The political acceptability of the two routes, if at all desirable, is low. But even if the rupee could be weakened using other questionable processes, a weaker rupee is certainly not the long-term solution to India's declining competitiveness in the produce markets.

Infrastructure and productivity

We wish to reinforce the observation made by Mr S. Venkitaramanan that India's low productivity and declining competitiveness are the results of inadequate public infrastructure and poor maintenance of public infrastructure (Business Line, March 6, 2000). Mr Venkitaramanan has expressed despair that the vicious cycle of high deficit, high debt and high deficit may not allow new investments in infrastructure and the better maintenance of existing infrastructure. Poor infrastructure could hold India's progress back when the global markets open up as a result of greater liberalisation of trade in future.

The problems related to the long-term competitiveness of India's produce and manufacturing industry have to be solved at the earliest. The solution lies in making such public investments that would — with a great degree of certainty — improve the economy's aggregate productivity.

The gradually-weakening dollar, likely global deflation pertinent to capital and construction goods, strong and rising demand in the domestic economy, and the large foreign exchange reserves of over $80 billion present an unprecedented opportunity to achieve several objectives.

First, some part of the foreign exchange reserves could be used to make investments in public infrastructure. These should yield long-term results, especially by boosting the productivity of the spices and plantation produce economy.

Second, these investments will require outflow commitments in the future. The commitments could be `debt creating' or otherwise, but will tend to have an impact on the forward premium for the dollar against the rupee. The forward premium will provide the right incentive for producers, marketers and exporters to export as much as possible, and as efficiently as possible.

Third, the utilisation of the reserves and the creation of claims against future earnings and inflows of foreign exchange could soften the rupee in the short-term and, more important, without any lag. This could have a favourable impact on the domestic produce industry in the short-term. The benefits could begin to flow from the start of the 2003-04 season. The favourable impact could last at least until productivity gains emerge from the investments in infrastructure.

Wasting to enduring assets

We also wish to reinforce the observation made by Mr Venkitaramanan that the policy of the Reserve Bank of India (RBI) in favour of absorbing all the dollars coming into the system contributes to the appreciation of the rupee (Business Line, May 27, 2002).

India has absorbed more dollars since then. The growing reserves may not earn much, but the strengthening of the rupee has exacerbated the decline in the competitiveness of India's produce sector. That is indeed a double whammy.

The decline in competitiveness has also occurred in an environment characterised by incipient deflation.

The deflationary condition could worsen. The portents do not look good, and India's spice and plantation sector could face a triple whammy. However, we see a bright future for India and its domestic economy. Our optimism stems from the strength of the rupee.

This may be likened to bandwidth in the context of electronic networks and communication. Bandwidth has to be and can be used to create wealth. Bandwidth cannot be kept in inventory for future use.

Any bandwidth that is not used at one instant cannot be carried forward as a resource to the following instant. If the strength of the rupee were used now, the economy would have used a wasting asset and created an enduring asset.

Foreign exchange reserves can be kept in inventory while bandwidth cannot be kept in inventory for future use. Foreign exchange reserves are more enduring resources. The trade-off that India and the RBI face is between

The gradual strengthening of the rupee and the weakening of the dollar could be exploited now, and then used — through investments in infrastructure — to pursue gains from productivity and efficiency in a liberalised global marketplace.

The RBI can move the economy to a winner-takes-all situation. From such a perspective, the strength of the rupee could be used to generate benefits that accrue to every sector of the national economy.

Win here, win there

Steps that could discourage imports and shore up consumption of homegrown produce are superficially attractive. Some rich, developed countries have established opportunistic and cravenly expedient precedents in these directions.

For example, the US has thought it fit to impose stiffer tariff barriers in the context of some imports from India.

These precedents render the higher tariffs on imports of spices and the larger subsidies on domestic production more defensible now than in the past. But the defensibility is superficial.

The imposition of higher tariffs on imports and the granting of larger subsidies on domestic production are practices that patently work against the long-term interests of domestic consumers.

The long-term interests of domestic consumers should be preserved and promoted without compromise. If the long-term interests of domestic consumers cannot be aggressively promoted, it is unlikely that India would ever have the motivation and the methods to win in the global markets. India's producers and marketers should pass the price-quality, value-convenience tests at home before they compete to win in the global markets.

And, it would be naïve and costly to overlook a one-billion-strong domestic market while expending efforts of a large magnitude in search of smaller markets.

India's producers and marketers cannot afford to dodge the domestic market for spices and plantation produce. There is no way to win globally in the long-term without winning in the domestic market.

Expand PFCE

India cannot create jobs, incomes and consumer surpluses of a large magnitude in the long run if its producers and marketers do not use sustainable methods to serve the domestic markets.

These are joint issues. They are also joint objectives that could be best served when India is an open economy by choice, and not because the West has — merely — preached such openness. Without consumer surpluses, there can be little savings and investments from within. The internal capability to create jobs, incomes and consumer surpluses is very important.

The Government's dependence on private savings has intensified as a result of the low tax-to-gross domestic product (GDP) ratio. At the same time, government final consumption expenditure (GFCE) in constant prices (1993-94) has grown alarmingly from 5.82 per cent of GDP in 1960-61 to 12.68 per cent in 2000-01.

Raising private consumption can raise the tax to GDP ratio. Private final consumption expenditure (PFCE) has declined from 85.2 per cent of GDP in 1960-61 to 61.68 per cent of GDP in 2000-01. Moreover, PFCE has grown by merely 3.72 per cent annually when

India grew its domestic economy and its global prominence in the past on the back of its spice and produce economy. It could repeat the feat all over again.

When some part of India's foreign exchange reserves is used to make public investments that are designed to yield long-term results, the productivity of the spice and produce economy will increase. PFCE will expand.

The gains from the strong rupee and the large magnitude of foreign exchange reserves will then flow into the domestic economy.

(G. Ramachandran is a financial analyst. Ashwin J. Shah is an exporter of spices and plantation produce. Feedback may be sent to indiagrow@sify.com)

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