Jaitley woos capital flows to support the sliding rupee

Being hurt by the pains of falling rupee, rising crude prices and trade war policies in the West, Finance Minister Arun Jaitley announced five steps to support foreign exchange inflows to the country.

The five steps are largely aimed at attracting capital flows, accompanied by undeclared steps for restricting non-essential imports.

Remarkable feature of the newly announced package is that four out of the five steps are aimed at promoting capital flows.

And surprisingly, one step is to encourage short term capital ie, encouraging manufacturing firms to get loans up to $50 million for a short maturity up to one year.

This is indeed a fire game as the government is relying on hot money to escape from the current trouble.

The other three capital flow attracting steps are: liberalizing FPI limit in corporate bond market, elimination of withholding tax in Masala bonds and avoiding hedging requirements for infrastructure loans.

On trade front, the government will announce steps for curbing non-essential imports later.

India is the third largest trade deficit country in the world after the US and UK. Reflecting the trade deficit pressure, the rupee has already lost 12% this year making it the worst performing currency in Asia.

Adding to the trade deficit problem, higher interest rate and better macroeconomic performance in the US has produced capital outflows.

Government’s more reliance on capital flows to support the rupee indicate the helpless situation on the trade front. Trade wars, limited competitiveness of exports and essential good nature of imports, honouring of international trade agreements – all reduces the scope for action on the trade front.

Finance Minister is expected to announce the curbs on imports in couple of weeks. If he goes for some serious measures, it will be quite symbolic in the global context where trade war trends are strengthening.

Undoubtedly, India’s initiative to target current account deficit may trigger similar steps by other emerging markets governments that are facing deficit problems.

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