Prime Minister Manmohan Singh on Friday said the sudden decline in the value of the rupee was a “shock” but the government would address this problem through “other measures,” not by reversing the process of reforms or through capital controls.
Making identical statements in both Houses of Parliament, Dr. Singh sought a political consensus for carrying out “more difficult reforms” such as reduction of subsidies, insurance and pension sector reforms, eliminating bureaucratic red tape and implementing the Goods and Services Tax. Reforms such as GST were essential to restore growth and required States to come to an agreement.
The sharp and sudden depreciation of the rupee, he said, was due to unexpected factors such as the situation in Syria and the prospect of the U.S. Federal Reserve tapering its policy of quantitative easing as the U.S. economy was recovering. This led to a reversal of capital flows which was now sharply pulling down not just the rupee but also the Brazilian Real, the Turkish Lira, the Indonesian Rupiah, the South African Rand and many other currencies.
Prior to 2010-11, the current account deficit was more modest and financing it was not difficult. Since then, there had been a deterioration, mainly on account of huge imports of gold, and a higher cost of crude imports and recently, of coal. On the export side, “weak demand in our major markets has kept our exports from growing.” Exports were further hit by a collapse in iron ore exports. Taken together, these factors made “our current account deficit unsustainably large,” he said.
“Clearly we need to reduce our appetite for gold, economise on the use of petroleum products and take steps to increase our exports.”
Not only had the rupee been hit because of a large current account deficit, part of it was a needed adjustment as inflation in India had been much higher than in advanced economies. Therefore it was natural that there had to be a correction in the exchange rate to account for this difference.
“To some extent, depreciation can be good for the economy as this will help to increase our export competitiveness and discourage imports,” the Prime Minister said.
While admitting that there were several problems facing the economy and investor sentiment was affected, he said the country would face “short-term shocks” but expressed confidence that growth in the current fiscal would rise to 5.5 per cent, up from a decade’s low of 5 per cent in 2012-13.
“It is important to recognise that the fundamentals of the Indian economy continue to be strong. India’s overall public-debt to GDP ratio has been on a declining trend from 73.2 per cent of GDP in 2006-07 to 66 per cent in 2012-13. Similarly, India’s external debt is only 21.2 per cent of GDP, and while short-term debt has risen, it stands at 5.2 per cent of GDP. Our forex reserves stand at $ 278 bn, and are more than sufficient to meet India’s external financing requirements.”
The Prime Minister’s statement in the Rajya Sabha was marked by sharp exchanges between him and Leader of the Opposition Arun Jaitley after Dr. Singh charged the BJP with stalling crucial reforms Bills by repeatedly disturbing proceedings. In the Lok Sabha, several Opposition members staged a walkout, dissatisfied with his statement.