From a breakout Nation to a breakdown Nation

The rupee had plunged to an all-time low against the dollar and its fall has become a subject for debate. India, which was a potential ‘breakout nation’ in past is now a days facing an economic and political crisis. It is now near the bottom of the emerging markets’ list of countries that will break through their troubles. Majority of India’s troubles are self-inflicted, but some are part of the global sweep of economic events.

At the time of independence, India had no foreign borrowings and the rupee was at par with the dollar. With the introduction of the 5 years plan and the subsequent requirements for foreign investments the dollar slowly rose. In the era of economic liberalization in 1991, there was a sharp devaluation of rupee and the rupee had dropped to Rs.24.5 against a Dollar. It continued and the rupee had hit an all-time low of Rs. 68.85 against a dollar on August 2013. Factors identified and responsible for fall of Indian Rupee against Dollar are Current Account Deficit and Poor economic growth in terms of GDP.

India’s current account averaged a deficit worth 1.5 billion USD since 1947 until 2013. In the first quarter of 2013 the CAD was 18.1 billion and at present it has gone up over 20 billion. India's these fundamental terms have deteriorated steadily since 2007. The current account deficit has exploded from $8 billion to $90 billion; it now equals 5% of GDP, twice the level academic studies suggest is sustainable. Meanwhile, many corporations have been on a borrowing mode. Since 2007, borrowing by the 10 most indebted companies has risen six-fold to $120 billion, with much of it denominated in foreign currencies.

The downfall in the Indian economy had 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. US federation had also withdrawn some of its bond buying programmes resulting in a sudden outflow of money that in return has left India far behind in the race .Foreign investors started pulling out of the Indian economy.

As stated above, adverse point came in may, when signals that the US Federal Reserve was serious about tapering off its quantitative easing programme triggered a sharp rise in long-term interest rates in the US, drawing dollars home. The trickle of money out of emerging markets turned into a flood. In India, more dependent than ever on foreign capital, the rupee has fallen 20% since May - the largest decline of all emerging market currencies.

Economic growth has also fallen to an average of 4% in emerging nations. In India, it is barely 5%, disappointing for a country with an income of only $1,500 a head, compared with the emerging market average of nearly $10,000.

Indian government assumed strong investment and savings rates would keep growth above 8%, and dismissed inflation as the natural price of prosperity and crony capitalism as a normal symptom of early-stage growth, rather than recognising it as the serious decease that leads to a backlash against wealth creation.

After the advent of new governor of reserve bank of India and his policies on very basic instrument like repo rate, cash reserve ratio, SLR and many other fiscal matters, the falling trend of Indian Rupee was somehow controlled. Initiatives taken by RBI during this time was criticised by economist initially but accepted when it shows curbing on falling down of Indian currency.

Government of India and RBI are the main players in the field of economy in India and global world. Both are empowered to regulate and control the economy by respective area’s instruments. Government of India has although taken immediate action to control the down fall of Rupee and Indian economy, yet failed in all areas. This time RBI initiatives have somehow controlled the economy.

A sharp decline in rupee affects inflation, current account deficit and the economic growth of our country. The government and the Reserve Bank of India both have the power to regulate and monitor the economic and fiscal policy for India. They should work hand in hand to stabilize the situation and minimise the gap between Indian Rupee and Dollar. In present scenario of global economy uncertainty, both should be aware and updated on latest economic trends in world economy and its effects over India. They are required to be equipped with diversified business areas apart from traditional dependency on borrowing and imports, keeping eagle eye on CAD, Forex Reserves and GDP. External borrowing and Imports should be minimised and promotion to be given for maximum export of indigenous goods and services. It will help in strengthen the health of economy and Indian Rupee as well in global market.