"Several factors like a sluggish global economy, coupled with policy mismanagement and political deadlock have led to the worst slowdown the country's economy has witnessed in years. What we need is the right kind of policy making, bold economic reforms in the right direction and a relentlessly driven government so India can claim its rightful place among the leading economies of the world" ...
"Several factors like a sluggish global economy, coupled with policy mismanagement and political deadlock have led to the worst slowdown the country's economy has witnessed in years. What we need is the right kind of policy making, bold economic reforms in the right direction and a relentlessly driven government so India can claim its rightful place among the leading economies of the world"
Having just stepped into our 65th year of Independence, it seems like a good milestone to sit back and analyse where our country stands today on the global podium. During the past few months, the country has been buried neck deep in scams, scandals and parliamentary mud-slinging, making the political environment quite conflict-ridden. Newspaper headlines narrating how the Manmohan Singh government is in deep paralysis as far as its policy making powers are concerned at the hands of the opposition party, have become a standard occurrence.
Moreover, regressive retrospective taxation, a declining GDP that is 2 per cent lower than last year, an inflation that still remains at an enormous 8.41 per cent and a huge fiscal deficit continue to weaken and threaten the very survival of Asia's third largest economy. Adding fuel to the fire in an already uncertain and shaky Indian economy is the downward spiraling of the Indian Rupee (INR).
Even a year back, fortune tellers of economic markets the world over were claiming that the Indian economy, along with the Chinese, will rescue the world economy from the global financial meltdown and recession. However, the prediction is fast becoming a distant reality, casting dark shadows of doubts as to the performance of the Indian economy. International observers are waiting with bated breath to see whether or not the Indian rupee survives the recent beating to its value as against that of the American dollar.
While the Indian Government can blame the Euro-crisis for the depreciation of the rupee, the current mess is largely self-inflicted. A coalition government that clearly lacks the leadership to introduce significant new reforms continues to be pulled down by conflicting interests. And even if it does somehow manage to reach an effective break point to liberalise the economy, it eventually succumbs to renewed opposition from party colleagues and coalition allies, thereby rattling investors.
Besides the policy-paralysis, India's recent volte-face on opening the $450 billion retail sector to foreign supermarkets, proposed implementation of the General Anti Avoidance Rules (GAAR) and its resistance to FDI in the aviation sector has sparked an outcry among foreign investors, further upsetting the country's economy.
Stalled economic reforms directly imply a struggling Indian economy trying hard to meet its fiscal deficit target of 5.1 per cent of the budget. For a nation whose single-point obsession has always been its overall GDP growth, the figures recorded in the quarter ending March 2012 are nothing but disappointing as the GDP growth rate nose-dived to 5.3 per cent in the quarter ended March 2012. To add to our woes, a stubbornly high inflation of 7.3 per cent as of April 2012 stares right into our faces as we helplessly grope under the pressures of a depreciating rupee.
As the rupee continues to hit new lows, it becomes pertinent to note the impact it has on various sectors. For the eternal optimists, the depreciating rupee may be a reason for the exporters and the IT sector to rejoice. With the devaluation in the rupee value, exporters stand to gain more of the local currency for every unit of foreign currency, even though the quantum of trade remains unchanged. Similarly, the depreciating rupee is a positive for the Indian IT sector which generates more than 80-90 per cent of its $70 billion revenue from the overseas markets.
However, the negative impact of the rupee devaluation by far overshadows any positive reliefs that it may bring. Among the worst hit in this situation is the oil import bill of the country. India imports close to 70 per cent of its net fuel requirements, making it the world's fourth largest oil importer. In the last fiscal year alone, India spent approximately '8,29,050 crore on its oil imports. Judging from such high-strung figures, it becomes obvious that increase in oil prices will directly impact the budgetary estimate. Between 2010-11 and 2011-12, India saw its average cost of imported crude oil rise by $27 per barrel, making India's oil import bill rise from $100 billion to a whopping $ 140 billion dollars.
In this scenario, the depreciating Indian rupee serves as only a catalyst in a chain reaction triggered by increase in the import bill. A rising import bill leads to heavy buying of dollars from the market to meet such an increase, which in turn results in imports becoming costlier; prices of key commodities like oil, imported coal, minerals, fuel and metals rising higher; and, consequent domestic inflation.
Driving the point home is the recent plight of state-owned Oil Marketing Companies (OMCs) like Indian Oil Corporation, Hindustan Petroleum Corporation Limited and Bharat Petroleum Corporation Limited that have already used up 40 per cent of the '40,000 crore budgeted oil subsidy for 2012-13. Indian Oil Corporation, India's largest commercial enterprise, posted its biggest quarterly loss ever at '22,451 crore in the first quarter of the current fiscal year against a loss of '3,719 crore last year, making it the highest loss for the current quarter for any Indian company.
If the figures compiled by the Petroleum Planning and Analysis Cell are anything to go by, these state-run OMCs are reported to be losing over '520 crores per day on sale of sensitive petroleum products. Such devastatingly high losses can only be attributed to higher crude oil prices and non-receipt of sufficient subsidy; while the depreciating rupee simply expedites the loss figures further.
Among the other sectors that have been badly hit by this steep rupee devaluation is the shipping and the ship finance industry. On the one hand, the Indian shipbuilding and ship repair industry is touted as being likely to reach '9,200 crores from the current level of just over '7,310 crore. However, on the other hand, the recent downfall of the Indian rupee has caught the ship breaking industry off-guard, causing a staggering loss of almost '800–1000 crore during the financial year 2011-12. Although there has been an increase in tonnage, a weak rupee has converted profits into losses, mainly after the October 2011 period.
As per the traditional business practice of the shipping industry, ship breakers pay money within a period of six months. This means that for the deals made in mid-2011, the payment was made only towards the end of the year, by which time the rupee had started depreciating against the US dollar. Consequently, numbers being projected as profits in the account books turned into unforeseen losses.
Similarly, in the case of ship finance, shipping companies and vessel owners who procure loans by furnishing assets as security find themselves bearing the brunt of the depreciating rupee, in addition to the already existing woes of an on-going global depression. Finances in the shipping industry are considered to be highly geared with borrowers being required to maintain a ratio of 125:100 as regards the total value of the vessel being provided as security against the total loan amount.
With a dip in the global economy, value of vessels provided as security also falls steadily in the international market, rendering such security as insufficient. All this makes it incumbent upon the borrower to immediately make good such deficiency. The borrower is therefore required to either pay the entire loan amount upfront or liquidate assets or bring in collateral assets to bridge such deficiency in security. The shipping industry, which is presently surviving on thin profit margins, is confronted with the additional burden of a weak rupee as more rupees need to be pumped in to meet the security requirements in dollar terms. Such is the cascading effect of the depreciating rupee!
For an industry, which packs prospects of huge profits and which can be considered pivotal in resurrecting the country's economy, much needs to be done indeed! In tow with the shipping industry, the fate of several other important sectors also appears to be contingent on the fluctuations of the rupee value. A weak rupee adversely impacts the cost of borrowings for the corporate sector that borrowed in foreign currency to take advantage of the low interest rates, but failed to put a contingency plan in place to protect themselves against the adverse exchange rate movement that could take place. So also, foreign travel and studying in foreign universities are set to get costlier since more rupees would be required to fund the same.
Real estate is another important sector seriously hit by the rupee devaluation. The impact in this particular case is three-fold. Firstly, a week rupee directly impacts the cost of material, most of which is imported from abroad. In addition, increased cost of crude oil makes fuel costlier, which in turn makes freight costs of material even higher. Secondly, foreign PE investors who may have invested large sums in the Indian real estate market now stand to get lesser dollars in return for their investment. Conversely, new investors may look at this as perfect timing to enter the real estate market. However, the chances of this happening also appear bleak given the risks and volatility in the market. Lastly, as in most cases, it is always the consumer who bears the brunt of steep market fluctuations. Typically, additional costs of construction will get passed on to the domestic customers.
"Instead of opting for short term "bird-in-hand" survival tactics, what we need today is to get the best minds in the country to come up with innovative and bold economic reforms, and a government capable of fearlessly implementing them."
The Indian currency has depreciated close to 22 per cent in the last one year. The RBI has taken certain timely steps to cushion the fall in the economy. Various austerity measures have also been invoked. But one question still remains unanswered-Is the government prepared to implement some fundamental economic reforms or will it opt to continue treating the country's economy solely from a political stand-point?
The present state of the country's economy is an outcome of deeply rooted illnesses, some of which manifest themselves in the form of incompetence of the coalition government, lack of initiative to carry out the next level of economic reforms and opposition parties who will do just about everything to prevent any reasonable policy from reaching its logical conclusion. Growing debt burdens, rollback on implementation of key policies and continued support of loss-making state-owned enterprises (read Air India) are a glaring evidence of the same.
The fact that India is the world's largest democracy does not make the situation any better. We are a population that has meekly tolerated several elected terms of incapable governments, corrupt ministers and inherently-deficient policies. What we lack is an elevated level of public accountability and an effective anti-corruption framework.
Another significant contributor to the catastrophic downfall in the value of the Indian rupee is the fact that there has been a complete and absolute failure of responsibility – responsibility to be more accountable to the tax-payer, responsibility to maintain transparency in market operations, responsibility to keep abreast with the fast changing economic reforms being implemented around the world, responsibility to keep lobbyists from influencing the outcome of parliamentary debates and reforms. It is this failure of responsibility that has dragged Asia's third largest economy into its worst slowdown since India's transition in the early 90s from a controlled to a market economy.
A sluggish global economy coupled with policy mismanagement and political deadlock have all led to the undoing of the country's economy. Promises to kick-start economic reforms have been made and broken consistently by the Government for years. The upcoming general election in 2014 and a jam-packed electoral timetable do very little to save the day. What the country awaits now is a stronger economy raring to be unleashed with an animal force. And with the right kind of policy making, bold economic reforms in the right direction and a relentlessly driven government, India will soon be on its way to claim its rightful place among the leading economies of the world!
Disclaimer–The views expressed in this article are the personal views of the author and are purely informative in nature.