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.