Econ­o­mists say Govt Steps will Lift Sen­ti­ment

But some say mea­sures sug­gest panic on part of govt

The Economic Times - - Economy: Macro, Micro & More - Kir­tika.Suneja@ times­group.com

New Delhi: Econ­o­mists feel the gov­ern­ment mea­sure to ad­dress the cur­rent ac­count deficit and ru­pee de­pre­ci­a­tion may im­prove sen­ti­ment and were just the lim­ited re­sponse that was needed, but some felt they sug­gest panic on the part of the gov­ern­ment. The gov­ern­ment on Fri­day an­nounced a slew of mea­sures to bring ad­di­tional cap­i­tal in­flows of $8-10 bil­lion to ar­rest ru­pee de­pre­ci­a­tion and ad­dress the un­der­ly­ing prob­lem of high cur­rent ac­count deficit.

“We view the gov­ern­ment’s guarded re­sponse as ap­pro­pri­ate be­cause In­dia’s macro fun­da­men­tals are in a much bet­ter shape to­day than in 2013 – higher growth, sta­ble in­fla­tion and fis­cal com­mit­ment − and do not ne­ces­si­tate a knee-jerk re­ac­tion,” Sonal Varma of No­mura said in a re­search note.

Upasna Bhard­waj, se­nior econ­o­mist at Ko­tak Mahin­dra Bank, was not sure how much cap­i­tal flow will come from th­ese mea­sures but agreed that no panic re­ac­tion was needed. “Though we need to be vig­i­lant of ru­pee de­pre­ci­a­tion, there is no need to press the panic but­ton and an­nounce any Big Bang mea­sures be­cause our fun­da­men­tals are stronger com­pared with oth­ers,” Bhard­waj added.

In­dia’s for­mer chief statis­ti­cian Pronab Sen had a dif­fer­ent view. “I am puz­zled by th­ese mea­sures since they seem to be send­ing out wrong sig­nals,” Sen said. “First, they give the im­pres­sion that the gov­ern­ment is pan­ick­ing, which will worry in­vestors and en­cour­age spec­u­la­tors be­cause it is rightly as­sumed that the gov­ern­ment knows much more than the av­er­age in­vestor/spec­u­la­tor.” “They will as­sume that gov­ern­ment is wor­ried about some­thing if they want to raise $8-10 bil­lion de­spite RBI hold­ing $400 bil­lion of forex re­serves,” he added.

Per­mit­ting man­u­fac­tur­ing sec­tor en­ti­ties to avail ECB up to $50 mil­lion with a min­i­mum ma­tu­rity of one year from the ear­lier pe­riod of three years is an­other mea­sure econ­o­mists have is­sue with. “Though th­ese mea­sures don’t seem to have a long-term im­pact, the gov­ern­ment has tried to in­cen­tivise debt cre­at­ing cap­i­tal in­flows and this does not augur well for the econ­omy in the medium- to long-run,” said Deven­dra Pant, chief econ­o­mist at In­dia Rat­ings. As per Sen, by eas­ing tenor of ECBs to one year from three, the gov­ern­ment has made ex­ter­nal bor­row­ings at­trac­tive for short-term cap­i­tal needs.

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