits worth a few thousand crore rupees yet to be refunded. They have to finance these as well as other operations through expensive informal credit, as scam-scarred banks have crimped lending, particularly to the small sector. Making imported inputs costly with high tariffs, even as the rupee’s decline has made them more expensive, will not help exports grow. Restrictive trade practices by India will add to the anti-globalisation narrative taking hold in the wake of trade wars and mercantilist policies by the US. India must champion, not oppose, globalisation.