Fears over subsidy burden trigger bloodbath on bourses

The already battered Indian rupee on Tuesday plunged to a new intra-day low at 66.30 against the dollar while a bloodbath was played out on the bourses over serious concerns that the UPA government’s ambitious food security legislation will drive the fiscal deficit out of control and further widen the current account deficit (CAD).

While the rupee was in a free fall and collapsed by 194 paise against the greenback to end the day’s trading at 66.24 to mark its single largest drop thus far, the Bombay Stock Exchange witnessed mayhem with its sensitive index (Sensex) hurtling down 600 points intra-day and closing below the 18000 mark with a loss of 590 points.

With this, while the INR has shed over 20 per cent during 2013 and ranks among the worst performers within the emerging economies, stock investors were witness to erosion of their wealth to the extent of Rs 1.7 lakh crore as market participants, including foreign financial investors (FIIs), went in for manic selling across all counters.

Even as currency and stock market investors were particularly perturbed by the likely bloat in the food subsidy bill by about Rs. 25,000 crore each year owing to the government’s legal responsibility to feed about 82 crore people, or about 67 per cent of the population, adding to the panic was the apprehension amid tension over a suspected chemical weapons attack in Syria coupled with crude oil prices soaring to a five-month high.

In effect, market participants visualised an overall rise in the subsidy burden with oil prices going up further in the coming days and the government not in a position to hike fuel prices to commensurate neutralisation levels. Adding to that will be the additional food subsidy and, therefore, the fiscal deficit for 2013-14 may go wide off the target unless expenditure is further compressed. In such a scenario, anticipating growth — both industrial and economic — would be far too optimistic.

Not without reason then that foreign investors unloaded heavily and chaos prevailed on the bourses after three sessions of gains. So much so, that even earlier during the day, investors sought to ignore assurances by Finance Minister P. Chidambaram that the fiscal deficit would be contained at 4.8 per cent of the GDP even after implementation of the Food Security Bill. He also asserted that the rupee had been hammered enough and, at current levels, was clearly undervalued.

‘Will not let fiscal deficit cross red line of 4.8 % of GDP’

Despite the rupee’s free fall and the Sensex nosedive on Tuesday, Mr. Chidambaram stuck to his guns during a discussion on the economy at the Lok Sabha. He also assured reporters that the government has a firm grip on the fiscal deficit.

“[Fiscal deficit of] 4.8 per cent of GDP and the absolute number indicated in the Budget is a red line and the red line will not be breached...We have provided enough money for the cost of the food security programme for the remainder of the current fiscal,” said Mr. Chidambaram.

At the Lok Sabha, Mr. Chidambaram argued that the only way to tackle the situation was to unleash more reforms and sought an end to the impasse in sectors such as coal and iron ore for a return to high growth.

Listing a package of 10 steps, which include a boost to the manufacturing sector and exports, to achieve a potential growth rate of eight per cent, he said: “What we need now is not less reforms but more reforms; not more restrictions but less restrictions; not a closed economy but a more open economy.”

Giving an assurance to the House that the red line of fiscal deficit would not be breached, Mr. Chidambaram said: “We will go through some pain, by the end of the day, I am sure we will be able to emerge stronger.” He asserted that all efforts would be made to bring down the CAD to $70 billion from $ 88.2 billion during 2012-13.

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