February 18, 2020
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Rising, Falling

Rupee appreciation brought good and bad tidings, ultra power projects got approved, farm policies went haywire, and SEZ projects led to violent protests...

Rising, Falling
outlookindia.com
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Rupee Rises: Brings Good And Bad Tidings

Grappling with multiple concerns, the 12 per cent appreciation in rupee since April 2007 and around 15 per cent since October 2006 has been both a boon as well as a cause of concern for India. On the brighter side, the steep rupee appreciation against a weakening dollar yielded downward pressure on inflation and helped trim India's import bill. This helped to partly cushion India against spiraling crude oil and fertilizer prices and eased the attempts to source wheat, so as to create buffer stocks for domestic demand.

In a new report, global financial services major Goldman Sachs, however, states that despite expectations of further rupee appreciation, inflation would go from the current level of 3.75 per cent and an estimated 4.5 per cent for 2007-08 to 4.4 per cent in 2008-09, as loose liquidity passes through into price-rise.

One of the main reasons being that import-dependent India, which has for well over a year not passed on to the consumers the full price impact of global crude oil prices, may be forced to hike prices of petroleum products that are bleeding the state-owned oil marketing companies. Despite crude oil prices scaling all-time high levels of close to $100 a barrel last month, the government has so far shied away from hiking the retail prices of petroleum products. Given the ballooning subsidy bill, the it may, however, be forced to review the situation. Goldman Sachs estimates that domestic retail prices of petroleum products need to be hiked by 20 per cent but it is unlikely that the government will increase prices by even 10 per cent given that general elections are just a year away.

The biggest negative impact of rupee appreciation was felt on the export front, particularly in sectors with little import content. The result is hundreds of exporters are striving to keep their business alive against fierce global competition. Seeking further sops from the government to tide over the difficult period, most export bodies stress that it is not the currency appreciation but the steep rise in a short span of time that is hurting exporters. Many have started taking recourse to various market instruments to hedge against currency risk while gearing up to lower operational costs and become more competitive.

With experts anticipating a further hardening of the rupee and the expected slowdown in the US economy, which remains India's main export market, it seems unlikely that India will achieve its export target of $160 billion. Commerce Secretary G.K. Pillai is of the view that if the current trends persist, Indian exports during 2007-08 will reach around $140-145 billion.

Apart from commodities export, Indian companies engaged in export of services are also feeling the pinch due to appreciation of rupee against the weakening dollar.

India Takes Ultra Power Projects Mode
Striving to surmount the growing power shortage in the country, this year saw India embarking on plans to set up Ultra Mega Power Projects (UMPPs) of 4,000 MW each with the award of contracts for three projects in Mundra, Sasan and Krishnapatnam. There are more than seven UMPPs under consideration though none of them will be completed by 2012, when India estimates the demand to be over 200,000 MW.

Experts expect the peaking shortfall in the country to go up from 12 per cent currently, to around 14 per cent. To meet this shortfall, India has set an ambitious target for adding 78,000 MW generation capacity by 2012. This is around the capacity China has been adding annually.

Few believe this is an achievable target in India where five-year plan targets have routinely been missed. During the Tenth Plan period (2002-07), India could only add 21,280 MW, a little over half the targeted 41,110 MW. Till November-end this year, an additional generation capacity of 4,380 MW had been commissioned against a target of 16,335 MW for 2007-08.

Farm Policies Go Haywire
From hundreds of farmers committing suicides, particularly in progressive states, to foodgrain shortfall despite a bumper wheat crop, with production going up from 69.35 million tones to 74.89 million tones, India has seen its farm policies go haywire this year.

For the second consecutive year, India had to import wheat in 2007, this time around four million tonnes, despite high global prices due to tight supply position. Indications towards the year-end are that the government may have to look at import options for rice also to meet its buffer stock requirements as farmers are once again showing preference for private companies. The flaw lies in the government not taking into account the increasing input costs in agriculture and setting minimum support price (MSP) for crops like wheat and rice which are way below market trends.

The government move to import wheat at almost double the price of what farmers had been paid may have been targeted at meeting buffer stock requirements and also used as a means to keep domestic prices in check. This has not gone down well with the farmers. And is apparent from the fact that this year, wheat acreage till mid December was 206.32 lakh hectares as compared to 234.48 lakh hectares during the corresponding period last year. 

A worse scenario seems set for the sugarcane with many farmers still to be paid their dues by sugar mills while in Uttar Pradesh farmers are finding no buyers at state government fixed rates. While the government has announced sops for the industry conditional to the farmers' dues being paid, the Consortium of Indian Farmers Association has pointed to the reluctance of sugar factories to fulfill their part of the bargain due to losses suffered because of government ban on exports earlier this year.

Whether sugarcane, wheat or rice, the government policies with regards farmers seems contrary to the Agriculture Policy (released in 2000) or the National Policy for Farmers, (released last month), which is based on the recommendations of an expert group headed by MS Swaminathan. The important question is how is government planning to meet its avowed objective of ensuring food security through four per cent annual farm sector growth without addressing the farmers issues of market linked prices for their produce, better access to technology and other farm inputs, and most importantly better irrigation facilities?

SEZs: Stealing Land Or Creating Wealth
The year 2007 has been marked by agitations, often violent, by farmers and various political lobbies protesting government efforts to promote Special Economic Zones (SEZs). With no clarity in policy over the land acquisition and resettlement of farmers and people displaced, the year is set to end on sour note with a stormy protest slated to rob picturesque Goa of its traditional New Year revelry and peak tourism season.

Across the country, whether in West Bengal, Uttar Pradesh or Maharashtra, such agitations have been seen as scores of private companies rushed in to grab a slice of SEZ opportunity, inspired by Chinese success in exports, to raise India's share in global trade from low levels of around one per cent. The argument placed in favour of SEZs is that it will attract foreign investments and generate employment in lakhs.

So far, of over 400 SEZ proposals to have received approval, 172 SEZs have been notified and are operational in 17 states and union territories. Of these over 50 per cent are IT related. While some of the states like Haryana and Himachal Pradesh have become wiser and put in place safeguards to protect the rights of people whose land has been acquired by private developers, there is definitely much more that needs to be done. For one, while the government professes that acquisition of fertile agriculture land for SEZ will not be allowed, the fact is that this is not really happening. This is giving rise to a lot of heartburn among farm groups as seen in West Bengal and now in Goa.

Critics of SEZ say that it has become a garb by deep pocket industrial groups and foreign investors to acquire land for real estate development. While the commerce ministry denies this charge and points out to various safeguards in place, there are many who point to loopholes in the rules. It remains to be seen whether the SEZs will really help India to scale up exports and grab a bigger share of global trade or it will see companies use these tax-free havens to tap the domestic market through investments in import substitution projects like being done by many telecom companies in south.

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