Economic Highlight
New
Delhi , 29 August 2015
Rupee
Slide
HEAR
THE WARNING BELL?
By
Shivaji Sarkar
The crashing
rupee, falling interest rates, flight of capital from stock markets, not
jettisoning Manmohanomics and no new economic paradigm are affecting the Indian
economy. The rupee unfortunately is touching the level of August 2013, when it
bottomed to almost Rs 69. It has already slumped to the level of Rs 67.
This is a warning
sign. The advantage of crude prices falling to $40 is not reaching the Indian
economy. The falling rupee is negating the benefits and volatility in commodity
prices continue. Inflation that has officially come down may once again
skyrocket putting severe pressure on government finance apart from social and
political unrest.
It seems since Independence the country
had not been able to manage the rupee parity with foreign currencies in a pragmatic
way. It was on par with the US dollar at the time of Independence in 1947, but has depreciated by
a little more than 65 times in 69 years. It moved downhill since the 2008
western economic meltdown despite the fact India was directly not hit by it. But
policy failings and liberal incentives to corporate added to the people’s woes.
The 2008-2013 had
been the period when some corporate clocked highest profits of up to 142 per
cent a year and average profits were over 40 per cent. High profits have been
adding to the inflationary trends but the poor consumer laws and government
checks allowed the mayhem to continue. This adds to the erosion of the rupee value.
The currency value, it is common knowledge, is based on the intrinsic value –
purchasing power, and that is decided by the prices in market. Rupee everyday
buys less and less.
External factors
are responsible for determination of the international value to an extent. But
if a country’s economy is not doing well, political management is weak, market
is allowed to be determined by speculators and everything works for the benefit
of some large groups it tells severely on its currency.
The cacophony for
reducing interest rates, which has recently hit Indian depositors hard, is
again making the rupee weaker. Recall the depositors had lost billions during
the past few months, for the benefit of again large borrowers. High NPAs
(losses) of banks, officially pegged at Rs 3 lakh crore, though in reality may
be higher--about Rs 5 lakh crore, is hitting the banking sector. RBI Governor
Raghuram Rajan has expressed severe concern in the apex bank’s annual report on
“booster shots”, which he says, “may lead to a collapse when reality hits”.
Lower interest
rates particularly at a time when the US Federal Reserve is considering
increasing it is not a wise decision. It is only likely to lead to flight of
capital – dollars – to the US,
where FIIs and pension funds can fetch higher rates than in a fledgling Indian
stock market. The stock exchange is likely to remain bumpy in the coming days.
Fall in portfolio investments can cause loss in foreign exchange reserves. More
so as Indian exports are dipping.
Another aspect is
the better employment record of the US during the past few months. This
gives strength to the US
economy to invite more investments. India again is not creating new
jobs. Various data show losses of jobs in industry and even the farm sector.
The Prime Minister’s much spoken of initiatives on skill India and
Digital India may take time to show impact.
Worldwide, this
country did not learn-- jobs in the industry, including manufacturing, have
been steadily falling. India
is at the mistake of stressing more on industry ignoring the farm sector. Agriculture
can not only create jobs but also ensure stable supplies and prices – critical
aspect for growth at even keel.
India
is also not investing in solar and alternative energy research despite its
abundance. A proper policy for non-grid linked domestic solar power can reduce
crude import bills and dependence on fossil fuel. It can make fuel cheaper and
shore up individual coffers. The perspective is missing.
Ignoring
the writing on the wall is leading to fall in FDI as well. FDI's have remained
low on the sidelines of waiting for concrete action on - Tax (retroactive
taxation, unclear rules), investment (FDI norms), and foreign exchange convertibility
(Re -fully floating). This has prevented major investments coming in and kept
the Rupee under pressure.
The
RBI reports that FDI in India
decreased to $1749 million in June 2015 from $3509 million in May. The FDI
averaged $1078.97 million from 1995
until 2015, reaching an all time high of $5670 million in February, 2008 and a
record low of minus $60 million in February, 2014.
The
biggest bane of Indian economics has been Manmohanomics. It has made the rich
richer, widened the rich-poor gap and added the largest numbers below the
poverty line. Today, the country has the highest number of absolute poor with a
family income of around Rs 5,000 a month while commodity prices skyrocket.
Keeping such large numbers out of the market dampens the spirit of investors.
The middle class owing to high prices are slipping to the near poverty line.
All this once again add to the rupee woes. Additionally, it is the increasing
gold import, which is acting as a safety against the falling rupee and
uncertainties in economy. This again hurts the rupee.
It
appears that over the years the economy has been not much of concern for the
governments. The political class is too dependent on bureaucrats who may be
wise but lacks the wisdom. It is leading to ad hoc decisions, which further
complicate the course. The Modi government has many knowledgeable people in the
party fold. They have ingenious ideas and can suggest how to break away from
the pernicious past of anti-people Manmohanomics and make the rupee stronger.
It
needs a paradigm shift, a bold step to take the economy on a different
pro-people path with a view to strengthening the fundamentals of Indian
economy. It would call for drastic real changes to empower the people,
agriculture, industry and start activities in all spheres. Will Modi break from
the past as he suggests and lead to that paradigm shift? ----INFA
(Copyright, India
News & Feature Alliance)
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