Economic Highlights
New Delhi, 2 July 2018
Trump Corners India
RUPEE
ON HISTORIC LOW
By
Shivaji Sarkar
The trade war, US warning
against the deal with Iran, India’s move to WTO with Norway against high duties
by Donald Trump on steel and aluminium and certain domestic macro-economic and
political issues have taken a toll – on the rupee. It is on a roll.
For the first time it
breached Rs 69 to touch Rs 69.09, making it one of the worst performing currencies
in Asia. It has shed 7.7 per cent this year and is slightly ahead of the
Philippine peso. The rupee had strengthened 6.75 per cent against the US dollar
last year, but has been on a general downtrend since the beginning of 2018.
A weak rupee and higher oil prices
may accelerate inflation and force the Reserve Bank of India to hike interest
rates further. Despite hopes of the government it may cause impediments in the
economic recovery as cost of all imports, including petroleum would rise.
Some financial investment
companies such as Janus Henderson has sent warning against putting money in
India, Indonesia and the Philippines. The three countries are net importers of oil
and may see their current account deficits worsen,
As the US interest rates are
expected to rise further, the investors may further turn towards it. It may
aggravate the world scenario. In fact, it is just not India, other Asian
currencies such as the Chinese yuan, the Singapore dollar, the Malaysian
ringgit and Indonesian rupiah are trading in the red.
The political situation in
Jammu and Kashmir, Trump’s directives to India to stop importing Iranian oil
and his belligerent attitude against “high 100 per cent Indian tariff” are
spanners that could scare away the investors. This is against the government’s
hope that more investments should pour in. The dim hope is in US companies like
Harley Davidson moving out their manufacturing to other areas. But would Trump
allow it?
The US move against dealing
with Iran has other ramifications as India is investing in Iran to open up
routes to Afghanistan and Central Asia. This apart, Tehran has always stood as
a trustworthy friend. Trump’s animosity towards Iran is a diplomatic move to
increase its oil and arms sale and browbeat its Asian neighbours. The pressure
on Iran is deliberate and not because of its so-called nuclear ambition. Citing
Iran as a bête noire helps it keep the oil prices high as supply crunch
continues and competition is eliminated. Besides, such moves put countries such
as India in a tight spot.
There is no easy solution to
this critical situation. Despite issues like J&K and women’s safety being
domestic subjects, the United Nation, apparently under US pressure is raking
these up to paint an uncertain domestic scenario, though this is not the
reality. Such maneuvers too certainly scare away the investors.
Despite over $426 billion
forex reserves, the FDI flow remains moderate. According to Department of Industrial
Policy and Promotion (DIPP), total FDI during April-December 2017 was at $35.94
billion. The
World Bank has stated that private investments in India is expected to grow by
8.8 per cent in 2018-19 to overtake private consumption growth of 7.4 per cent,
and thereby drive the GDP growth. There are projections it may touch an annual
$ 75 billion. But the moves of Trump may cause upsets.
The currency is expected to weaken further,
according to analysts including those from Australian bank ANZ and Dutch lender
ING. This has a high cost on the Indian economy and consequently on other
economies of the sub-continent and South-East Asia.
For the government it means tightening the
belt at a time when public investment alone is supposed to move the economy up.
It is likely to hamper creation of jobs and investments, cost escalation and
slow down of many projects in a crucial election year As the rupee depreciates
amid fears of further rise in oil prices, country’s current account and fiscal deficits
may widen.
India is a net importer of oil and every
increase in price, coupled with rupee value could worsen its fiscal balances
maybe by over one to two per cent of the GDP. This is likely to hit its growth
projections.
Another fall-out of rupee depreciation would
be the increased outflow of forex for its imports. Often it is said that it
might increase its exports but the earnings in dollar terms would be nominal. Indian
diplomats are said to be good negotiators as they proved during various talks
with the US nuclear non-proliferation, WTO and other issues. This time a
beleaguered US, battered by its prolonged wars in West Asia, including in Syria
and Afghanistan, engagements in South China Sea and as Trump says with little
support from its NATO allies in the EU, is unlikely to yield concessions
easily.
Whether the Indian counter tariff moves would
help or it has to go back to the negotiating table needs to be watched. A suggestion
often given is to rake up the rupee value to stem the loss of forex as well as
the onslaught of crude oil prices. The international money market and not the
governments or central banks decide the rates. These are decided on many
factors and primarily on the purchasing capacity of the currency. Various other
economic activities contribute to it as well. Machinations by foreign powers
also cannot be ruled out. Trade war manifests in a move to keep the Asian
powers in an economic tight spot and the currency is the easiest tool.
There are suggestions to reduce imports.
Good. But how to check oil imports that keep the nation’s lifeline alive? How
to stop critical arms purchases and technologies? While suggestions are easy to
give, over the years the rupee has been on a continuous fall. No economist, or RBI
or Planning Commission or NITI Ayog could come out with a way to stem it.
Trump has ensured, for the present, world
business and finances look towards the US. All others are looking for avenues.
He has won the first phase of the trade war. There is nothing to be
pessimistic. Countries such as India have the strength and capability to find
new ways, forge coalition and methods like the recent concession on soya exports by China. The world has always come
out of such criticality but the big question is how long would it take?---INFA
(Copyright,
India News & Feature Alliance)
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