2013- Tumbling India rupee against US dollar hampering the growth prospects of Indian economy?

1. “THE DEBT BINGE”
Indian economy was expected to grow at a rate of 6.1% in 2013-2014. Indian
policy responded more quickly to the global financial crisis of 2008-2009.
With fiscal and monetary stimulus it achieved a growth rate of 8.6% and 9.3%
in 2009-2010 and 2010-2011 but due to the combination of both external and
domestic factor, growth rate slipped down to 6.2% in 2011-2012 and an
estimated 5% in 2012-2013.
India’s economy has experienced its worst slowdown in nearly a decade this
year. This downturn is a rare piece of bad news for a country experiencing
booming growth since 1991. Is there any sign that a country which is still the
second fastest growing economy in the world be able to cope up with the
downtrend?
In 2012-2013 economic growth has fallen drastically from 9.5% to
just 5%. Industrial growth has dwindled from 8.2% to unexpected 1%.
Wholesale price index inflation has reached its bottom position in
2013 with 7.3%.

2. It is a huge disappointment for a country whose economy has been rising
ahead at 8% plus for last 8 years. According to a study the Indian economy is
in crisis with slowdown in growth, rising fiscal and current account deficit amid
persistent inflation. Current account deficit (CAD) gets amplified against the
backdrop of slowing economy. CAD fear has been central to India’s economic
slump. High CAD to GDP ratio is the result of slowdown in exports and
increase in imports of oil and gold.
Attributing to high CAD the Indian Rupee has experienced considerable
depreciation of value in the recent times that has affected every aspect of the
economy of India. Currently, foreign exchange rate has popped up by 12%
and it is now hovering over 60-65 rupee per dollar which is reported to be the
lowest price till date. This sharp decline in Indian currency is a cause of
concern for the government.Foreign institutional investors (FII’s) have pulled
out nearly $3 billion over past 2 months. The main reason for the rupee’s
decline is the appreciation in the U.S dollar that has been rising since fear of
the US Federal Reserve (fed) tapering its quantitative easing (QE) that hit all
asset classes.
With economic growth at the lowest level in a decade, Prime Minister hoped
the slow pace will not last long as the government is working hard to find a
solution of the situation by removing some bottlenecks in the pathway of
“traditionalIndian development since 1991”.

3. Government adopted various measures to deal with such augmented CAD.
Import duties have been raised for the 3rd time in 2013. It has been raised to
10% from the previous 8% on gold making it, the rarest metal in India. This
move will help Indian rupee edge up against dollar but this in turn will make
the yellow metal costlier by Rs. 600/ gm. and to restrict CAD to 3.7% of GDP.
Attracting investment through the ECB’s route has become an “instrument of
choice”. The focus of attention is foreign currency loans by corporates and
encouragement of investments by NRI’s into foreign currency deposit offered
by Indian banks. “It’s a strategy that may be driven by necessity and the
need to get money into the country in the short term, but such
strategies is quick fixes, They need to be backed by a real reform.”
says DK JOSHI chief economist of Crisil,a rating firm.
The strategy of garnering more debt inflows to finance the CAD has already
been tried and tested over last few years and has resulted in the country
accumulating large external liabilities – the price of which is being paid
now. The government’s ECB policy was heavily liberalised in1999, which
burst inflows between 2000 and 2001. As a result the share of ECBs in
overall debt rose from 19% to 31% b/w 2006 and 2013. Use of this tool by
RBI and the government to bring dollars to the country is a huge irony.
Indian economy faces a big question- will it be able to surmount this
augmented CAD? Will it be able to attract foreign investors
encountered with its economic condition?
These measures are unlikely to have a meaningful impact on the currency.
For a long term impact we need to increase the attractiveness ofIndia as an
investment destination though it is also a difficult task as investors are
fleeing to safe havens. For a country with unstable CAD, weak currency
and uncertain macroeconomic outlook,it is a bit blurring condition from
the point of view of investors to whether invest here or not.