Gear up Growth!!

 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.