Economy Worse yet to come

Nantoo Banerjee
Ever heard of a run on a country’s central bank? The continuing collapse of Indian rupee threatens to lead to a run on the Indian Reserve Bank’s foreign exchange coffer. Both foreign financial institutions (FIIs) and rich resident Indians are fast losing faith in the Indian currency and the country’s economic stability. With Rupee’s exchange rate vis-à-vis US$ poised to cross Rs 70 for a US Dollar and the economy showing no signs of recovery, FIIs, which control the Indian stock market with gross investment of over $ 100 billion in equities since the UPA came to power at the centre in 2004, appears to be in desperation to pull out even at the prospect of losing huge amounts and substantially draining out RBI’s forex reserves in the process. On the other hand, rich resident Indians are in mad rush for gold to hedge the impact of fast sinking Rupee on their assets. The gold price in the Mumbai bullion market is going through the roof.
The situation is extremely grim and calls for an immediate strong action by the Government and the RBI. It may even force the government to go for early Lok Sabha election, which it has been avoiding despite its inability to correct the economic downturn by resorting to some strong policy measures facilitating large investments in India’s infrastructure and manufacturing sectors, ensuring steady foreign fund inflows in good quantities in both the areas and making serious effort to enhance export production. Unfortunately, a quick economic upturn appears to be difficult at this stage as the UPA Government is almost held hostage by both the so-called allies and its opposition, including BJP and the left group, allowing little room for policy manoeuvre.
Ominously for Indian economy and its people, things are fast going out of the government’s control. Financial markets have practically rejected the present Government. Foreign investors are on a pull-out mode. The Indian currency’s continuing decline at such a speed and ferocity sans logic. Economy is, no doubt, in bad shape. But, it is not irrecoverable. Currently, the country’s foreign debt to GDP ratio is not only manageable, but also well below the levels of some of the G-8 countries. Could there be a mischievous foreign hand behind these sudden developments? Possible. But, unlikely. Over the last 10 years, the Government has left the reins of economy to foreign elements. The latter, not the Government, seems to be in drivers’ seat today, causing such an upheaval in the market. They now threaten to challenge the very existence of their creator, the Government. Nothing seems to be working anymore to put the economy and the market back to order.
The mere announcements of concessions and cabinet clearances with regard to FDIs and FIIs and massive investment of Rs 2,00,000 crore (around $ 30 billion) in large infrastructure projects have failed to cut ice with both external and domestic investors. Most of these long pending projects run through opposition states and there is no reason to believe that the latter will cooperate with the union government in ensuring their implementation. Land acquisition poses as the single biggest hurdle to large new projects. Clearly, investors don’t trust the government. Economy has been slowing down. Corporate bottom line is under increasing pressure. In the last eight sessions alone, FIIs have sold stocks worth over US$ 1 billion. It is certainly indicative of a worrisome prospect considering the fact that stocks had been India’s one sturdy source of capital inflows in the first half of 2013. Worse may still to come.
The global rating agency, Standard and Poor’s has predicted rocky road ahead of India. An India downgrade may just be round the corner. The French multinational banking giant, BNP Paribas has cut India’s GDP growth forecast for the current financial year to 3.7 per cent, the lowest since 1992. A situation of ‘financial emergency’ seems to be looming large as on Wednesday Rupee slumped to a record low near 69 to the dollar on growing worries that foreign investors will continue to sell out of a country facing stiff economic challenges and volatile global markets. The rupee cost of essential imports such as petroleum, edible oil, fertilizer and coal will skyrocket. The growing uneasiness and weakening sentiment in stock and forex markets sent the rupee tumbling 3.7 per cent to an all-time low of 68.85 with the unit closing just a touch off that, at 68.80/81 per dollar, its biggest single-day fall since October 1995.
The public sector financial institution, Life Insurance Corporation of India (LIC) was made to intervene in the stock market on Wednesday buying shares to arrest their fall in the wake of continuing FII ‘sell’ orders. This allowed the benchmark indices – Sensex and Nifty — to erase steep early losses and end the day stronger. “If steps are not taken to implement the reforms necessary to tackle the structural issues, the government will be left with the so-called ‘3D options’: debt default, devaluation, deflation,” reacted Angelo Corbetta, head of Asia equity for Pioneer Investments in London, adding that “in India, devaluation is happening now and deflation could be about to start. The good news is that the debt default is highly unlikely.”
However, RBI’s foreign exchange reserves are going to be under big pressure in the next six months as India’s corporate sector gears up to draw down some $ 172 billion from the central bank to meet its loan repayment obligation mostly against short-term commercial borrowings. A further India downgrade at this stage will make fresh foreign fund flow into the country more difficult and uncertain, impacting the country’s economic growth plans, the inflation rate and the exchange value of its currency. Only a decisive political mandate in the coming election can change the situation and investors’ interest in India to any positive direction. (IPA)

LEAVE A REPLY

Please enter your comment!
Please enter your name here