THE SINKING ECONOMY By Vidyadharan Nair[1]

 

Abstract:

A sinking economy of India is pictured, especially since 2011. The Rupee Conundrum resulting from the sliding of Rupee, attributed out of the concerns that US Fed may curtail dollar supply by tapering off bond buy back, has pushed up demand for dollars. The rate of inflation exceeds to that of US, pushing down Rupee.The current account deficit of $ 85 billion marks a terrible scenario and Foreign  Institutional Investors (FIIs) have sold over 5.4 billion worth of bonds in 2013 in the month of June alone.  The impact of this scenario can be statistically interpreted over the reference period of 2008 to 2013. RBI is not much worried due to the reason that most emerging market and Asian currencies have weakened against dollar and commodity prices have softenedeasing pressure on import bill . Again a gradually weakening rupee will help to correct current account imbalance and further the share of short term debt in overall foreign loans is very low. As such,  the monetary authority held on unconventional measures, unlike Bank rate and CRR(Cash Reserve Ratio). As Rupee sliding continues, Government says no need for panic. Indian economy is strong and we will turn it around (the words of Commerce and Industry minister). The Government saysthe decline in the domestic currency was a reflection of irrational sentiment.

Key words: Bond buy back, FIIs, bank rate, CRR.

INTRODUCTION

In the paper currency standard of today, we recognized an Exchange rate system between currencies which are reflective of the relative state of the two economies and therefore exchange rate become the key indicator of the state of the economy. Thus currencies  may be appreciated or depreciated in terms of another currency as per the demand and supply of the currencies. A mild fall in the value of currency or a fall  at a particular level from the conscious policy of the government (devaluation) is desirable to correct a deficit in balance of payments. But the current scenario of the sharp depreciation of rupee has broughtworst results to the country. The rupee has plummeted over 20 % since April 2013.

The current depreciation of Rupee is really not a problem but merely the symptom of a problem.  Of  course, global capital market reaction in anticipation of the changes in US monetary policy is a factor for this catastrophe, rather the fundamental problem lies within the country itself. Experience validates that Rupee is losing its competitiveness which may be attributed in turn, out of the high rate of inflation relative to our trading partners and  an increase in the current account deficit..

  1. PROPOSED APPROACH

The primary concern of the approach is to work out  the reasons for this scenario.

1 ) Dollar Strength. Since US Federal Reserve chairman Ben Bernanke first hinted at slowing bond buying under the so called quantitative easing programme, triggering a world wide sell- off in bonds and equities, the rupee has lost  6.69 % – the second biggest loser among the emerging market currencies (the first being Brazil’s Real).

2) Weakness in Domestic Equities. The BSE Sensex has been in a downslide due to sell off by foreign institutional investors, who have sold about Rs. 3900 crore worth of indexfutures. This is a hedging move as FIIs expect stocks to fall in the near term.

3) Demand from Oil and Gold importers. Oil and Gold imports account for 35 % and 11 %of India’s trade bill respectively which necessitated rising demand for dollar.

4) Reduction in supply.Organisation of petroleum exporting countries ( OPEC ) thought of a fall in profits if the same trendcontinues and decided to  curtail production, leading to artificial scarcity  in oil in international market thataccentuated  oil prices again and the import bill.

A statistical  analysiscan highlight  a Sinking Economy.

  1. Shocking down turn in the growth rate. The growth rate of the country has fallen from 3% in 2011 to 6.2 % in 2012 and further to 5% in 2013 till August.This is visualized in Graph (A). In contrast to this situation, the country traced 6.7 % in 2009 to 8.6 % in 2010 and 9.3 in 2011.

                                                                                                          Graph (A)

 

  1. Current Account balance in $Billion.

Current Account Deficit (CAD) is an index of the extend to which country’s economy is functioning on borrowed means. India has a worsening CAD, specially from 2010. In 2010 the deficit was $ 52.3 billion which has worsened to $60 in 2011 and $80.1 in 2012. This is highlighted in graph ( B).

                                                                                                      Graph (B)

 

3.The pressure of inflation.

India has to contend with high inflation, specially from 2011, where in 2011 it was 8 % (consumer price inflation) increased to 10% in 2012 and further to 11.05 % by August 2013 [(noticeable in graph (C).]

                                                                                                                     Graph (C)

 

  1. Indian currency has recorded the sharpest fall against dollar.

Graph (D) visualizes this scenario where in Jan 2 2011 it was 44.7 Rupee per Dollar, jumped to 53.3 in 2012.Again in May 2, 2013, it reached 53.8 and the sharpest fall in the value of Rupee. The Rupee in terms of Dollar boosted to 63.13.

                                                                                                                      Graph (D)

 

  1. The collapse of the share market is noticed by the fall in the sensex below 19000.

The report till the middle of August 2013 shows that there is a decline of the value of share capital of the listed companies from $ 1 lakh crores in toto and she was the one among 14 business centres with the value of share capital exceeding $ 1 lakh crores.Similar is the case with respect to Russia, Spain and South Africa. Indeed India attained this landmark in 2007 June and in September 2008 again lost her position.Further in 2009 May she was resuming the position.The major reason for this situation is the collapse in the exchange value of rupee.

RBI has taken the responsibility to reduce rupee volatility to a large extent. There is the say from RBI that it is not defending a particular level of the Rupee, but a stable currency regime. In this respect the measures include –

  1. Banks borrow from the RBI at 7.5%, under the liquidity adjustment facility and 1% of the total deposits comes under this facility and now reduced the rate to 0.5% to restrict liquidity.
  2. Under the Marginal Standing Facility (MSF), meant for additional provision of liquidity extended to banksby RBI, the earlier interest rate of 8.25% has hiked to 10.25%.
  3. To reduce short term liquidity, RBI instructed that in the current rate of 4% as CRR (Cash Reserve Ratio), they need to maintain 99 % as a daily basis from the earlier figure of 70 %.
  4. RBI has tightened norms for import of gold which accounts for 11% of our total imports.
  5. To attract new NRI deposits RBI has liberalized CRR and SLR requirement for incremental NRI deposits over 3 years.

These measures, possibly may be temporary as they are non conventional

What is the actual stand of the government? The Finance minister P. Chidambaram announced a 10 point programme to invigorate the economy in August 27, 2013

  1. Export promotion by making use of the favorable situations available in the sectors.
  2. Steps will be taken to promote production in coal and Iron ore sectors by liberalizing the legal and technical constraints.
  3. The deficit financing must not cross 4.8% this year.
  4. Current Account deficit will be curtailed to $ 7000  crores.
  5. Foreign exchange reserves will be increased.
  6. To start long term projects, government decided to put Rs. 1.87 lakh crores
  7. Steps will be taken to augment the capital base of public sector banks.
  8. Steps will be taken to promote agricultural production by making use of monsoons.
  9. To promote production of 20 selected basic sectors that excel in the economy.
  10. To activate the investment cycle, a congenial atmosphere will be created.

Results.

At first we traced out the diverse reasons for the sinking rupee. We visualized a sinking economy by across section analysis of the economy in different respects such as Growth rate, Current Account balances, rate of inflation, the value Indian Rupee and the Share market Sensex.  The economy was worsening since 2011.RBI has taken up its own initiatives,  but in  unconventional  ways,  signaling  that they are temporary. As RBI has not taken up its traditional weapons, critics are of the opinion that the recent policies will further slow down the economy. There was much contradictions with the opposition in the parliament about the worsening situation that ultimately gave birth to the 10 point programme of the finance minister.

Conclusion

The deteriorating situation of the economy is the highlight of this paper which really needs right and prompt policies. During 1998 Post- East Asian crisis, the then RBI governor, Bimal Jalan, hiked bank rates and CRR by 200 basis points to protect the rupee from further depreciation. In contrast to this, RBI has taken up only nonconventional weapons of correction. “As Indian Rupee tests 65 level against the greenback, the steps taken by Government and RBI to defend the rupee  are proving too weak. The precarious monetary situation, coupled with shrinking industrial production is portraying an economy deep in distress”( Anand Mishra )

We anticipate real policies to recover the economy and there is the need for proper evaluation of the policies. Media and  Literature are the effective means for this  realization.

References.

JyotindraDubey, “The crumbling BRIC”, Business Today, monthly, Sept 15, 2013

Rajendran, “Tough to tame,the sinking Rupee” Money Indices, Vol 1, issue 3, Sep 2013

Anand Mishra, “ Defending the Rupee”, Money Mantra, monthly magazine, sept 15,2013.

Pranav Mishra, “Rupee Devaluation”, Business and Management Chronicle, August 2013, vol 17, No. 7.

Jottings, “The Rupee Conundrum” Business world, RNI NO. 39847/81, 9 Sep. 2013.

MalayalaManorama,  “10 point Development programme” Daily News paper, August 28,2013.

The Times of India, “As Rupee slide continues, Government says no need for panic” Daily News paper, August 29, 2013.

The Financial Express, “India needs  a lot more reforms, not less : FM, Daily News paper, August 28, 2013.

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[1] Research scholar,  Bharthiyar University, Coimbatore, India

Supervisor Dr. Rajendran, Assistant professor in Government Arts College,

Coimbatore, India