Modi Yens for Jap Money, But its Not Free!

-Arun Goyal-

After Hindu Nepal, its Buddhist Japan. PM Modi is dancing to Japan music to woo the Yen. The Japanese policy of monetary easement and release of Yen to boost the ailing Japanese economy (One of the Five Abe Arrows to remove recession) has found a taker in India. Rs. 70,000 crores for a bullet train from Ahmedabad to Mumbai and Metros in 50 more Indian cities the DMIC and Freight Corridors will certainly help relaunch Japan. It is a moot question whether the Power-Water-Land starved high cost Indian economy will become more efficient with the high cost - high speed Bullet trains! The over regulated high transaction costs will not come down with more trains and roads.

The five year Yen loans of $35bn offered by Abe to Modi have a cost. To begin with, India must bear the exchange rate risk, in terms of the depreciation in rupee value which will add to the outgo on principal and interest in forex borrowing. This may add an average of at least five percent every year to the cost if the rupee loses just three rupees to the dollar every year to end up at Rs. 75 in the next five years.

Even if we assume that the exchange rate may work in India’s favour with the rupee remaining steady against the dollar and the yen going down with a near zero interest rate, there is always a cost of earning the dollar to pay for foreign loans and meet interest burden. At a modest estimate, it cost 15% incentive to earn dollars in goods export, the main stay of forex earnings. This cost earning dollars must be factored in the Yen for Borrowings from Japan.

A third factor is that of ownership of assets. Borrowing from Japan of two lakh crore rupees over the next five years is not too high for the Indian economy. The government expenditure every year is estimated at 37 lakh crores. Surely the Indian Government can fund the infrastructure investment from the domestic economy.

The Japanese will recover the investment from tied sales of high price equipment, services and know how. They will also reap bumper profits from equity investment in monopolies. (For example, the Suzuki takeover of Maruti and the high profits due to duty protection). The Japanese are known to be poor employers, they pay very low to vendors. Borrowing from the Japanese will drain the Indian economy, that is for sure!

The moral of the story is Bite the Bullet only after reading the Fine Print.