With the rupee’s fast depreciation over the last three months confidence is collapsing. According to Reuters, India’s economic growth virtually halved in two years to 5 percent in the fiscal year that ended in March, the lowest level in a decade. And most of the economists interviewed by the same news agency expect 2013/14 to be worse. Amid investors worries, there are some aspects that should be taken into account.
The situation in India right now looks a bit dismal, what with the Indian Rupee taking a beating. This will obviously have its impact on manufacturing, especially those that are dependent on imports, which will in turn lead to some industrial slowdown. The second impact of a weaker Rupee is the increasing demand for it from importers, leading to a sort of shortage which could further aggravate the Rupee value. So in the short term we are not going to see any dramatic changes. Some of the measures taken by Reserve Bank of India (RBI) have started to take effect and we have seen the Rupee make its first move up North in recent times.
The causes outlined are on target. The current account deficit is one big contributor. Unlike China and Brazil who are net exporters, India is a net importer, ie. imports are higher than exports. However, we have been able to maintain a positive current account balance all these years due to huge exports. What has slowed down export revenues is some amount of judicial activism, where the Supreme Court of India has stepped in to curb certain industrial activities due to inherent corruption issues, like with iron ore mining. India is the world’s largest exporter of iron ore and that big revenue earner has been stifled.
The other is the fiscal deficit, which has been caused by years of profligacy in terms of subsidies to the public, which have seriously eroded the exchequer. Here also, the govt. has rolled back some of these subsidies, like with fuel and domestic gas. But it is probably too little too late. Yesterday, the govt. has cleared the Food Security Bill which will be another massive drain on financial resources and expected to cause more problems. But the govt. is sure that they have the means to manage this. Need to wait and watch.
One other contributor is the proposed reversal of QE by the US Govt. This has choked FDI (Foreign Direct Investment) as the free cash may not be available for long. But this will only be a temporary phenomenon, as they will start to come back once the Indian economy gets on to the growth path, which in the medium to long term looks certain and the reason for this optimism is domestic demand. Much of what is produced is consumed here and the demand is growing. Plus some of the projects cleared by the govt. are sure to kick start the economy pretty soon.
There will be some uncertainty till the next general election in 2014 and the markets will reflect the volatility till we know who is going to be in command. Right now it seems to be a mixed bag. There is no clear winner emerging from the opinion polls thus far. But these are early days and there are still nine months ahead for political equations to take form. What has emerged thus far is that the main opposition, while trying to ride the anti-incumbent wave, may not be successful in forming the govt. due to their lack of vision and fixation with religious jingoism.
A significant part of the voting population are between 18 – 35 years and they have no time for such narrow minded policies. The current govt., whilst will probably not get a majority, may still cobble together the next govt. with the help of smaller regional parties, who are apathetic towards the main opposition due to their insistence with religious ideologies. How this will affect the stock market and the Rupee is to be seen.
All that said, India is good to go in the medium and long term and I am confident that the economy will bounce back. Hope that helps. They are my views and I am known to be an incorrigible optimist.