From a breakout Nation to a breakdown Nation

The rupee has collapsed, stock market is falling – has India moved away from a breakout nation to a breakdown nation in just a few months?

A crisis point that Indian Economy is facing is the all-time lowest point that it had had in past. Experts have their own views on this, if it will be a long term or a short term crisis. If this situation is persistent and it continues to be like this, India is likely to be declared junk status. A short term loan of $170 bn  standing to be paid by March 2014 is making the situation worst. Rupee has collapsed and the stock markets are in a free fall.

At the time of independence Indian economy was at par with no foreign debt and economy was in equilibrium. With subsequent requirement for foreign investment the dollar rose. With a GDP growth of 8% in 2008-09 India was experiencing a boom. A slowdown in US economy was a gain for India. A free fall in the rupee in last few months has been erratic for the Indian economy. This has certain internal as well as external factors attached to it. A mismanagement of Economy by UPA-2 government along with certain macroeconomic factors has led to a slowdown of Indian Economy.

Current Account deficit is considered to a major factor behind this slow down and downward movement of rupee against dollar. CAD occurs when total imports are greater than total exports thus making India a debtor to rest of the world. Strengthening of Dollar in the last six months the dollar has strengthened by 3.52 percent with the strengthening of the US economy. The dollar has been rising on signs of growing economic momentum and talk of an early end to the Fed’s stimulus effort.  This is something which is beyond the control of the Indian Government and it is hampering the recovery of the rupee. This is one of the immediate reasons for fall of rupee that the US Economy is doing better. Money is flowing to United States. Insufficient inflow of FDIs and outflow of the foreign investments. The downfall in the Indian economy has worsened the situation and the government is unable to generate heavy capital inflows. Despite all the government effort to allow Foreign Direct Investment (FDI), there hasn’t been significant FDI inflow. The US federation has withdrawn some of its bond buying programmes resulting in a sudden outflow of money that in return has left India far behind in the race .Foreign investors has been pulling out of the Indian economy. The month of May has seen a record outflow of foreign investments of Rs. 44162 crore. With the giants like Posco pulling out of its Rs. 30000 crore steel plant project in Karnataka followed by ArcelorMittal pulling out of its Rs. 50,000 crore project in Odisha due to delays and land acquisition delays.

The rising import bill is one of major concern and is has hindered the government effort to tackle the falling rupee. Oil accounts for 35% of the total imports and gold 11% on India’s current bill. Oil and gold imports account for 35 per cent and 11 per cent of India’s trade bill respectively. There has been an uninterrupted demand for the dollar from the oil importers pushing the rupee lower. Likewise the falling gold prices have made the central bank to reduce imports, which increases CAD and hits the currency directly. Indian economy requires a strong structural reform to maintain a positive balance of payment. According to the latest figures released by the RBI the CAD has fallen down to 1.2% of GDP on the back of turnaround in exports and decline in gold imports.

The Gross Domestic Product (GDP) has hit its lowest patch in the last 10 years. With fall of the GDP to 4.8%, it had significant effect on the stock markets and the falling rupee. The manufacturing, mining and the agricultural sector has faltered and investors have become cautious of investing in India.

The central government has unraveled a multipronged strategy to bring about an increment in the inflow of dollars and limit the outflow to compensate for the sliding value of rupee. A planned increase in import duty has been exercised to shore up the decrement in rupee. Some of the other possible remedies that can be emphasized are:

• The customs duty on several red-hot imports like gold and silver is on the rise as it’s a strategic movement by the central government to ease the gap between dollar and rupee.
• NRI bank deposits can be made more attractive and foreign loan norms eased.
• The government has also decided on three public sector institutions based on finances to raise funds in dollars through bonds.

• Electronic goods top the list when it comes to making big business. In order to stabilize rupee a significant increase in customs duty on Electronic goods needs to be exercised.
• Another point that can be kept on the anvil is that some imports should be denied. The products can include crude palm oil, copper and certain varieties of coal.

The best business prototype anyone can have is to spend in rupees and earn in dollars, which is what the giants of India Inc, including the top IT companies, excel in. Basically the sector which is targeting exports for its industrial operations are the one wins the game.

Dollar appreciation would be positive for sectors such as IT, pharmaceuticals, hotel, textiles and automobiles which have the total foreign exchange earnings of these firms are far greater than their forex spends. As much as the rupee weakens, the foreign exchange earners gain provided the other factors remains constant. A sharply declining rupee triggers inflation, broaden the current account deficit, hits investor sentiment and creates burdens for organization with high exposure to foreign debt. The government and the Reserve Bank of India have taken several reform initiatives to resist the downturn, but their success stories are looking gloomy. As a whole we can say that though weakening rupee is the reason for someone’s smile it is a real threat for the country’s overall fiscal health and increase the current account deficit heavily. But in my opinion this huge downgrade is a temporary phenomenon and the rupee is really oversold. Now the Central bank and Government should work hand in hand and find out the policy measures to stabilize the frightening scenario. I personally hope a further cut in SLR to ease the liquidity to save rupee and also import duty hike in gold and other related materials. RBI can buy bonds to ease liquidity in the market. Finally we can say that the situation is tight and challenging for us, but we can not only hope for the best but also should contribute the most to get back Indian economy in the driving seat.