Is India heading for a grave Economic Crisis?


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India has one of the largest and fastest growing economes. It is one of the members of BRICS and forms a part of G-20. With a huge population, India now faces a high Inflation rate of 9.39% (CPI) as in April 2013 and a high CAD (Current Account Deficit). Eurozone crisis and in-house politics worsen matters further. Is all well in India? A brief & closer look at what is happening in the country.

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Is India heading for a grave Economic Crisis?

  1. 1. Is India heading for a grave Economic Crisis?(A small outline as to why India might be headingtowards a silent storm & a special focus on thefalling rupee)© 2013 Deena Zaidi. All rights reserved.
  2. 2. Reasons for the Crisis• Since 2009, the Indian inflation rate has galloped.• Indias exchange rate is overvalued.• Rupee appreciated against the Yuan by about 25 %.• Indias 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.
  3. 3. © 2013 Deena Zaidi. All rights reserved.Reasons for the Decline of the Rupee
  4. 4. Reactions ByThe Finance Ministry40.2645.99 47.44 45.56 47.9258.330102030405060702007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013*AverageExchangeRate(Rs/US$)YEARS( *2012-2013 exchange rate is rate as on 10th June 2013)Average Exchange Rate (Rs. /US$)Even though rupee continues to fall, theIndian finance ministry feels there is littleneed for markets to panic. Even asconcerns over CAD (Current AccountDeficit) loom over India, especially at atime when policymakers are trying to pullup growth, Raghuram Rajan, the countryschief economic advisor, feels that the dropcould be a temporary phenomenon. Boththe government and RBI are taking steps tocurb gold import in wake of wideningCAD, which in turn puts pressure on rupeevalue.© 2013 Deena Zaidi. All rights reserved.
  5. 5. • 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 sellerscausing RBI intervention causing a market stirWhat can worsen matters further?© 2013 Deena Zaidi. All rights reserved.
  6. 6. Reactions from the IndianMedia The Times of India says the rupee is "the mostbattered" of the Asian currencies and its fall can beattributed to Indias "significantly larger currentaccount deficit". The Hindustan Times feels the rupees fall can "endup fanning inflation“. The Tribune, however, says that Indianexporters, including IT firms and drugmanufacturers, are likely to benefit from the fall. The Asian Age believes the currencys recorddecline should be a "wake-up call" for thegovernment which must "stop paying lip service"and take concrete actions.© 2013 Deena Zaidi. All rights reserved.Source:
  7. 7. What keeps India safe after all this?Indias long-term growth drivers are intact, thedemographic dividend, young population, capacitylevels and rising productivity levels could lead tohigher and faster growth rate. "The economysoutlook is weak, however, and the currency willremain vulnerable to periodic policy setback andglobal factors," Deutsche said. "But the majorsources of drag to the currency in recentyears, high inflation and high current accountdeficit, are dissipating rapidly, and will helpsupport the currency."© 2013 Deena Zaidi. All rights reserved.
  8. 8. Is it a Fool’s Paradise?Reacting to a financial crisis and saying all is well is more like turning a blind eye towards anapproaching storm. The markets are in panic because there is information asymmetry. Thecontinuous fluctuation in prices of gold, oil and exchange rates reflect that something is notgoing right in the Indian economy. It is true that the global crisis impact has its effects butcorrective measures without corruption & a strong political stability can lead to a strongereconomy. India with its strong central bank, RBI, has all that it takes to get the country out ofthe crisis , if the need arises. But the action should be prompt and perfectly timed since ‘waitand watch’ policy has ruined many nations in the past.© 2013 Deena Zaidi. All rights reserved.