Rupee's slump comes at wrong time

September, 02nd 2013

New Delhi: India is hurtling into a major economic crisis with the rupee’s slump to a series of record lows firing up inflation pressures, which would inevitably lead to a spike in interest rates at a time when economic growth is teetering at its worst pace in four years.

Gross domestic product expanded at a slower-than-expected 4.4 per cent in the three months ended June, the weakest rate since the global economic crisis in 2008-09, with two important constituents – manufacturing and mining – contracting 1.2 per cent and 2.8 per cent.

The official data, released by the government after markets closed on Friday, thumped New Delhi’s assertion that the economic slowdown has bottomed out. In reality, the growth rate is likely to dip further as the sharp depreciation in the rupee piles pressure on prices while consumer spending goes into hibernation.

New investments have ground to a halt, many companies are reducing shifts to tackle mounting inventories, projects undertaken are stuck midway and loan repayments are in disarray. Making the situation worse is a government that is at odds with itself, lack of clear policy direction and abysmally poor governance.

“The lack of affirmative action by the government on improving the investment cycle in rest of the year risks reviving a downward spiral, which might pave the way for slip below 4 per cent mark, as a worst case scenario,” Radhika Rao, an economist at DBS in Singapore, wrote in a note to its clients.

BNP Paribas on Wednesday slashed its growth forecast for India’s economy in 2013-14 to 3.7 per cent -- the slowest annual pace since the crisis of 1991-92 when New Delhi was forced pawn its gold and take a loan from the International Monetary Fund to tide over a severe balance of payments problem.

Although India’s foreign exchange reserves now are sufficient to cover six months’ of imports, they are depleting and the current account deficit that hit 4.8 per cent of GDP in 2012-13 is not sustainable. The rupee’s collapse by as much as a fifth of its value in 2013 will boost exports and slow down imports, but overseas debt repayment costs would balloon.

Nero fiddles

The frustration among industry captains who have a lot at stake are bubbling over, and the anguish is the talking point in business corridors and among investor classes.

“We have lost the confidence of the world. We have been slow to recognize that in the government,” Ratan Tata, former chairman of the Tata Group, told a TV channel. “We don’t have leadership that we have been talking about, that is leading from the front.”

The government has taken a series of measures over the past few weeks but these have failed to halt the rupee’s slide – it struck a historic low of 68.85 to the dollar, taking losses to more than 20 per cent in 2013 – because the steps were aimed at largely curbing speculation and curtailing demand for gold, a major import item.

New Delhi has been singularly ineffective in addressing the fundamental problem – policy road blocks that have thwarted large projects and driven investors away.

Faced with such gloomy situation much was expected from Prime Minister Manmohan Singh, but his rare speech in parliament on Friday was a disappointment and did nothing to reassure jittery businesses or investors.

“For all his attempts to explain and engage, the prime minster appeared evasive,” the Indian Express wrote in an editorial. “This was so, most of all, with regard to this government’s own role in eroding the economic fundamentals.”

The widely circulated newspaper punched a hole into the government’s penchant to blame global factors and disruptive opposition parties for the economic ills, by showing New Delhi priorities were misplaced. The administration got populist legislation, a food security bill and half-baked land reform, through parliament this week without any hitch.

The day after the food security bill, which commits to provide heavily subsidised grains to some 800 million people, was passed the rupee dived the most in 18 years while main share indices shed more than 2 per cent. The bill is a gimmick to influence voters, unmindful of the damage it could cause to fragile government finances and the economy in the longer run.

“Inertia, a lack of ownership of decisions, and conflict between policymakers continue to bedevil economic decision-making, even at a time as dire as this,” the Indian Express said.

Inflation time-bomb

Foreign portfolio investors pulled out $1 billion from Indian shares over 10 sessions to Thursday, according to the Securities and Exchange Board of India, an outflow that is set to pick up momentum as business confidence sinks to its nadir in at least two decades.

“Selling by foreign institutional investors has clearly accelerated,” Akash Prakash, CEO of Amansa Capital, wrote in the Business Standard. “Investors fear that a crisis is brewing, thanks to Indian policy makers’ inability to bring the situation under control.”

An inflation time-bomb is ticking with prices of everything soaring, onions, for instance, were selling at as much as Rs80 a kg from around Rs10-12 until three months ago, which are bound to pinch the pockets across the spectrum, the poor being the worst sufferer.

Good monsoon rains will help farm output but the cost of inputs such as fertilisers, fuel and labour are all rising. It will be baptism by fire for Raghuram Rajan who takes over as the new governor of the Reserve Bank of India on Thursday.

He might read up on D. Subbarao, the outgoing RBI chief who was often vilified by the government as not supportive of growth.

“Critics of our monetary tightening must also note that our degrees of freedom were curtailed by the loose fiscal stance of the government during 2009-12,” Subbarao said in his last public speech as RBI head. “Had the fiscal consolidation been faster, it is possible that monetary policy calibration could have been less tight.”

Investment guru Mark Mobius believes the government must harness India’s true potential to help ride the economic storm.

“The government must allow private enterprise to make investments and slowly reduce the extent of public sector involvement in the economy. As it does that, the productivity would increase, the growth rates would improve, and the currency will strengthen,” Mobius told the Economic Times.

“The government must counter inflation by improving productivity, which is an ongoing task. There is no reason why a country that makes the cheapest and highest quality medicines and is the software and services factory to the world cannot manufacture goods at a competitive cost.”

Source: Gulfnews.com