Susmit Kumar, Ph.D.

Published at South Asia Monitor on August 9, 2016.

After the onslaught of criticism by Subramanium Swamy, Raghuram Rajan decided not to pursue the second term as RBI Governor due to not getting enough political support. This led to the US economic media to write the obituary for the rupee and Indian economy. Nearly all of them were giving Rajan the credit for the stability of rupee during his RBI tenure after the turbulent 2011-13 period which saw drastic devaluation in rupee. But the truth is that rupee is stable mainly due to the drastic drop in global crude price.

Due to record Current Account Deficit (CAD) of $88.2 billion during 2011-13, exchange rate of India’s rupee (with respect to US dollar) went down from 44.17 in April 2011 to 62.92 in September 2013. During 2011-13, crude price went from $72 a barrel as high as $110 a barrel. As India imports nearly 75% of its crude oil consumption, its crude oil bill spiked to record level. In last two years, the crude oil price has been hovering around $40 a barrel. In 2014, India’s net crude oil bill was $116 billion and at $100 a barrel rate, this number would have been $290 billion which India would not have sustained without having a crash of rupee, may be to 100 Rupee to one USD. In 2015 and 2016 its CAD was only $26.8 billion and $22.1 billion, respectively. In 2015, India was able to overcome $137 billion trade deficit with the help of USD $72 billion NRI remittance and more than $50 billion Foreign Direct Investment (FDI).

Despite drastic drop in crude oil bill, Indian government has not reduced the petrol price at the pump and this extra money to the exchequer is helping it to keep budget deficit in check. This is helping Modi government to spend money on infrastructure projects, like constructing 10,000s of kilometers of national highways, several ports, dozens of smart cities and modern airports as well as spending on massive welfare programs for the poor.

During 2011-13, the then UPA government was blamed for the double-digit inflation which was mainly due to record price of crude oil price. As India imports 75% of its crude oil consumption, any increase in crude oil increases the price at pump, resulting in rise of everything in market. Last year Rahul Gandhi, the Congress Party Vice-President, was boasting in the parliament about the record rise in Minimum Support Price of grains, the price at which the government buys from the growers, during his party government. He was criticizing the present NDA government for not giving similar raise in the Minimum Support Price of grains in last two years. Actually it was a failure of the previous UPA government, for not reining in the trade deficit, which was behind the record rise in MSP prices. Stars are helping the Modi government in keeping inflation in check (due to low crude oil price) otherwise it would have been in the financial troubles similar to the previous UPA government was.

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