Part 2- The Rupee Crunch: Reconciling theory with reality

While there are compelling arguments against opening the capital account to the volatilities of global finance, there are institutional frameworks and regulations that can be crafted and certain appropriate segments of the account that can be liberalized to alleviate such distortions.

Another useful approach is the assessment of our commendable macroeconomic standards vis-à-vis passive microeconomic interventions by the government. We’ve managed to keep fiscal deficits within the internationally accepted thresholds, our debt is of very high standards, recurrent expenditures are financed entirely through domestic revenues, inflation is within acceptable bounds and unemployment is relatively manageable. But on the microeconomic front, government intervention has been incoherent and businesses still face bottlenecks in starting up and operating. Hence, there is a clear presence of supply side constraints which have invariably inhibited us from harnessing our full productive potential. However, the implementation of the Economic Development Policy should address a number of these concerns. Countless attacks have been launched on the government’s fiscal operations giving the impression that they originated from extremist austerity driven critics. It is difficult to believe that a developing country that is constrained by its terrain and scattered settlements would come under criticism for delivering much needed infrastructure. Even in the realm of austerity we must acknowledge that Bhutan’s debt is of very sustainable quality and fiscal deficit has always remained below GDP growth rates. Critics may argue that there are areas of government spending that could be rationalized but in my estimation this would result in savings accruals of a maximum of Ngultrum 500 million whereas we are dealing with a current account deficit of 15bn. So government spending is not the major factor.

A recent study by the BCCI attempted to plot government spending against private credit. Any amateur economist would be able to identify the technical flaws of deriving relationships from such simplistic methods. One of the deficiencies is the issue of omitted variable bias. With private credit being determined by many other variables the simple filtering of government spending as being the major contributing factor amounts to intellectual dishonesty. Even if government spending did genuinely lead to credit expansion, due to the private sector attempting to capitalize on government construction activities, laying the blame on the government is dishonorable. When receiving official development assistance, be it unconditional or project tied, the detailed cost breakdown of every project is generated. For instance transportation costs are also factored in project expenditures so the government could resort to the alternative of hiring Indian services but in the name of promoting the private sector the opportunity was extended to private contractors who availed colossal loans to purchase heavy duty vehicles and machinery. Laying the blame on the government for inducing the private sector to take on credit is an attempt to vindicate themselves, even Wall Street bankers used similar shades of arguments.

The government is not entirely vindicated but it definitely wasn’t the driving factor. There were areas where the government could have intervened to promote productive capacities through prioritized lending, incentivizing savings, taxing ostentatious consumption and restraining harmful speculations in the real estate sector, but it wasn’t directly responsible for the crunch.  To

  …be continued


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  1. Government investment is the only big driving force in our economy. There is nothing much private business investment in our country. Even those existing private entities hugely depend on government investment. So government is more responsible for rs crunch. They invested more than what economy could handle. That was the problem that caused the RS crunch.

    • Yeah well, i guess we could stop government investment so that your pathetic ass could starve to death. Pathetic neoclassical idiot…

  2. yes the govt could have resorted to hiring indian services but it would have led to rupee outflow even of the profit. so it was a good idea to outsource within the country. This led to bhutanese contractors having to purchase trucks and machinery on a big scale. It would have been okay because these machines would have been profitable in the long term with so many projects.

    but the bigger question is why are there so many projects and so many at the same time? It is obvious that if you do it that way then you need all that rupee upfront. Yet the only way the truck owners get their money back is over the long haul, on a truck load basis. So the amount spent upfront is much much more than they are getting up front. And there you can clearly see a source of rupee deficit, in the short term. 

    And this has affected all other parties in the private sector that need rupees, even if they are not in the hydropower sector. In effect, the massive outlays in the HP sector is negatively affecting our economy’s overall growth and diversification.

    Who decided to do so many hydropower projects at the same time? You need to blame them for the rupee crunch. We don’t need to talk about macroeconomics or even fiscal policies. This is about simple cash flow. In this case it is about rupee cash flow. It is an artificial crunch that was avoidable.

    Two toilets on a plane may be adequate if you space out the toilet visits over the course of the journey. But if the pilot says everybody can go only at a specific time for only 5 minutes then he is creating an artificial rush and the toilets will not be enough. It is as simple as that.

  3. hydropower is the platform for diversification…It is a medium term solution that needs to be harnessed immediately…there will be a few shocks here and there…the energy industry is rapidly changing and we better capitalize on it asap…would you forgo a much higher paying job for your current one because you are concerned that you would have difficulty managing liquidity flows with your bank account or that you might be compelled to spend more?

    • i think there’s a world of a difference btw you taking calculated risks in your career and taking leaps in macroeconomic level investments the repercussions of which nobody seems to understand. Even Mckinsey did not predict the rupee crunch. 

      Are you the PM’s advisor for all this rush rush? 

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