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03 September, 2013

Coping with economic ills

BRP Bhaskar
Gulf Today

With the rupee in free fall, the stock market in violent fluctuation and inflation in two digits, last week threw up evidence that India’s economy is ailing.

While presenting the budget, Finance Minister P Chidambaram had held out hopes of a growth rate of 6.1 to 6.7 per cent during this year. Replying to a debate on the state of the currency in the upper house of Parliament on Friday, Prime Minister Manmohan Singh lowered the target to 5.5 per cent. Data released by the Central Statistical Organisation later shows even this may be unrealistic.

The CSO report said growth in the first quarter of the fiscal was only 4.4 per cent, the lowest since the global meltdown of 2009. The growth rate fell in every sector of the economy except that of social and personal services, which registered an increase — from 8.9 per cent to 9.4 per cent.

Some foreign analysts and domestic critics cited the Food Security Bill, which provides for heavy subsidy on grains supplied to the poor, as one of the reasons for the decline of the rupee. The fact, however, is that the rupee began falling weeks before the bill was adopted by the lower house of Parliament, and it was caused primarily by global investors moving money out of foreign financial markets following the US move to tighten money policy in view of improvement in its economy.

The economies of many countries had suffered when the US experienced meltdown a few years ago. It is ironic that some of them now suffer because the US economy is improving.

The rupee is not the only currency affected by outflow of foreign investment. The currencies of many developing countries from Brazil to Indonesia have suffered erosion in recent weeks. However, the rupee happens to be the worst hit.

India received foreign institutional investment of $12 billion this year. About $1 billion went out in a fortnight as investors began pulling out.

The main cause of the plight of the rupee is the growth in the current account deficit — the gap between the value of imports and that of exports — which touched an all-time high of $88.2 billion during the last financial year. This was 4.8 per cent of the GDP. The government planned to reduce the CAD to $70 billion, or 3.7 per cent of the GDP, this year. High oil and gold imports foiled its efforts.

Appeals to the public to reduce oil and gold consumption having failed, the government is considering other remedial measures. Buying more oil from Iran paying rupees and keeping petrol outlets closed from 8pm to 8am are among the ideas mooted to reduce oil import bill. Austerity measures are also envisaged.

Some analysts have likened the current situation to what prevailed in the early 1990s when India borrowed heavily from the International Monetary Fund and suggested going back to the IMF. However the government says the situation does not warrant recourse to IMF aid.

Its optimism is based mainly on two factors. One is that the country has foreign exchange reserves of about $280 billion as against short-term debts of about $172 billion. The other is that since there was plentiful rain during the year the outlook on the farm front is bright.

However, Corporate India has cause for worry. Taking advantage of the economic reforms, many companies borrowed heavily from abroad and the falling rupee has pushed up their repayment burden.

A US website has quoted an official of the financial services firm Morgan Stanley as saying 25 per cent of Indian companies technically do not have enough money to make interest payments and 15 per cent have negative cash flows.

Manmohan Singh shares Corporate India’s view that the answer to the current economic problems lies in more reform. However, since general elections are approaching, he cannot overlook the fact economic reform, while benefiting big corporations, has added to the misery of the poor. The food security and land acquisition measures which the government is trying to push through are aimed at mitigating its impact on the vulnerable sections of the population.

Amid the gloom of the week the state-owned Life Insurance Corporation spread a bit of cheer by releasing a report of the global research firm Dun and Bradstreet, which said India is likely to achieve an average growth rate of over 8.3 per cent between 2014 and 2020 and realise its full potential. -- Gulf Today, Sharjah, September 3, 2013.

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