by Pranjit Agarwala
India is facing an economic emergency with the free fall of the rupee and a high rate of food and fuel inflation despite comparative stability in the global crude oil and commodity markets. Fluctuations in the international currency markets are quite common and any excess volatility is normally absorbed by the economy's inherent structural checks and balances. But the Indian economy's built-in course corrections, necessary in a globalised economy, are apparently weak because in the past two months the rupee has depreciated from Rs 53.50 to a historic low of Rs 68.56 to the dollar. It has also depreciated significantly against other currencies of the world and experts expect it to breach the Rs 70 mark soon. What is alarming is the government's failure and near paralysis in arresting the downslide thus exposing the hollowness of its oft-repeated claim that the fundamentals of the Indian economy remain strong.
The primary reason for India's current economic crisis is a deceleration of growth. Blaming only the external factors for the crisis is misleading considering that the economy was able to maintain its growth even after the global recession in 2008. This was possible because of the fiscal consolidation achieved earlier during the years of economic boom which has since been squandered by misgovernance and fiscal mismanagement. The UPA-II's tenure has been marked by political populism, financial profligacy, policy paralysis and corruption, instead of sound executive decisions to strengthen the economy and generate growth. All the economic growth indicators have reached decadal lows. International rating agencies have also been critical of the government's functioning placing India almost at the bottom of all socio-economic indices.
Internally, the huge fiscal deficit, up from 2.5 per cent of the Gross Domestic Product (GDP) in 2008 to 5.9 per cent in 2012, has increased government borrowings and debt. Government borrowings have crowded out private sector investments adversely affecting trade, commerce and industry. Non-plan government expenditure has also diverted funds from the development of socio-economic infrastructure essential for growth. Further, the government's indecision, excessive red tape and high levels of corruption have eroded India's credibility driving away both domestic and foreign investors. It is a paradox that while India is desperately wooing foreign capital investments, Indian companies have invested billions of dollars abroad.
Externally, India has a current account deficit (CAD) and an adverse balance of payments (BOP) position mainly because its imports far outstrip its exports. In 2012-13 India's CAD was 4.8 per cent of the GDP or $ 87 billion. The country has foreign exchange (forex) reserves of $ 279 billion which is an import cover of less than seven months compared to an import cover of seventeen months in 2003. The strengthening of the US economy has also caused a reverse flow of capital from the emerging economies of Asia. However, unlike India and except for Indonesia, almost all the other countries have a current account surplus and forex reserves to cover imports for nearly two years. This enables them to support their currencies from any excess volatility caused by large outflows of foreign capital. India's weakness on both counts has allowed the rupee to depreciate far in excess of its real value. In 1947 India enjoyed exchange parity with Rs 1 = $ 1.
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This is no time for the government or Opposition to indulge in rhetoric or politics. The government must bring down the fiscal deficit by adopting austerity measures and cutting down on wasteful government expenditures. Unwarranted subsidies that cater to the interests of lobbies must be abolished. The government also cannot afford to continue splurging money on populist schemes for poverty alleviation etc. without any accountability because the ultimate beneficiaries are not the poor but a coterie of middlemen. The government must work but with transparency, decisiveness and accountability so that investor confidence is restored.
Inflation, particularly of food and fuel at consumer prices, has to be curbed. The Reserve Bank of India's (RBI) tight monetary regime that sacrificed growth to check inflation has not been fully effective because of the country's parallel economy run on black money which is fuelling inflation. There has to be a crackdown on black money and the billions of dollars stashed abroad must be retrieved to help strengthen the rupee and boost India's forex reserves. It is much more viable to bring down fuel subsidies by strengthening the rupee than by triggering inflation every fortnight by increasing fuel prices. To bring down food prices inter-mediaries must be removed from the supply chain and agricultural infrastructure improved so that the small farmers have direct access to the market.
Till the rupee stabilises priority must be given to the import of capital goods and equipments over non-essential consumer products, branded foodstuffs, high-end luxury goods, vehicles etc. Although the import of crude oil and coal are unavoidable, there is tremendous scope to boost domestic production. According to M. Veerappa Moily, the Union Minister for Petroleum and Natural Gas, India has hydro-carbon reserves conservatively estimated at over $ 1 trillion and can attain energy security. But these have remained largely under-explored because of a lack of trust between the regulator and the exploration and production companies and inter-ministerial discords which have impacted decision-making. In the meanwhile India continues to pay $ 160 billion annually for energy imports.
However, the depreciation of the rupee has made Indian goods internationally price competitive and provides a window to boost exports. Moreover, China has become a high cost economy with increasing labour wages. India, which has a huge pool of labour at compara-tively lower wages, can now become the hub of global manufacturing provided its manufac-turing base is widened. Priority must therefore be given to developing the unorganised labour-intensive medium, the small and micro enterprises (MSME) sector. MSMEs should be organised into industrial clusters so that they get the advantage of easy availability of land, labour and logistics to effect economies of scale and become competitive. Equal focus must also be given to agro-industries to generate rural employment and effect value addition to agricultural produce. The best way to eradicate hunger and poverty is to give the people an opportunity to earn a decent livelihood.
The author is an entrepreneur and freelance writer based in Guwahati.