Monday, January 16, 2012

My take on the rupee shortage!

The rupee crisis is for the simple reason that we import more from india than we export to them. The situation is exacerbated by our ambitious developmental goals which are probably not within our means. This is perhaps why the Governor of RMA has advised the government to reduce spending. The following are my suggestions;
i. The Govt. is borrowing in dollars for its developmental activities, saving the dollars and showing it as an increase in our foreign reserves. However, the downstream effect is that most of the materials required for the intended developmental activity is purchased in rupeee. So, we have a situation where we are happy to accept and save dollars but are unwilling to replenish the rupee cost associated with it. We have to therefore convert the dollars into equivalent rupees to the extent of the amount required in rupees for the developmental activity.
ii. Prioritize projects : Although excessive government spending is probably desirable to expand the economy in Bhutan Case because the Bhutanese inflation is directly linked to the Indian inflation and not our own spending. However, the excessive rupee dependency has adverse effect on our sovereignty. The global war today is played through economics and not guns. We have to therefore spend within our means which will mean prioritizing developmental activities although there may be many desirable ones in hand.
iii. Import substitution : From an economics point of view, it makes sense for Bhutan to import from India and China where the cost efficiencies are probably the highest given their global competitiveness. However, from a self sufficiency point of view, we could try to make substitute products within the country which can be bought in Ngultrums, but would probably come at a higher cost because of the lack of economies of scale. The actual cost of any product that we are buying in Bhutan is the cost we are paying as individuals and the 10% interest that the govt. is paying to make the rupee available.

iv. Increase exports : Hydro power and ferro silicon products are probably the chief exports of our country to India. We have to study the situation properly and start producing products or services which will earn rupees for us. Tax incentives and other short term incentives could be provided by the Govt. for such initiatives to help kick start the project and also to provide an artificial competitiveness to the product or service.