The Indian Rupee Crunch

What is "Rupee Crunch"?

Rupee crunch is basically the shortage of hard currency (Indian Rupee) in Bhutanese Market. Indian Rupee is a foreign currency and is like any other foreign currency cannot be printed as and when we like. Basically we have to EARN it. The current rupee crunch was a small crisis but then the RMA circular restricting the Indian Rupee have added fuel to the fire and thereby affected all Bhutanese. Now the crunch is a big economical crisis and such measures would add even more to the crisis.

How the Rupee Crunch?

Every country's economy to be sound should have favourable trade balance meaning the export should always be more than imports. By exporting we earn cash (Ngultrum / dollars / rupee, so long as we earn any it doesnt matter, we can convert it to each other) but when we import we have to pay cash (Ngultrum, dollars / rupee, again doesnt matter). If Exports > Imports, the balance is trade surplus which is one source to adding to the foreign exchange reserve and when Imports > Exports, the trade balance is deficit which necessitate that we have to pay in foreign currency (To pay such deficits, RMA borrows from India, called as credit / over draft facility i.e current level at 3 Billion Rupee, in other words we can use this 3 Billion Rupee to pay the deficit till we have enough rupee by earning through exports). The exports have been increasing but then the imports have been increasing at a most rapid speed whereby the rupee we have earned have exhausted, the 3 Billion Rupee overdraft facility also exhausted, 2 Million Dollars converted to rupee also exhausted... Currently we have only limited rupee currency for our needs.

What was the previous measures Government / RMA has taken?

The Indian Rupee crunch is not a new thing, it was from the 1990's but then certain measures taken had solved the problem. Making INR 500 and INR 1000 not legal tender in Bhutan was one measure to solve the problem. Limiting INR 40,000 for cash release to Bhutanese was also a measure however then bank draft facilities were continuously being traded.

What previous actions Government / RMA has taken?

I dont know about other actions (RGoB / RMA may have the detail), but so long as I know, the credit facility of Nu. 3 Billion @ 10% interest is a action taken by MoF, it is under revision which is proposed to be increased to 7 Billion Rupee @ 10% Interest which will passed in Indian Budget Session. RMA has converted 200 Million USD to Indian Rupee (from the Foreign exchange reserves).

What recent remedies Government / RMA is taking?

RMA have recently issued a circular restricting the release of INR to Bhutanese or foreigners. It also states that imports of vehicles be stopped temporarily (have to route through RMA), freezing of building loans (new constructions) and stopping of all Indian merchants bank account. MoF also requested the Indian MoF to increase the bank over draft facility at the earliest.

Causes of the INR Crunch

Excessive lending by Banks for housing construction, vehicle loans and other loans are the main causes increase in imports. Increase in bhutanese students studying in India and abroad is also making INR to go out of the country. More than 50,000 expatriates working in Mega projects and other places (construction) have all export rupee to India thereby rupee volume has gone down (More than 80% contract award on Mega projects goes back to India). Increasing pilgrims, increasing imports from India (groceries / construction etc), unaccounted trading in the neighbouring business towns are some causes.

What action / remedies Government / RMA has not taken?

RMA should instead of freezing / stopping the foreigner's account suddenly should restrict the release down to Nu. 20,000 or 10,000 from the current limit of Nu. 40,000. Foreigner's account should be stopped but not currently (this will add fire to fuel only), can be stopped after few months when the economy runs smoothly. MoF should request to increase the INR overdraft temporaily may be at a higher interest rate. MoF / GNHC could fasten the release of fund for the Mega Projects at the earliest atleast in few billions to cease the crunch. RMA could sell another 100 M or 200 M of foreign exchange into rupee (what use is the foreign exchange reserve if it cannot solve the current crisis).

What long term measure should RMA / RGoB should take?

Foreigner's bank account should be stopped. Make INR not legal tender in Bhutan, meaning INR should not be traded in Bhutan. MoF should seek the over draft facility to be increased every year incrementally. RMA or the Government should initiate a INR reserve similar to the foreign exchange reserve that is constitutionally required. RGoB should initiates projects like education city and concentrate on increase in Indian tourists. Bhutan should explore Japan / Thailand / other countries for dependence on import lowering the dependence of import on India. Bhutan should also look at other export alternatives other than hydro power may be software exports which are non seasonal and is constant.

What are the risk of the current crisis?

The risk of INR black money floating in Bhutan will increase, so long as we are heavily depended on India, the black money on INR will always be there. There is also spreading rumors (likely to be true) that some people are trading 100 Nu. for 80 INR which is illegal. The risk of Ngultrum being not recognized for trading in neighboring Indian towns will create inconvenices to bhutanese.

What are the advantages of the current crisis?

The crisis means that Bhutan is developing at a much rapid speed than anticipated by the Government and RMA, though the reports doesnt show exactly. This is the time, that we stop INR trading in Bhutan (make INR not legal tender), it will also stop the foreigners account in Bhutan. We should be aware of small crisis to lead to big crisis that means certain measures should be taken at the early stage.

Never mind the crisis, all the measures that RMA take should not effect the bhutanese.