What Birla's investment abroad means for rupee

Investments abroad will further see the rupee's value fall

Billionaire Kumar Manglam Birla plans to invest Rs 6,100 crore in the US to buy or set up a fertiliser plant. Birla’s decision has come at a time when India has become a net importer of fertilisers, points out his executive.

What it means is that the government’s attempt to revive the  Indian economy and the rupee has been more of an attempt to treat the symptom than to cure the malaise. The series of measures to increase FDI at a time when Indian businessmen are not willing to put their money explains the paradox very clearly.

Birla is not alone in his drive to invest abroad. Onkar Kanwar of Apollo Tyres recently announced an investment plan of Rs 2,500 crore overseas. But Birla’s case is clear example of frustration that Indian businessmen are dealing with.

His fertiliser company Indo Gulf has dues from the government which are not coming in time hence company’s working capital requirements have increased. Eventually, the company in such situations need to borrow from the market where the rate of interest for the short term has risen.

But that is only in the short term. In the long term, fertiliser plants will have higher energy cost as the government has revived the natural gas price to $8.4 mmbtu from April 2014 from $4.2 mmbtu now. No doubt that government  will subsidise the increased cost burden; the delay in payments is going to hurt the industry any way.   

Especially, the gas price increase has come at a time when the US economy has revived with the boom in shale gas production that has brought down gas price to sub $4 mmbtu level. It naturally makes sense for businessmen to use this opportunity and invest in the US.

India will be hurt in two ways. First the taxpayers will be paying for the subsidy to factor in the increased gas price for production of fertiliser. Second our fertiliser industry not being globally competitive, India will not have enough production capacity. Hence the import of fertiliser and investments abroad will further deteriorate the rupee’s value which will have inflationary impact. And the RBI's measures in such situations are very well known now.

If the rupee's value is nothing but trade deficit which is highly inclined toward the imports from the US, then its depreciation can be curbed effectively only with bringing down import. And that can happen with boosting local production, not with asking women to wear less gold, NRIs to remit more and FDI to come home.