If our policymakers cannot manage the economy, they should at least learn how to manage expectations. For two days, the UPA government let it be known that a robust package to check the fall of the rupee and improve market sentiment was around the corner. An announcement was scheduled for Monday, Pranab Mukherjee’s last full working day as the Finance Minister. Speaking to reporters on his way back from the G-20 and Rio+20 summits, the Prime Minister also helped talk up sentiments. As far as industry and the markets were concerned, the timing couldn’t have been better. Economic growth has been slowing down, falling to 6.5 per cent in 2011-12. While industrial output continues to be sluggish with a mere 0.1 per cent growth in April, inflation remains elevated. Of specific concern has been the precipitous and psychologically damaging decline in the rupee’s external value. Having lost over 25 per cent in the last one year, it breached the 57 level against the dollar on June 22 and threatened to drop further in the medium-term. To many observers, the rupee’s fall embodies all that has gone wrong with macro-economic management recently. Therefore, it was assumed that any major economic initiative from the government would primarily seek to address concerns over the rupee. More optimistically, it was hoped that the government would announce some reform measures alongside specific rupee-supporting measures.
In the event, it was the absence of any reform measure in the ‘package’ unveiled on Monday that has contributed to the disappointment seen across the board. The stock indices fell back and the rupee once again lost value. The measures announced by the Reserve Bank of India in consultation with the government are by themselves unexceptionable. Companies in the manufacturing and infrastructure sectors with foreign exchange earnings can borrow in dollars to cover rupee loans, up to a ceiling of $10 billion subject to certain conditions. The cap on foreign investment in government bonds has been raised to $20 billion from $15 billion. Sovereign wealth funds and pension funds can invest in government securities. These and a few other measures aim to boost foreign exchange inflows by selectively relaxing existing rules and regulations. However welcome increased dollar supplies are at this juncture, the government’s package reflects a knee-jerk response to the rupee’s decline. In particular, the Finance Ministry and RBI ought to have weighed the consequences of these measures on the country’s already high level of short-term external debt.
Keywords: Indian economy, rupee strengthening, RBI, currency values
As has been aptly pointed out above by another reader, it is the failure of the UPA Govt to effectively articulate the various measures undertaken by the Govt, manned by such bright intellectuals like Dr.Singh,Dr.Rangarajan,Dr.M. Aluwalia and others including Jairam Ramesh and such others also not to speak of the well-educated and right-thinking well-meaning youngsters like Jyotiraditya,Sachin Pilot not to mention about Rahul Gandhi,that it is being placed in the 'dock'? Further, many of the States notably like T.Nadu,Gujarat, Bihar etc have been also doing very well indeed to redeem the poorest of the poor, all of get no media hype/attention and their growth story seems to get no acclaim? As rightly pointed out in one TV interview, factional politics seem to play out a biased review. For the results to manifest themselves obviously will take time, which needs to be highlighted by those in power about each scheme through the media every now and then. There is no point in 'crying wolf'!
One of the underlying issues is why did the sentiments end up where it
is right now. Yes, It is partly growth numbers and the inflation
levels. It is also about the fact the government could never quite
articulate the growth story, which is the rationale for the reforms in
the first place.
While it is fashionable for intellectuals to state that the reforms
have not percolated down to the poor and glib statements like the poor
have become poorer, data suggests that in states where reforms were
well implemented such as TN, the changes border on sweeping. About
50% of the households have a motorized means of transport (42% have a
scooter or motorbike and 12% have a car), huts have nearly
disappeared, and the per capita income is Rs72000 per annum. So let
us stop this reforms are not working whine and get on with it.
I think the RBI's autonomy has been severely compromised and this does not bode well for its independent decision making. These knee jerk and ill conceived decisions to mop up dollars at any cost should have emanated from the Finance Ministry and the RBI should have been pressured in announcing it. Even before policy announcements, we see the Finance Ministry and other Ministers advising the RBI to toe the line of market and cut rates when monetary policy is presumed to be the exclusive domain of RBI. Thankfully, last time the RBI did act independently and did not cut rates in tandem with rising inflationary expectations which was the need of the hour. During 2006-2009, when inflationary expectations were rising, RBI did not increase rates substantially bowing to market expectations and did on a piece meal basis which is the exact reason for the inflationary monster not being tamed now. Now high inflation and high growth cannot sail together & this is the reason for our slow down.
Well said! Actually the Government are taking decision from the shoulder of Reserve Bank of India on trivial policy matters. The time is now for being taken action on major economic reforms from own side of the government to lift up plunging economic scenario of the country as RBI has its own limit and it can not do more.
Decision making should always be done keeping long run in view. These short term decisions always lead to disasters to the economy in long run. We have been observing that from the past few months whenever there is a jerk in the economy, our policy makers always tried to do some first aid and leave it alone. I guess they (the policy makers) are not able to see a bigger picture. Or they are trying to lure people for their personal gains.
It is the media particularly electronic business media which creates hype where it does not exist.What is the use of higher GDP growth if it is not translated in removing poverty and improve living conditions of large majority of citizens? Whatever being done and demanded is only for a minuscule minority to boost their riches and nothing to do with removing inequality and proper distribution in the nations wealth.The greatest contribution of Pranab Mukherjee in the last 40 years is making Ambani family among the richest in the world.
There are two parallel issues here - First is what I would call as
technical issues associated with financial management: the ballooning
deficit, inflation, the response of the $, and interest rate hikes in
response to the inflation & $$, and Second: An issue of market
sentiment which is a herd mentality that amplifies a trendline. The
stodgy FM and the equally stodgy RBI have tried to address the former
without realizing that a sustained dose of optimism is what keeps
capitalism alive.
The government & RBI over the past week had two opportunities to play
with the sentiment which were both damp squibs. The RBI refused to
reduce interest rates citing inflationary pressures while a handful of
stodgy economists applauded while the markets tanked, and then two
days ago they announced a series of anemic measures that tweaked
overall availability of credit and government securities.
Remedy? reduce interest rates. PERIOD.
Mr.Mukherjee is leaving behind an economic legacy which clearly reflects his far from
satisfactory handling of Indian economy in recent years. Will Dr. Manmohan Singh be able to
set things right? Doubtful indeed!
What are the real achivements of our esteemed Finance minister till Mon 26th? Looks very negative, The economic growth has slipped down to 6.5 per cent for the year 2011-12 as against the earlier expectation of about eight per cent. Industrial growth has slipped down to 0.1 per cent in April 2012. Of serious concern is the falling rupee value which has lost about 25 per dcent in the last one year. And Pranb Mukherjhi is rewarded with the prestigious post of President with an assured job security for the next five years. Let us eagarly hope our Prime minister do some miracles to restore the sagging economy of the Country.
To deploy our booming population in profitable works, it is urgent
to build high growth rate unless the unemployment and industrial
production will be on its hampered state. Approach of our coalition
govt. for one year at the time, rupees initiated declining, has been
diminutive as, it busied itself doing its main duty: politics rather
harking the economic sentiments of the economy.
PM perched with $10 billion in the international community to tackle
the EURO-zone crisis and what for the Indian crisis that our economy
is suffering? even on the basis of this warmth, credit rating
agencies like S&P, MOODIEs will find reasons to show generosity to
Indian side is uncertain. This time, decreasing growth rate and
increasing inflation is obvious , even though the PM doesn't find
any stagflation in the economy.
Indian Rs is the worst performer in Asia. It simply tells 'other
countries are performing better'. In peace times, economics plays
the most significat role in the lives of masses.
The decisions reflect what has already been reflected by some of the
previous decisions of both the RBI and the ruling party, a cautious approach. Unfortunately, there have been no lessons learnt. Everybody
has cursed the regulatory body and the present government of our
nation for lacking the willingness to take some tough decisions in
order to revive the once existing and now missed growth story. These
actions are like baby steps for a Godzilla. With poor investors'
sentiments and the credit rating going down all we need is some robust
decisions. One should remember what happened in 1991. Our country just
can't afford a repeat.
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