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A case study on the falling Indian Rupee and its future

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The Indian Rupee is facing the biggest crisis since independence. Here is a study that attempts to understand what led to this and how the citizens can resurrect themselves from this.

The Indian Rupee is facing the biggest crisis since independence. Here is a study that attempts to understand what led to this and how the citizens can resurrect themselves from this.

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  • 1. The Indian Rupee Tumbles A Case study on what lead the 3rd fastest growing Asian economy and the next super power to China into a financial catastrophe
  • 2. Introduction  The Indian rupee is facing one of its worst trading value falls in its history. Though several developed countries are looming with a serious economic crisis. The rupee weathered the 2008 American recession and continued to be the most stable economy in these troubled situations. The stable economy attracted several foreign investments and, as the investments grew it forced the government to relook at its foreign investment policies, and open its gates for foreign investors.  India being a mixed economy there were repulsive protests when the economy started leaning towards capitalism. In a multi-party political system the hurdles are many, regional and minority problems tend to supersede the national interest easily and political parties are forced to please these minority vote banks to retain power!  An economy that has to comprehend to the diversities of regionalism, international corporates needs a solid structuring and fundamentals. Is the fall of the Indian rupee a question on the fundamentals of its economic policies? Here is an attempt at understanding this.
  • 3. The Five Year Plans The 5 year plan is the backbone of the Indian economic structure. A program which was started by Joseph Stalin in the Soviet Union has been adopted by several capitalist economies also. The 5 year plans lays the foundations of India’s economic policies and annual budgets. Every financial policy is a weaved around the objectives set in the 5 year plans. In the beginning the 5 year plans of India focused on agriculture. Later, the plans focused on the industrial revolution and foreign investments. The central government was the stake holder of these industries established under these policies and was directly under the control of the Government of India. Entrepreneurship was still a relegated thought from the Indian policy Over a period of time as the economy started to grow broad changes were made to the policies. The aim was to shed its tag of ‘Developing Nation’. Fast forwarding to the 21st century the economic policy has gone through a number of amendments. A economic liberalization happened during the early 1990s where the economy opened up for foreign direct investments. The new neo-liberal policies included opening up of international trade and investment, deregulation, initiation of privatisation, tax reforms, and inflation-controlling measures. The overall direction of liberalisation has since remained the same, irrespective of the ruling party.
  • 4. The Five Year Plans The liberalization opened up the socialist economy that India had been following for ages and paved way for private organizations and entrepreneurs to become contributors of the nations GDP. The policy amendments was widely welcomed in the western world and other Asian countries as India had a geographical advantage in South East Asia with a large coastline along the Indian Ocean . Also the policy helped India pip its neighbor and rival China to attract foreign investments. India’s democratically elected government was also a strong contributor to foreign interest as China was still communist. The economic liberalization catapulted the Indian economy, the GDP started growing and touched the double figure mark in a span of 5 years. The rapid growth and supporting government policies made India haven for several company’s to setup their offshore centers. The Indian population was the other major contributor to this growth. A country with a population of 1 billion and more half it being under the age of 30, was irresistible asset to India’s growth. When everything was so well setup and things were heading in the right direction what led to the next super power from Asia to fall so drastically that the entire world is now questioning its very fundamentals!
  • 5. The Rupee Plummets The current Prime Minister of India Dr Manmohan Singh holds a doctorate in economics from the University of Cambridge, he has also served as a distinguished professor for economics for more than 10 years and served as the finance minister while drafting the economic liberalization policy of 1991. The current finance minister of India P Chidambaram holds an MBA from the prestigious Harvard University and a masters in law. The President of India holds a masters in political science from the prestigious Calcutta university. This is an enviable profile of leadership for any nation. The pedigree of these people at the helm of affairs of the Indian government can be termed the ‘Dream Team’ for a developing economy. With a well bred and financially literate candidates at the helm of affairs the Indian economy should have been the most scientifically stable economy. Why did these literate policy makers fail?
  • 6. The Political reasons In a country where only 58% of the population votes, the elected government lacks the complete support of the nation. This leads to parties concentrating only on these 58% of voters of which a majority belong to the minority and economically backward section. In an attempt to please these vote banks, elected representatives tend formulate schemes through government policies that economically empower them. These policies are nothing but the tax payers money. This has lead to a fiscal deficit which is completely imbalanced for over a long period.For dummies fiscal deficit is a measure of difference between government revenues (in the form of tax) and spending(Eg. Government pension schemes for unemployed). According to the World Bank 32.7% of India's population falls under the international poverty line. Several government schemes(whose source is the citizens tax) are aimed at eradicating poverty. This in a country where only 3% of the population pay personal taxes. The numbers are staggering! How the money flow is managed in a country with more than 34 government funded schemes is a puzzle to most economist. These schemes directly depend on the revenue created from a dwindling sources of revenue and unstable growth rates. With such levels of economic pressures creating policies that would make the nation a Economic Super-power is a different challenge by itself. The political reasons for the rupee fall is simple and clear, policy makers trying to hold on to their position and power and concentrating more on being re-elected, rather than serving the nation!
  • 7. The Social reasons:- India is a country of farmers. The economic policy post independence was structured to empower the farmers and the words of its pioneer leader M.K. Gandhi. To quote Mahatma Gandhi- “Agriculture is the backbone of the Indian Economy”. Lets look at the growth an average Indian farmer has attained over the period. India is to day celebrating its 66th year of independence, it is the third fastest growing nation in Asia and predicted to be the next super power. But how far has the average Indian farmer on whom the first 5 year plans were made reached? In a 2011-12 nation wide survey, 16.3% per 100,000 famer suicides were reported. These are only the official figures in a nation where death reports is largely mismanaged or go unreported. The daily wages of farmers continue to remain under `50. This is the status of the Indian farmer of the 21st century around whom the first 5 year plan was made. Does this mean India was failing with its fundamentals from the day one? Or were the policies not implemented effectively? Yes corruption in government funds and schemes has diseased India largely. But is corruption the only reason? If so, are the elected representatives of the democratic system who are involved in corruption, responsible for this crisis. The number of scams that were reported India is only growing by the day and the money involved in scams are the those collected from the taxpayers, which has led to a fiscal deficit that is crippling its own currency.
  • 8. The Social reasons:- So does it mean the Indian citizens are to blame for not electing competent leaders to lead the nation? Invariably the answer is yes. The social reasons points to only one conclusion lack of strong leadership and the citizens are largely responsible for this. The educated class doesn’t practice its democratic voting rights and the political parties are aware of this and target the vote banks to get into power. The educated class continues to complaint the elected leaders but does little or nothing to make an effort to change this! Several revolutions in the recent past have began. Questioning the elected representatives, from the population which has remained silent in the democratic process all these years is leading a new revolution in India. Policies like the Jan Lokpal have given rise to new accountable leaders with new promises and proven leadership to lead India. Will the average Indian wake up and choose strong leaders to save himself and his country? The 2014 elections will decide the fate of India in the years to come. What is needed is more than leadership. The will and strength to take decisions that are puts India back in the global map of double digit growths and not be influenced by western or international interests.
  • 9. The Rupee’s future The future looks more gloomier than it was before the economy opened up. The fiscal deficit has been badly mismanaged which has lead to a complete collapse in the fundamentals of the policies. The immediate need is to strengthen the reserves and arrest the depreciation of the rupee through inflow of capital. There have been talks about floating a sovereign bond in international markets. If the purpose is to augment the reserves, whatever resources the country raises will be added to RBI. It will be invested in low- yielding treasuries of foreign governments and deposits of international institutions. Modifications to the foreign investments and NRI(Non Resident Indians) investment policies must be made at the earliest. Unlike the depositors, who are mostly semi-skilled migrant blue collar workers sending funds to India for domestic maintenance, foreign currency account holders (NRIs) are high net-worth individuals settled abroad. They comprise professionals in various fields who are looking for good yields against the near zero rates prevailing in the West (around 0.15 per cent for one year). Although the interest is free of income tax in India it is not so in the US. Thus, the after-tax difference in interest income may not be much under the current rates in India. The RBI should revisit the issue and consider removing the remaining restrictions on interest rates on foreign currency deposits. It will give a significant boost to inflows. Banks may be expected to be responsible to fix the rates at a viable level. The cost, including the transaction cost, would be less than that of the bond issue. This will increase the money flow and provide stability to the rupee.
  • 10. Conclusion Inspite of all these blunders from the policy makers and bleak future of the Indian currency, the situation puts India to script a new story of resurrection and rise from the fall. The lack of leadership in the current ruling party at New Delhi is one of the major reasons for the state of India. At the end it’s the political reasons that has led to this crisis. A country which produced Nobel Prize winning economists like Amartya Sen is facing an economic crisis that has deterred its growth. The leaders elected in the upcoming 2014 national elections will play a crucial role in shaping the country’s economic growth. Narendra Damodardas Modi has emerged as one of the front runners in the choice of leaders. Modi has the led the state of Gujarat from dead rubbles of the 2001 earthquake that destroyed 4 lac homes to the largest contributor of GDP. The ruling BJP government led by Modi has received accolades from several corporates for providing state of the art infrastructure. It has also balanced the agriculture and farming with industrialization. In 2010 Ahmedabad, the capitol of Gujarat was ranked as the 3rd fastest growing city in the world by Forbes magazine. The BJP (Bharatiya Janata Party) which led the India Rising campaign during its power at the center is the only ray of hope the average Indian has for a strong leadership to lead India. This study is not aimed at any political promotion of interests. It is only an attempt to put forward the truths and spread the need for a strong leadership for India. Democracy is an individual choice and nobody can be forced to make their choices. But this study would is aimed to throe lights on what is the solution that could solve the crisis Indians are facing and provide a solution to its concerns in the future.
  • 11. Thank you Share this if you liked iFollow Me! @kartzb /kartzb