Is India heading for a grave Economic Crisis?

(A small outline as to why India might be heading towards a silent storm & a special focus on the falling rupee)

© 2013 Deena Zaidi. All rights reserved.

Reasons for the Crisis

Since 2009, the Indian inflation rate has galloped.
India's exchange rate is overvalued.

Rupee appreciated against the Yuan by about 25 %.
India's trade deficit today is almost twice as large as the Mexico Crisis in 1944.

Export growth has come to a virtual halt over the past year.
The top 10 borrower groups now account for 13 % of banks' outstanding loans.
© 2013 Deena Zaidi. All rights reserved.

Reasons for the Decline of the Rupee

© 2013 Deena Zaidi. All rights reserved.

Reactions By The Finance Ministry
Even though rupee continues to fall, the Indian finance ministry feels there is little need for markets to panic. Even as concerns over CAD (Current Account Deficit) loom over India, especially at a time when policymakers are trying to pull up growth, Raghuram Rajan, the country's chief economic advisor, feels that the drop could be a temporary phenomenon. Both the government and RBI are taking steps to curb gold import in wake of widening CAD, which in turn puts pressure on rupee value.
70
Average Exchange Rate (Rs /US$)

Average Exchange Rate (Rs. /US$)
58.33 45.99 40.26 47.44 45.56 47.92

60 50 40 30

20
10 0
2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013*

YEARS
( *2012-2013 exchange rate is rate as on 10th June 2013)

© 2013 Deena Zaidi. All rights reserved.

What can worsen matters further?

• • • •

Loss of confidence amongst investors resulting in market panic Falling rupee leading to costlier commodity imports in local markets

Failure to address the issue at the right time by RBI
Foreign Institutional Investors who are buyers suddenly might turn into sellers causing RBI intervention causing a market stir

© 2013 Deena Zaidi. All rights reserved.

Reactions from the Indian Media

The Times of India says the rupee is "the most battered" of the Asian currencies and its fall can be attributed to India's "significantly larger current account deficit". The Hindustan Times feels the rupee's fall can "end up fanning inflation“.

The Tribune, however, says that Indian exporters, including IT firms and drug manufacturers, are likely to benefit from the fall.
The Asian Age believes the currency's record decline should be a "wake-up call" for the government which must "stop paying lip service" and take concrete actions.

Source: just-a-few-lines.blogspot.com

© 2013 Deena Zaidi. All rights reserved.

What keeps India safe after all this?
India's long-term growth drivers are intact, the demographic dividend, young population, capacity levels and rising productivity levels could lead to higher and faster growth rate. "The economy's outlook is weak, however, and the currency will remain vulnerable to periodic policy setback and global factors," Deutsche said. "But the major sources of drag to the currency in recent years, high inflation and high current account deficit, are dissipating rapidly, and will help support the currency."

© 2013 Deena Zaidi. All rights reserved.

Is it a Fool’s Paradise?
Reacting to a financial crisis and saying all is well is more like turning a blind eye towards an approaching storm. The markets are in panic because there is information asymmetry. The continuous fluctuation in prices of gold, oil and exchange rates reflect that something is not going right in the Indian economy. It is true that the global crisis impact has its effects but corrective measures without corruption & a strong political stability can lead to a stronger economy. India with its strong central bank, RBI, has all that it takes to get the country out of the crisis , if the need arises. But the action should be prompt and perfectly timed since ‘wait and watch’ policy has ruined many nations in the past.

© 2013 Deena Zaidi. All rights reserved.