By Stuart Burns
The sense of depression among Indian corporations is positively palpable; an economy that was zipping along at a fast clip just two years ago is now mired by indecision and negativity.
Investment decisions are for the most part being postponed and government is tinkering around the edges of reform as the rupee slides lower by the week. The falling rupee isn’t just the fault of a stagnant political scene, although that is certainly not helping.
Last year, according to the FT, foreign investors poured more than $20 billion into Indian equity and debt markets, encouraging the RBI to cut interest rates three times. But then Ben Bernanke hinted at a slowdown in quantitative easing and billions of dollars flooded out of emerging markets in search of higher U.S. yields – and the rupee crashed.
Inflation, Industrial Output
The RBI has raised short-term rates to stem speculation against the rupee, but this has reduced already-slow industrial growth. High inflation is eroding India’s competitiveness as an exporter, driving the current account deficit to 4.8% of GDP in 2012-13. Recent data suggests a depreciating rupee may now be helping exports.
Trade figures for July showed exports rising nearly 12% to $25.83 billion from the same month last year, while imports fell 6% to $38.10 billion, cutting their deficit by a third, but other data were less encouraging. Industrial output fell 2.2% year-on-year in June, while inflation in July as measured by the consumer price index remained high at 9.64%.
Economists agree that cutting the deficit should be a major target, but the government seems more intent on liberalizing corporate borrowing rules to allow firms to borrow more abroad, especially in the form of quasi-sovereign debt issued by state financial and oil companies. Increasing debt levels is not the answer; that strategy has been tried repeatedly over recent years and resulted in simply accumulating larger external liabilities; more of the same is unlikely to solve the problem.
Gold and SUVs
A 10% import tax on gold is meant to stem the flood of funds abroad as gold is India’s largest luxury import, but so far gold imports have rebounded a few months after each rise. While on the topic of luxury goods, an anecdotal example of the depression descending across India’s middle class is the collapse of SUV car sales. Auto sales contracted for a record ninth consecutive month in July, led for the first time by sales of SUVs, previously the industry’s only bright spot, which fell for the first time in four years.
Unfortunately for India and for those trading partners and investors in the country, an early solution is unlikely.
The next 9-12 months have been written off by most observers as politicians prepare themselves for elections in May, but unless a clear mandate for change emerges from those elections, the medium term could be simply more of the same – a weak rupee, stubbornly high inflation and stagnant or slow growth.