Dr Ashwani Mahajan
Since the beginning of the year 2018, Indian rupee depreciated by more than 20% reaching at rupee 74.72 per dollar by October 10, 2018, before improving to rupee 73.5 per dollar. On the other hand, the prices of petrol and diesel are skyrocketing and in the last two months, Current Account Deficit in the Balance of Payment (CAD), which was hardly 1.9% of the GDP in 2017-18, is expected to reach 3% of GDP in the current financial year. Sensitive Index of the Mumbai Stock Exchange (SENSEX), which reached near 38,900 level, by October 11, 2018 has come down to 34,000. In these circumstances, it seems that India is once again in the grip of crisis. However, if we look at the history, this kind of situation is no new for India. In the year 2011-12 and 2012-13 the CAD had reached nearly 4% of GDP, prices of petrol and diesel were also very high and rupee was also getting depreciated fast and had reached a record level then at rupees 68.84 per US dollar by 20th August 2013. The question arises whether India is once again in the situation of economic crisis as it was in 2012-13. If we look back, the situation then was very grim. During tenth and eleventh five year plans, economy was growing at the rate of nearly 8% and GDP growth came down to 6.2% and 4.2% in the year 2011-12 and 2012-2013 respectively. However in 2017-18 the economy had achieved GDP growth rate of 7.3% and for the year 2018-19 growth is expected to reach nearly 7.6%, as per the international agencies. In the year 2012 and 2013 the rate of inflation had peaked two digits, and the same is revolving around 3.5% now. On the basis of this we can safely say, that though Indian rupee continue to be under pressure, prices of petrol and diesel are also rising fast; however, Indian economy is standing on a strong footing.
Agriculture and Industrial Development
In the last 4 years not only the rate of growth of GDP has accelerated and growth is clearly seen in almost all the sectors of the economy. It is notable that the growth in industrial production, which had come down to 1.1 percent in 2012-13 and, by 2013-14 it had dipped to (-)0.1 percent, recorded a growth of 5.2 percent between August 2017 and August 2018. Similarly we find accelerating growth in agriculture. We find significant increase in production of almost all commodities including food grain, pulses, oilseeds, cotton, sugar etc. Food grain production which was 253 million tonnes in 2014-15 has increased to 277.5 million tonnes by the year 2017-18.Increase in agricultural production has not only dipped general inflation, its impact is more seen in food inflation. Food inflation which had reached 14.7 in November 2013, by June 2017, came down to -2.12%, which means instead of rising, prices have actually started falling. In the last few years, rate of inflation is revolving around 3 to 4 percent. Data shows that though the prices of petrol and diesel are rising fast, however in case of pulses food grain, edible oil etc. the rate of inflation is very meagre.
Fiscal balance
Inflation is under control, not merely because of the rising industrial and agricultural production, but also because of the fiscal balance achieved in the last four years. Fiscal deficit of 5.7 percent of GDP in 2011-12, had come down to 3.5% of the GDP in 2017-18. Rising GDP on the one hand and declining fiscal deficit, on the other hand, is keeping inflation under control, despite rising prices of petrol and diesel.
No big crisis
Situation of crisis is there if business environment is not favourable, production is stagnated, inflation is rising, whereas, many countries of the world are facing the problem of external payments, in India foreign exchange reserves have increased by 25% in the last four years. Many countries are dependent on the foreign nations for their basic requirements and the governments are not able to provide social security net and civil services. In India there is nothing like this. Stocks are overflowing and country is even exporting agricultural commodities hugely. Government’s budget is totally under control. Taxes both direct as well as indirect, are increasing in leaps and bounds and states which used to face severe resource crisis in earlier days have comfortable fiscal position. In the last few months because of the global factors, there has been a huge increase in the demand for dollars, causing stress on Indian rupee. However there is no crisis like situation. Rise of crude oil has increased from US$ 55 per barrel to US$ 80 per barrel in the last few months. There are two reasons for increase in the demand for dollars. Rising prices of crude oil in international markets in the last few months have increased our oil import bill. Apart from this, because of the increase in the interest rates by Federal Reserve (the central bank of US), the foreign institutional investors have started taking their money back from Indian markets. To add insult to injury, US government under Donlad Trump reduced personal income and corporate taxes both. This has further accentuated the tendency of outflow of foreign exchange by foreign investors. However, these factors are not going to have a long-term impact on Indian economy. On October 10, 2018 there has been a decline in the price of crude oil in future market and it seems that from now onwards, the price of crude oil will take a downward trend. Foreign investors have made huge profit in Indian markets. Therefore, though, they are taking their money out in the short run, but in the long run it is not going to continue and once they come back, supply of dollars will increase once again, and rupee may return back to its original level.
What to Do?
There is an urgent need for RBI to intervene in the foreign exchange market. Government can also try to reduce foreign trade deficit by increasing the tariffs on non-essential commodities.
Apart from this we have to take strict action against the dumping of products in Indian markets, by some countries. Foreign Institutional Investors also are needed to be disciplined by imposing minimum lock-in-period, so that they cannot take their money back overnight. We can also impose ‘Tobin Tax’, according to which, as and when foreign investors convert to the international currencies, the tax is imposed. In conclusion we can say that the economy which is the fastest growing economy of the world, in terms of GDP, where all economic indicators are moving in the right direction, a short-term increase in the demand for dollars and stress on Indian rupee does not indicate towards any big crisis. However there is a need to manage the present situation in an efficient manner.
(The author is Associate Professor, PGDAV College, University of Delhi)
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