Foreign Exchange reserves falling-a matter of concern

Our Foreign Exchange Reserves are aggressively falling. The reason being RBI supporting the rupee by selling foreign exchange. The pressure on rupee stem from the high current account deficit along-with withdrawal of FPI till July. Though, there is reversal of FPI withdrawals in August, the pressure on rupee continued with astronomical current account deficit. The foreign exchange reserves look comfortable at present, but the magnitude of fall from peak level is a serious concern, which is more than 10%. Time has come for the RBI to allow rupee depreciation to help exporters earn more and penalise the importers.

In the long-run, we have to identify the reasons for continued deficit and ways to combat it.

 

Policy Rate Changes: Does it really work in long-term

There is a general reactions of central bankers to raise policy rates to combat inflation. Similarly, they reduce rates to promote growth. But does it really work in long-term. 

While demand-led inflation or demand-led growth can be controlled by raising interest rates in short-term, it fails to address the issues involving inflation and growth over a period of time. But in Long-Term, Consumer behavior and resultant investment cycle tend to adjust with the policy rates, high or low, if it continues for a long period of time. 

In the case of Cost-push inflation, as at present, the policy rate changes does not work at all. Present inflation is the result of supply-side disruptions. In 2020, factories in the world were closed for a considerable period of time resulting in loss of production. Additionally, very low capacity addition was affected after Covid-19 hit the world. The incremental consumption continued to rise in the intervening period. This led to shortages resulting in inflation.

The crisis has been aggravated due to boycott of China and now Russia. The current global inflation is the result of supply-side constraints, which cannot be controlled by raising interest rates as you cannot curb genuine consumption needs by raising interest rates. As there is shortage, any increase in costs due to increase in interest rates will be passed on to consumer leading to higher inflation.

Only and only solution in current crisis is improving the supply side.

Knee-jerk raising of rates is increasing the risk of recession in the near future. This may also lead to increasing delinquencies as those contracting debt before rate increases may find it difficult to meet their interest commitments due to sharp rise in short-term.

Migration of Indian students to foreign shores

Do not put restrictive conditions or reservations, but promote to increase the availability, the rest will follow.

Over the years, we see the migration of Indian Students for higher studies to various countries. While migrating to US for research work has been common since long, but in recent years, we are finding students moving out for basic medical courses too to countries like China, Philippines, Ukraine etc.

The major reason being acute shortage of qualified medical professionals in the country mainly due to scarcity of seats in medical colleges. This is the reason for large-scale migration of students to foreign shores. Once graduating from the foreign country, they easily establish clinics, even if not getting practicing License from relevant authorities. Such Medical Practitioners can be found in Tier-III cities and smaller towns.

One of the main reason for shortage of seats in medical colleges is tough postures by Medical Council in giving the permission. The Cost of education at Private Medical Colleges are exorbitant, one of the reason is high regulatory cost, though overcharging to benefit from crisis is another reason.

Only Long-term solution is increasing the capacity of existing medical colleges, besides upgrading District Hospitals as medical colleges. Private Sector should also be encouraged to upgrade their hospitals for medical colleges.

The regulatory mindset of administration, specially the  know all bureaucrats, is the biggest hindrance to all this. 

We need not put any restrictions, reservations and conditions. Let the capacity rise multi-fold. The cost and competition will follow. Once there is enough capacity, to attract good students, Private Sector will themselves offer merit-based scholarships. 

States may also provide some subsidy like Tuition Fee support for students to keep the cost of education lower. Consumption of goods and services by students will improve the GST Collections.

Let the better senses prevail.