From a breakout Nation to a breakdown Nation by Luv Sharma

The economy of India is 10th largest in the world by the GDP and the third largest in terms of purchasing power parity(PPP).For much of the past decade, India waa celebrated as one of the emerging nations destined to rise indefinitely.India's dream run continued from 2003 and lasted for five years with economy recording an average annual growth rate of 9% throughout that period i.e. 2003-04 till 2007-08.It was during these times that stories of a breakout nation vis-a-vis India started doing rounds in World market but this raging Indian juggernaut was brought to a deafening halt as recession hit the world in 2008.Though India survived the recession but its after-effects that reverberated throughout the world affected India too.India's economy & its currency has been on a downward spree ever since.

When India got freedom value of Dollar was at par with rupee.To finance welfare and development activities especially after introduction of 5year plan in 1951 ,the government started external borrowings which required the devaluation of Currency.The rupee was pegged at 4.79 against dollar between 1948 & 1966.In 1975 it was 12 against dollar.During 1991 economic crisis ,a period marked by high inflation, low growth & low foriegn reserves forced India to further devaluae rupee to 17.90.The rupee traded in the range of 40-45 between 2000 & 2010 touching a high of 39 in 2007 during economic boom.This boom that India witnessed was the outcome of a surge in bank credit to the private corporate sector boosted by a flood of foreign capital.The loose monetary policy followed by the US to revive the domestic economy after the dot-com bubble burst and Japan's near zero.interest rates around the middle of the first decade of this century led to the resurgence of the capital outflows to the emerging markets , with investors prepared to take greater risks in search of higher returns.FDI inflows also increased during this period as Indian Government relaxed norms to allow Venture funds/Private equity/Hedge funds to enter Indian Market .This was the story till the dream run lasted but as soon as the lehman brothers collapsed foreign portfolio investment ezpectedly fled for the safety of the dollar.

From 2008 till 2013 rupee has drooped to its lowest when it touched a record low of 62.80 against dollar in August .Present case scenario can.be attributed to many factors ,inflation and High Fiscal Deficit being prominent among them.If we take up inflation in India then one achool of thought argues that inflation in India is because of factors like increased payment through MGNREGA, higher minimum support prices for farmers& recently goverment introduced food bill under which it has committed to spend around Rs 1.3Lakh Crore per annum ..Money spent without increase in storage capacity in case of Food Bill & many infrastructure projects not getting under MGNREGA is bound to cause inflation.Questions are further raised about effective usage of Government money on health & education.Critiques also argue that although development indicators have improved ,money is not being spent as well ,as quality of service has not improved.Add corruption to this and one finds a perfect recipe for inflation.Inflation and a rise in Fiscal Deficit is bad news for exchange rate.Jn foreign exchange markets ,expectation plays a major role.High fudcal deficit & higher inflationary expectations make domestix assets less attractive .Currency depreciates & foreigners pull out money from the domestic capital market.

The fall of rupee every other day is a direct consequence of the above fact.The fall in currency has had its adverse impact on India's economy and will further dent it.India's CAD is likely to increase further as oil and precious metals still contribute to the bulk of India's imports.Moreover as government of india imports oil for its energy needs and then sells it at subsidised prices to companies the reultant Oil import subsidy bill will contribute its share to CAD .India buys oil in dollars and sells in rupees so this part of our import package is going cut a gaping hole in our forex reserves..Government takes short-term loans from international organisations that it will have to reimburse at a higher rate because of fall in the value of rupee.Still there are ways government and RBI can seek to fight it out in this tough battle.Govt can take number of steps like creation of environment for long-term capital investment,Improving of trade relations with Iran which will allow India to import oil in rupee so no need of spending precious dollar.Similarly Govt can try to implement government funded schemes better.Reforms such as Direct Benefits Cash Transfer(DBT)Scheme are welcome as they are expected to plug leakages in the system.Further short-term measures include, curbing imports of gold and silver by raising of import duties, raising of additional funds through ECBs by PSUs,liberalised deposit schemes to attract dollar inflow from NRIs,tighteninh of liquidity to reduce rupee availability in the system and lastly reducing amount of dollar resident Indians can take with them.outside.

The irony of the situation is profound.Indian leaders wete quick to credit a boom to the country's natural strengths, rather than easy flow of capital from.outside world but now they are quick to blame their troubles on the receding glolobal tide.This phase too shall pass as government looks to take some strict measures but toexpect a likely turnaround soon would be a farcry.India has always wanted to be 'next china' in economic terms but beating China to next crisis is not whay Indians had in mind.People are still wondering as to how their breakout nation became a breakdown nation seemingly overnight.