The Depreciating Rupee and India
Figures of 8% growth rate, implausible figures of below 3% CAD rate, these are I think frivolous figures estimates of government.
With GDP at 20 year low, meager IIP, Rupee at record low and performed one of the worst in this year, these are exacerbating the soundness of our economy. India is recorded at 132nd rank out of 185 countries in Ease of Doing Business, 173rd for Ease of starting business, 182nd for getting construction permit, 152nd for paying taxes, 127th for trading across borders, 184th for Enforcing Contracts.
The rupee has lost more than 13 per cent in a quarter and the investors in stock markets are poorer by 25 per cent in dollar terms. The GDP growth of 4-5 per cent is almost half of what the country has enjoyed during the recent boom period.
That jobs become scarce when the economy is down is obvious. The current situation can be compared with the post-Lehman phase of 2008.
Auto sector sales are down by 13 per cent compared with the same period last year, which has resulted in adjustment in staffing levels. There are reports of layoffs in sectors such as auto ancillary, hospitality and investment banking, among others.
Trade Deficit Problem
On the one hand we don’t have enough exports due to bad economic condition of foreign economy, due to ban on iron ore export.
And on the other hand we are importing around 76% of oil requirements from outside, we are importing coal to feed our power plants, we are importing natural gas from outside, importing Gold in unprecedented manner even after import curb measures taken by RBI.
With some global factors and depreciating rupee the burden on the OMC’s are rising & they in turn increasing the fuel prices adding to inflation & this in turn affecting the rupee badly.
These are the factors which are directly worsening CAD.
Another problem is of Fiscal Deficit.
Due to bad shape of the economy there government is not getting enough revenue out of the corporates in terms of taxes which is their largest source to fill their coffers. And due to election is approaching government is bound to expend more. And the recent announcement of Food Security Bill will worsen the coffers of government. So the expenditures are increasing & revenue are not increasing at that pace.
Another problem is due to slowdown & mood of the market is not good there is no divestment is happening in PSU’s & also the spectrum auction last time didn’t successful due to high prices of bids. So this source of revenue is also absent.
Due to interest rates are still high & economy is still not out of woods & fear of downgrade, mood of the industry & FII is not good. With not enough reforms by government industries are not investing enough, their capex plans are still on hold. And so IIP numbers are not so cheering.
Even after announcing some reform measure in different sectors, there is not enough FDI or investment is coming because government is not able to not clear picture for long term growth & related to tax related issues& other bottlenecks. They have announced these short term measures to curb the rupee depreciation & change the mood of the “dalal street”.
Deterred to the mood of the economy, comes the rupee shocker which touched all time low against US dollar. Some of it happened due to the announcement by Federal Reserve of QE taper as US economy is showing some revival & FII pulled out from its coffers.
Problem of External Debt.
India’s short term debt maturing within a year would seem to be a matter of concern against the current backdrop of the declining rupee & US Fed’s possible change of stance on easy liquidity in future.
Short term debt maturing in a year is considered as a real index of a country’s vulnerability on the debt servicing front. It is the sum of the actual short term debt with one year maturity and longer term debt maturing within same year.
India’s total external debt ballooned & causes the real problem. The rise was mainly due to increase in short term debt, commercial borrowings & NRI deposits.
India has accumulated a lot of short term debt due the “hot money” from outside. When the developed economies were at laggards in last 4 years, the easy money came to India & with that easy money the short term debt ballooned.
If capital flows were dry up due to some unforeseen events & NRI stopped renewing their deposits with India, then 60% of the country’s forex reserves may have to be deployed to pay back foreign borrowings due within a year. A lot of the surge in external debt maturing within next year is on account of big borrowings by big corporates during boom years after 2004.
The continuing economic weakness and plunging rupee is only worsening the situation. Indian firms hold nearly $225 bn of dollar denominated debt, half of which is estimated to be unhedged, leaving those firms badly vulnerable as rupee depreciates alarmingly.
The corporates in last 5 years had accumulated large amount in their “right hand” side of balance sheets which now becoming stale with interest rates are are not serviceable. Their interest rate coverage ratio has ballooned. With the help of easy money they entered in different verticals & now they are creating problem for them as they are not performing due to slowdown or the execution plan was not correct.
Banks are most vulnerable situation, as many corporates had taken debt, especially in infrastructure, power sector they are facing blues due to bad situation of the economy. The projects are not commissioning & in turn banks NPA’s are rising.
With all these things India is facing some depreciating situation & facing the fear of downgrade by some credit rating agencies.
So, the government at least have to wake up right now to take some credible steps to shore up the economy. It’s not enough to announce some forex measures, announcing some ECB measures, raise duty on gold imports, raise duty on LCD TV’s coming from outside. Government must consider from the root cause of the problem.
First of all reduce the CAD & also Fiscal Deficit unless & until it can’t be curbed there is nothing which can save the economy. So for that start some export oriented measures as some of the western economies are improving so export will get some boost, waive the ban on iron ore export, strengthen the tie up in terms of trade with South East Asian economies to shore up the trade. Need to reduce Trade Deficit which has been ballooned from 2004.
Second there must be some more FDI announcement in credible manner in which there must come some FDI amount so that we can get inflow of dollar, FDI should not be for showcasing by government that we are announcing reforms. It should not be like that FDI in multi brand retails have been reduced but still we are waiting for some amount to come. Those happened because the root problem & causes was not cleared by government & those were not clear to those retailers. Ensure that the FDI that are coming they must be of long term nature & not for the time being by Venture Capitalists, Hedge Funds. There are also cases of round tripping investments where the investment is coming from overseas for the benefit of taxation & the n flown back to the country.
So government must be committed to its policies & not to become lame in their policy decisions to take the economy out of the woods.