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Modi has to break from the past, else Re and economic slide to continue

The crashing rupee, falling interest rates, flight of capital from stock markets, not jettisoning Manmohanomics and no new economic paradigm are affecting Indian economy.

The rupee unfortunately is touching the level of August 2013, when it bottomed to almost Rs 69. It has already slumped to the level of Rs 67.

It is a warning sign. The advantage of crude prices falling to $ 40 is not coming to Indian economy. The falling rupee is negating the benefits and volatility in commodity prices continue. Inflation that has officially come down may once again skyrocket putting severe pressure on government finance apart from social and political unrest.

It seems since independence the country had not been able to manage the rupee parity with foreign currencies in pragmatic way. The Indian rupee, which was on a par with the US dollar at the time of Independence in 1947, has depreciated by a little more than 65 times in 69 years.

It moved downhill since the 2008 western economic meltdown despite the fact India was directly not hit by it. But policy failings and liberal incentives to corporate added to the people’s woes. The 2008-2013 had been the period when some corporate clocked highest profits of up to 142 per cent a year and average profits were over 40 per cent. High profits have been adding to the inflationary trends but the poor consumer laws and government checks allowed the mayhem to continue.

This adds to the erosion of the value of rupee. The currency value, it is common knowledge, is based on the intrinsic value – purchasing power, and that is decided by the prices in market. Rupee everyday buys less and less.

External factors are responsible for determination of the international value to an extent. But if a country’s economy is not doing well, political management is weak, market is allowed to be determined by speculators and everything works for the benefit of some large groups it tells severely on its currency.

The cacophony for reducing interest rates, which has recently hit Indian depositors hard – they lost billions during the past few months, for the benefit of again large borrowers, is again making rupee weaker. High NPAs (losses) of banks, officially pegged at Rs 3 lakh crore, though in reality may be about Rs 5 lakh crore, is hitting the banking sector. Governor of RBI Raghuram Rajan has expressed severe concern in the RBI annual report on  “booster shots”, which he says, “may lead to a collapse when reality hits”.

Lower interest rates particularly at a time when the US Federal Reserve is considering increasing it is not a wise decision. It is only likely to lead to flight of capital – dollars – to the US, where FIIs and pension funds can fetch higher rates than in a fledgling Indian stock market. The stock exchange is likely to remain bumpy in the coming days.

Fall in portfolio investments can cause loss in foreign exchange reserves. More so as Indian exports are falling.

Another aspect is the better employment record of the US during the past few months. This gives strength to the US economy to invite more investments. India again is not creating new jobs. Various data show losses of jobs in industry and even the farm sector. The prime minister’s initiatives on skill India and Digital India may take time to show impact.

Worldwide, this country did not learn, jobs in the industry, including manufacturing, have been falling. India is at mistake of stressing more on industry ignoring the farm sector. Agriculture can not only create jobs but also ensure stable supplies and prices – critical aspect for growth at even keel.

India is also not investing in solar and alternative energy research despite its abundance. A proper policy for non-grid linked domestic solar power can reduce crude import bills and dependence on fossil fuel. It can make fuel cheaper and shore up individual coffers. The perspective is missing.

Ignoring the writing on the wall is leading to fall in FDI as well. FDI’s have remained low on the sidelines of waiting for concrete action on – Tax (retroactive taxation, unclear rules), investment (FDI norms), and foreign exchange convertibility  (Re -fully floating). This has prevented major investments coming in and kept the Rupee under pressure.

The RBI reports that FDI in India decreased to $ 1749 million in June,2015 from $ 3509 million in May. The FDI averaged  $ 1078.97 million from 1995 until 2015, reaching an all time high of $ 5670 million in February, 2008 and a record low of minus $ 60 million in February, 2014.

The biggest bane of Indian economics has been Manmohanomics. It has made rich richer, increased the rich-poor gap and added the largest numbers below the poverty line. Today the country has the highest number of absolute poor with a family income of around Rs 5,000 a month while commodity prices skyrocket. Keeping such large numbers out of the market dampens the spirit of investors.  The middle class owing to high prices are slipping to the near poverty line. All this once again add to the rupee woes.

Added to it is the increasing gold import as a safety against the falling rupee and uncertainties in economy. This again hurts the rupee.

It appears that over the years the economy has been not much of concern for the governments. The political class is too dependent on bureaucrats who may be wise but lacks the wisdom. It is leading to ad hoc decisions, which further complicate the course.

The Narendra Modi government has many knowledgeable people in the party fold. They have ingenious ideas and can suggest how to break away from the pernicious anti-people Manmohanomics and make rupee stronger.

It needs a paradigm shift, a bold step to take the economy on a different pro-people path with a view to strengthening the fundamentals of Indian economy. It would call for drastic real changes to empower the people, agriculture, industry and start activities in all spheres.  The country is awaiting Modi to break from the past and lead to that paradigm shift.

 

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