THE DOWNTURN
Runaway fuel prices, a falling rupee, a widening CAD, a banking crisis and an investment slowdown have all put the economy under strain
A raft of issues—both threaten to global and derail the domestic— challenges economy, posing the to the Narendra fresh run-up to the Modi government quick Lok Sabha in turnaround elections. is not on the And a cards
Back in the last general election, in 2014, nothing helped the then prime ministerial candidate Narendra Modi more than his promise to root out corruption and bring a troubled economy—derailed by the ‘policy paralysis’ in the second edition of the UPA government—back on track. With just months to go before the next general elections, the economy, ironically, is occupying centre stage again. There’s distress and uncertainty, triggered by a host of global factors, and, yes, some policy manoeuvres and misadventures too. The short-lived optimism in some quarters, as GDP growth ticked past 8 per cent in the first quarter of the current fiscal, is all but gone.
Rising oil prices and a widening current account deficit (CAD), where the value of imports is higher than that of exports, have weakened the Indian rupee by 14 per cent this calendar year, and it’s being pushed down further. High fuel prices are threatening to stoke inflation, forcing a wary central bank to resort to a ‘calibrated tightening’ of the monetary policy. Stock market indices, quick to react to news, good or bad, have been on a losing streak, as foreign investors pull out of Indian stocks, with global worries and a weak rupee hitting local returns. Five days of market turmoil in late September wiped out Rs 8.47 lakh crore in investor wealth, while another Rs 4 lakh crore was lost in the first five minutes of the trading session at the Bombay Stock Exchange on October 11. V.V. Viju, 40, a Mumbai-based investor in the stock market, says he has been so bruised by the recent bloodbath in the markets that he plans to keep away from investments for a while. “The Sensex has fallen over 10 per cent since August 28 this year, and analysts predict more turmoil,” he says. “This looks like a long-term depression, so it’s better to exit and be back when the revival returns.”
Meanwhile, foreign institutional investors (FIIs) had withdrawn over $12 billion (Rs 90,000 crore) from the Indian capital markets till the first week of October, which, reports say, is the worst ever outflow since 2002. “The situation looks grim in the short term,” says Professor R. Nagaraj of the Indira Gandhi Institute of Development Research in Mumbai. The problem is the flight of capital as FIIs withdraw their money, leading to a fall in the rupee and plummeting stock prices, he adds.
The economy, say experts, is grappling with three major global shocks: the rising global oil prices, rising interest rates in the US (the 10-year government bond yields have risen to over 3 per cent) and trade protectionism around the world, resulting in trade wars that scare global investors from the financial markets. Add to these an array of domestic woes, largely the result of faulty government policies, favouritism, corruption and bureaucratic hurdles over the years, and the picture gets scarier. “The Indian economy is indeed in a precarious position where it is facing the prospect of the main drivers of growth of the past few years coming to an abrupt halt,” says Pronab Sen, Country Director, International Growth Centre, India.
This period of grave uncertainty, fluctuating oil prices, a depreciating rupee, falling investments, a stressed banking sector can be termed the worst the Indian economy has seen in the past four years. Because this is the first time in many years that India is facing global headwinds as well as a tumultuous domestic environment. Besides the oil and rupee problems, the Infrastructure Leasing & Financial Services
TILL OCTOBER 15 THIS YEAR, FOREIGN INSTITUTIONAL INVESTORS HAD WITHDRAWN OVER Rs 90,000 CRORE FROM THE INDIAN CAPITAL MARKETS
(IL&FS) crisis has also hurt India’s credibility.
A Mumbai-based macro economist talks about an investor meet he is planning and how many more investors want to visit New Delhi to meet Finance Minister Arun Jaitley after the IL&FS crisis. “IL&FS is a government-owned company, they don’t know whom and what to trust. I usually take about 15 of my clients, but this time everyone wants an assurance,” he says. India is firefighting on both ends. And evidently, the government is worried about how the economy plays out for them before the elections.
Jaitley has vehemently defended the most recent policy decision of an excise cut in fuel, saying, “No government can be insensitive towards its people. In the past four budgets, the Modi government has consistently given some direct tax relief each year to the small and middle tax-paying population. Last year, in October, when oil prices were rising, the Centre cut down excise duty by Rs 2. We requested the states to make a similar cut. Most of the BJP-NDA states did so. The others refused to do so.”
Economists say it was a bad move, since it will cost oil marketing companies Rs 1,40,000 crore and the government nearly Rs 70,00080,000 crore since it is a shareholder. And while the government might end up paying through its nose for the excise cut, its impact on household expenditure will be about Rs 900, equivalent to two coffees from Starbucks, says a research note by Citibank.
So while the economy is navigating choppy waters, the government is being criticised for the lack of coordination between the central bank and North Block, and of policy cohesion. Whether it is the strategy to stem the fall of the rupee or the flight of capital from the country, India seems to be on the back foot. To assuage fears, Subhash Garg, Secretary, Department of Economic Affairs, at the recent annual meeting of the International Monetary Fund and the World Bank in Bali, said: “Prudent policy measures have helped, and measures being undertaken now will also help contain the stress currently seen in financial tightening and oil prices.”
ALL IS NOT WELL
On the home front, state-owned banks are struggling to address the mountain of over Rs 10 lakh crore bad loans, even as litigation delays the sale of stressed assets of companies under a revamped bankruptcy code. Meanwhile, the NBFC (non-banking financial company) space, also ominously called shadow banking, has been shaken up with the fall of IL&FS, which has piled up Rs 91,000 crore in debt, as delayed or shelved projects felled profits. Even the private banking sector faced a crisis of confidence as the top boss at the second largest bank—ICICI Bank—resigned over charges of nepotism, while the regulator cracked the whip on two others—Axis Bank and Yes Bank—disallowing extended terms to their CEOs over alleged irregularities.
Agriculture continues to be in the doldrums, despite the government’s promise to double farm-