Thursday, November 15, 2012

Rupee aplenty


Perspective: The next thing we have to concede is that the demand for the Ngultrum or rather the demand for the Rupee is reflective and a direct manifestation of what is actually happening in the economy which as already explained is a direct outcome of the government’s and RMA’s policies. 

The overwhelming dependence on India for the provision of Bhutan’s requirements – goods, finances and even services to the extent of retailing of these items clearly ensures the dominance of the Rupee over the Ngultrum. It also reflects the effectiveness or rather the ineffectiveness of the efforts of the country in the pursuit of self-reliance. Until this deficit supply of goods and services or the supply of adequate Rupee is met, there will always be preference of the Rupee over the Ngultrum.

More so as the Rupee is a legal tender in Bhutan. Thus the parity of the Ngultrum to the Rupee will definitely be a non-entity. Therefore rationing of the Rupee in the face of enormous demand for it, will only deepen the crisis and will ensure the devaluation of the Ngultrum or rather ring the death knell of it. Continuation of such a strategy will choke the economy especially in the face of the huge investment being made in the power sector. Or will ensure that the proceeds from the construction of the power projects will go as usual back to India. It will also encourage the start of numerous nefarious activities which will only harm our country more. To overcome this, there are only four things that can be done. 

One – provide adequate supply of Rupee in the country required for import of goods and services from India, two – provide the goods and services from within Bhutan to reduce import from India and subsequently decrease the demand for the Rupee. However this has to be done in an economic and sustainable manner. Three – reduce the pace of investment in the country in line with the absorptive capacity of the country and the last being the imposition of bans (banning of housing loans and imported goods and rationing of the Rupee in the present situation). The last route should however be taken only as a short term measure and of the last resort if the other strategies fail.

The first can be achieved only if we have the rupee reserves (or foreign reserves) to do so or we export more goods and services to India to earn Rupee – commonly known as export driven economy.  The success of this strategy is exemplified by practically all countries that have developed successfully -  Taiwan, South Korea, Singapore, Thailand, China, Japan, India, Brazil and many others. This will ensure increased and adequate supply of the Rupee for meeting the country’s imports from India. The second can be achieved if we are able to supply all the goods and services that our country needs internally which is being proposed by many as the magic mantra for overcoming the present situation – import substitution. However in reality and as empirical evidences suggest both the strategies have to be implemented jointly. The fine tuning of the two applications is where ground realities come into play, the government’s ability to promote the most effective and optimal mix of the export driven and import substitution economy and the ability of the people to maximise the opportunities existing or created.

Bhutan being a tiny economy with a very small market really does not have much of an argument for supporting a biased import substitution development strategy especially in the context of the globalised economy. Import substitution as a strategy for development has met with only limited success as experienced by many countries. Most countries which have developed successfully have used the export model applying absolute and comparative cost advantages for production of goods. For Bhutan, import substitution strategy should only be used for goods that have marginal and absolute comparative cost advantage and for services. Due to the low demand base, cost of production of any good for internal consumption only will be very high compared to the other bigger nations. The law of economy of scale applies for all provisions of goods and services. But there exist other factors and externalities apart from the scale that also impact the cost of goods that can make their production in Bhutan very competitive if not cheaper than other countries. Such as the price of domestic power, cost of transportation, cost of raw materials, cost of labour, cost of land, cost of infrastructure  and others which gives Bhutan cost advantages over goods produced in India or other countries. Taking into consideration the cost advantage factor and for absolutely strategic reasons, the country must permit only cost effective import substitution of goods in the country.  Bhutan has very limited resources and therefore cannot afford to waste them in the production of goods that are non-sustainable, non-affordable and definitely not cost effective.   Provision of services is however another matter. We must ensure that these are provided within the territory of the nation even if we have to import the labour for it.

Acknowledging the limiting factors of the import substitution and inward looking economic strategy for a small country like Bhutan, the only feasible way forward is export. Bhutan must be realistic and therefore must align itself to the export model with import substitution being promoted for only cost advantaged products, services and for security reasons. The existing friendly environment between Bhutan and India exceedingly makes the export model growth the most ideal and extremely advantageous for our country. A market of over 1,200 million people in India is available to Bhutanese products without any barriers.

This becomes even more significant when we take into consideration that our trade – import and export is mostly with India. Ask any industry in the country which has been primarily been established for export to India (meaning it has comparative advantages for various reasons) – be it calcium carbide, ferro silicon, steel ingots, TMT bars, plyboard, particle board, gypsum, dolomite, cement, electric power, mineral water, package food, fruits, vegetables, alcohol, beer, beverages, stone boulders, stone aggregates, minerals and host of other products, if they have any problems in marketing their products. 
Most if not all will say – No problem. We cannot supply enough of it. Bhutanese products exported to India must be one of the very few goods sold in the world without any marketing efforts. The constraints to increasing export to India is not the market but our limited resources – raw materials, limited supply of electric power for domestic industries, infrastructure, labour in quantity and quality, the government policies of the day and to a large extent our inability to identify new and more opportunities. In fact we have failed to optimise the fruits of this gift from India. Therefore it is vital and crucial that Bhutan does not introduce nor initiate any semblance of import bans from India which could jeopardise the free trade agreement between the two countries. If done, it will be at Bhutan’s cost. The identity of Bhutan as an independent and sovereign nation is acknowledged and accepted by all. Yet even now our efforts are still directed towards further acceptance of our country as an independent and sovereign nation. We must move on to the next level that of our nation becoming economically sovereign and self-reliant in the modern global context. We must stop putting obstacles in our path towards development on account of paranoia - looking for shadows behind bogey men. Instead we must acknowledge ground realities and exploit them to our advantage.
To be continued

Contributed by 
T Gyaltshen, Thimphu


Clarification:
The  title on the first part of this article published on November 15 did not come from the author

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