It isn't an overnight happening. It has been coming, and coming for a long time. When it actually arrives, the country finds itself sucked into the cross-currents of global politics of economics. All along, the Reserve Bank of India, which has sort of been pushed to announce a huge cut in Bank Rate, has been virtually pleading with the fiscal authorities to see the writing on the wall. The pleadings have largely gone unheeded. With the rupee sliding continuously against the dollar, the political leadership is beginning to sense the gravity of the situation.
Just consider the country's foreign exchange reserves. The reserves have dwindled by $1.37 billion last week to $291.80 billion. The week-before that saw the reserves shaved off by a huge $2.19 billion. The depleting reserves are a cause for serious concern, especially since the Indian currency is losing consistently against the dollar. In a volatile scenario, the RBI just can't afford to remain in the sidelines and watch the rupee swing up and down. The apex bank did come out with some non-market intervention measures to prop up the rupee. Those, however, dissolve into insignificance given the grimness of the situation. According to a rough estimate, every time the RBI visits the market to stem the rupee slide, foreign exchange reserve evaporates by close to half-a-billion dollar! Also, international claims worth close to $137 billion on India are slated for repayment within the next 12 months, according to preliminary data released by the Bank of International Settlements. The Indian currency has indeed seen 20 per cent erosion in value against the dollar over the last one year or so. This could easily result in substantial erosion in the declining foreign exchange reserves.
Will the country be forced to revisit the day when it had to pledge gold abroad to avoid debt default? One need not take an alarmist position, however.
Two contrasting numbers released by the RBI give some hope. While the FDI (foreign direct investment) saw a 34 per cent spike to $46.8 billion, the FII (foreign institutional investment) flow had dropped sharply by 43 per cent to $16.8 billion in 2011-12. The message is India still has attraction for overseas long-term money.
A series of scam-hit UPA (United Progressive Alliance) has all along been forced to focus on ‘existence issue' what with diverse partners pulling it in multiple directions.
Everything is based on coalition politics. Be it letting FDI in multi-brand retail or increasing foreign holding in the insurance space and allowing oil marketing firms to align the petrol, diesel and LPG prices to cost, New Delhi has only played to the galleries and not pursued a statesman-like approach.
If an individual is profligate in spending, he/she has to bear the consequence. If the State itself is so, who has to pay the price? Rather, who has to be held accountable? So much so, the country's fiscal deficit is estimated to be 5.1 per cent of GDP (gross domestic product) for 2012-13. With Government itself emerging as a big borrower for ‘money' in the marketplace to bridge the widening fiscal deficit, the option for enterprise-building or capacity addition is anything but costly. Costly funds are a sure roadblock to sew up the supply side of the economy.
The ‘indecisiveness' of the Centre on the oil price front is already costing the country heavily with the current account deficit ballooning to $19.6 billion in the third quarter of 2011-12 (as against $10.1 billion in Q3 of 2010-11). This works out to a steep 4.3 per cent of the GDP! Oil, gold and fertilizer form a major chunk of the imports.
As though ‘policy inactions' aren't enough, the Government has been making some totally avoidable noises, triggering negative perception among the overseas investing community. The Vodafone imbroglio, the retrospective amendments to tax laws and the like have all proved counter-productive to the India growth story.
The political leadership, it appears, has found an uncanny ability to convert a growth story into a ‘gloom story'. While Europe is reeling and America is struggling, India is still a ‘plus country'.
There is deceleration in growth, no doubt. But India is growing and still remains an attractive destination. What is needed is to create an environment that allows growth to perpetuate positively. We need a resurrection of Dr. Manmohan Singh-like personality of the early 90s to bring the economy back on fast lane.