New Delhi, India – All currency is neurotic, wrote the late US philosopher Norman O Brown.
The Indian rupee seems to fit this description these days. How do you explain the fact that the currency of one of the world’s fastest-growing economies has fallen more than 27 per cent against the dollar since July 2011? How has the rupee become one of the worst-performing currencies in Asia this year? How serious are the rupee’s neuroses?
There is, obviously, no single reason for the rupee’s debacle.
A cocktail of threats have conspired to drive down the currency. The rupee’s free-fall now threatens to stoke inflation, pull down the markets, and put additional pressure on an economy that has already contracted and is expected to grow by barely seven per cent this fiscal year – down from the nine per cent announced by the government at the beginning of the year. “There is a very strong pressure on the rupee to depreciate,” says Subir Gokarn, deputy governor of the Reserve Bank of India, the country’s respected central bank.
One of the currency’s challenges, as many believe, is India’s steep oil import bill, at a time when oil prices have gone through the roof. India imports more than three-quarters of its crude oil, and the annual bill stands at $154bn. “Large dollar demand, especially by the oil companies, is keeping the currency up and down,” said Commerce Minister Anand Sharma. “Our oil bill is on the higher side, and [is] responsible for the fall of the rupee.”
With Europe teetering on the edge, the US economy still sluggish, and domestic manufacturing shrinking, Indian exports are not growing fast enough – some estimates say exports could be just half of what they were in 2011. Not surprisingly, the current account deficit – net earnings from exports minus payment for imports – has ballooned to a record four per cent of the country’s GDP. The crisis in Europe has led to billions of dollars being taken out of emerging economies, and India is no exception. At home, high interest rates have dampened investments, petrol prices have seen their sharpest increase (more than 11 per cent in a year) in a decade, and inflation is on the upswing again. Ratings agency Standard and Poor’s recent warning that the growing deficit and slowing growth could lead to a downgrade of India’s economy couldn’t have come at a worse time.
“Will the falling rupee finally ring the alarm bells for a government that has been unwilling to push big-ticket reforms?”
The central bank has tried to intervene – buying government bonds worth more than $2bn, for example – to shore up the currency, but with few results. India’s chief economic advisor, Kaushik Basu, who is also a leading international economist, insists that the falling rupee is not an “Indian-specific problem”, and that currencies in all emerging economies are under pressure – citing the South African rand, Brazilian real, and Mexican peso as examples. “The exchange rate problem that you are seeing is probably a bit of a bubble,” Basu told a business news channel. “I do think it’s a bubble but it’s not an India-specific bubble. There is something global going on.”
He may be only partly right, say critics. They say that things would have been better if the government had moved on some key reforms – for example, allowing foreign direct investment in multi-brand retail supermarket chains and aviation. All but one of India’s six main airlines are in the red.
Will the falling rupee finally ring the alarm bells for a government that has been seemingly unwilling to push big-ticket reforms, from which they have backtracked due to pressures from political allies? Analysts such as Munish Gupta believe that stalled growth, a further decline in the rupee and a return to double-digit inflation may force the government’s hand to push through some tough measures to usher in an improved investment climate.
“Remember, it always takes a crisis in India to trigger off hefty economic reforms,” he said. “It was the 1991 balance of payments crisis that led to the unshackling of the economy and the beginning of the liberalising process. If things get worse, which they easily could, we could see some surprises.”
For starters, many believe the government should move quickly on slashing the high fiscal deficit by cutting subsidies. Kaushik Basu talked about the possibility of the government moving on some of the “lower hanging fruit” reforms in the next couple of months, without giving out details.
So will the rupee rumble be a “kick in the pants” for the government, as economist Arvind Subramanian calls it? It’s too early to hazard a guess, and politics may yet come in the way. India’s Congress-led government is reportedly the weakest the country has had in decades, its authority seemingly eroded by scams, indecisiveness and a perceived policy paralysis. But history offers some tantalising precedents: the 1991 shock reforms were also kicked off by a wobbly minority Congress government, under a virtually unknown prime minister called PV Narasimha Rao. So if things get worse, don’t rule out a reprise.