it is better to not let growth go off-track because if it cripples rest will fall apart. Exchange rate volatility is to some extent bearable not growth slowdown.
Finally
it is worded by trusted sources like ratings agency Crisil, Morgan Stanley and
Bank of America- Merrill Lynch that India is heading towards sub 5% growth i.e.
the so called Hindu rate of growth. Their predictions are crucial as these are
taken as yardstick by foreign and local investors to judge India as investment
destination. Unfortunately RBI’s liquidity tightening measures meant for supporting
rupee couldn’t do that but it surely worked to cripple growth prospects of the
country. Now Govt. and RBI are in dock whether to focus on symptoms i.e. rupee
fall, inflation or choose to operate cause i.e. low growth. Cure for one is
pain for another. Indian economy has thus stepped onto a vicious cycle, getting
off from which is a tough call!
Undoubtedly
it is rupee’s weakness against dollar which is the major concern and that is
what RBI did by making it tougher to reach out to cheap loans so that
speculation in currency could be curbed. But increasing lending rates worked
soar for consumers by reducing their purchasing power and for industrialists by
reducing their investment power which could have otherwise translated into
higher growth. It is worth to mention that India’s GDP is currently running at
5% which is already very low given its potential yet instead of boosting it; it
is being made to suffer even more.
One of
the important reasons for weaker rupee is falling external fund-flows i.e. FDI
or FII but the tricky part is that it is GDP rate in itself which is widely
considered to be an important parameter to look at before investing. Having
said that, India can never attract foreign-inflows keeping growth at bay and
thus can never get to a stabilized exchange rate. RBI’s outgoing governor
Duruvvi Subbarao rightly said that India has become a victim of impossible
trinity i.e. it cannot have stable exchange rate, free movement of capital and
independent monetary policy at the same time.
India
has been exuding unfavorable sentiment for many months in past. While demands
to lower down interest rates were pervasive, RBI had to go for the opposite.
Now Industrial production is surely going to go even down in the absence of
weak domestic demand due to decreasing purchasing power. Not only demand, India
also suffers from supply side bottlenecks. Thus there are sheer lack of
positives which can stimulate growth.
While
monetary policies by RBI do play an important role but govt. policies and the
way govt. functionaries work also influence foreign investors to a great deal.
Not only falling growth but issues like exorbitant land price, red-tape in
environmental clearances, higher power and fuel tariff etc also dampens the
hope of profit one can gain via investing in India. Thus fixing loopholes on
the part of RBI and Govt. alike is must. RBI did fire its attempt but in vain.
Now Govt. seems to be taking efforts by easing FDI norms and Special Economic
Zones (SEZ) norms, but this will also do no good. Govt. must understand that
FDI isn’t going to come in as long as profit prospects are not palpable by
foreign investors which are not due to legislative deficit, infrastructure
challenges and most annoying one i.e. the dereliction of duties. Being in an
election year is an added suffering.
With
the announcement that Raghuram Rajan is going to be the next governor, all
hopes are rested on him that he will roll back monetary tightening measures in
order to let banks breath so that growth can be rescued but at the same time he
will have to check that rupee doesn’t lose much ground against dollar. A
difficult task as short-term external debts are coming to maturity, funding of
which will require dollar putting downward pressure on rupee.
To
conclude, accepting that it is certainly a tough job to make a balance between
ruining growth and weakening currency in current circumstances, it is better to
not let growth go off-track because if it cripples rest will fall apart.
Exchange rate volatility is to some extent bearable not growth slowdown. It is
time that RBI and Govt. fix the nail at the right place instead of hammering
around on wrong places.
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