Simplistic as it may seem, there may be something to his argument. Plainly, nobody will be thinking of devaluing the rupee now. With the war in Kargil almost over and the stockmarkets on their old intoxicated scramble for the heights, people expect the rupee to become stronger, if anything. But this is not the same, as saying a case cannot be made for devaluing the currency.The case for a managed fall in the rupee, as our shopkeeper argued, comes from the persistence of demand recession in a number of critical industry sectors.

The level of aggregate demand has remained low in the last couple of years. Falling non-oilimports underscore this trend. Surveys of expectations by the NCAER shows pessimistic businessmen who expect demand to fall over the next six months. According to the NCAER, they expect sales even in the consumer non-durables sector to fall by over 10 per cent in the next six months. Industry expects its profits would be reduced by another 0.7 per cent. This will further affect the demand for investments in the economy.

Even a relatively slack monetary policy has not helped turn this trend. Perhaps this is a reflection of our lack of faith in our political will to carry on reforms. Elections in September invariably mean a slowdown in legislative activity, and an increase in populist measures.

Ordinarily, the thing to do would have been to use fiscal policy to stimulate demand. However, with the deficit heading for 6.5 per cent of the GDP, this is plainly not a very good idea now. The deficit is slated to increase for a number of reasons. While the government has more or less stuck to its plannedexpenditure, its revenues have fallen short by Rs 115,363 crore, a massive 40 per cent less than what the government hoped for. Kargil will now have to be paid for.

Estimates of the cost of the Kargil crisis vary between Rs 1,500 crore and Rs 3,000 crore. The ministry of defence will ask for and receive an increase in spending over the next year. According to the CMIE, the increase in capital outlay alone on defence is slated to increase by over Rs 2,000 crore over the next year. If the government were to try pump-priming now, it would merely lead to a hugely bloated fiscal deficit. In fact, sooner or later, the government will have to start making an urgent effort to control the deficit before it really gets out of hand. This might mean a fiscal contraction, which might depress demand even more.

Devaluation is the other option the government has to increase foreign demand. Devaluation is unacceptable most of the time because of the effect it has on prices. But this is where we had a stroke of luck now.As everybody knows by now, inflation is at a 17-year low. Since our external sector accounts for only around 20 per cent of the GDP, even a 15-per cent devaluation of the currency would only lead to an increase in inflation of three per cent. This would still mean our inflation rate would hover around the five per cent level, something which most of us would find acceptable.

At the same time, devaluation makes our produce relatively cheap. This might have two effects. The more conventional effect is on exports which, as they become relatively cheap on foreign markets, are demanded more. What is as important to us in the present situation is the effect such devaluation might have on industries competing with imports. As they become relatively cheap too, demand is "switched" from foreign goods to domestic goods. Between the two, these effects should deliver enough of a wallop to revive aggregate demand.

If he were to be really bold, and serious about the so-called second generation of reforms, the financeminister could devalue by a much larger degree and opt to cut import duties. Since devaluation gives domestic industry the same degree of protection as an equivalent rate of import duties, it would be a politically acceptable move. At the same time, a devaluation would be very efficient compared to tariffs and duties. For one thing, devaluation automatically wears away over time, as the economy does better. Import duties on the other hand are politically almost impossible to remove.

Even more crucially, the use of devaluation instead of import duties would remove any remaining policy bias against exports. Our regime of high import taxes has made it much more profitable for capital rich firms to concentrate in a few sectors where the import taxes are the highest. With such a high rate of tariffs, the prevailing price within the economy tends to be high.

The rate of return to firms, which produce these goods domestically, tends to be that much higher. Since this makes the import-competing sector so muchmore attractive, these duties are a sort of implicit tax on our exports.

So, if we were to replace protection through import duties with protection through devaluation, we would be reducing the lure of the import-competing sector for these companies over the long term. As more of these firms start entering the export sector, we should start adding more value in exports over time.

Some might argue that the government would not be able to afford the loss of revenues from cutting import taxes. But if depreciation were successful, the increase in demand would lead to an increase in other tax revenues, such as excise and sales tax revenues to the government. Most of the deficit created by a loss in revenues from import duties can thus be made up.

This column is not suggesting a devaluation is imminent, or even likely anytime in the near future. But this is a wonderful opportunity to reduce both the current account and fiscal deficits and push up growth at the same time. As long as inflation stays low, anyfinance minister is bound to find this an attractive option.