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Revealed: The ten big challenges for the sinking Indian economy

  • Bhaskar news
  • Aug 26, 2013, 13:35 PM IST
Revealed: The ten big challenges for the sinking Indian economy
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New Delhi: Despite that India’s Finance Minister and Prime Minister are economists, neither of the two is able to devise a formula to help the drooping Indian economy. Apparently rupee is sinking on an average rate of Rs 1/day. August 22 recorded so far the lowest ever exchange rate of INR at 65 against dollar. August 2013 has witnessed sharp depreciation in rupee. Indian rupee plunged 15% against dollar in July–August. As investors and traders are not sure about when US will start tapering its stimulus programme, nobody is certain as to what shall be the bottom price of rupee this season. Speculations are that if the pressure persists then rupee can breach the 70 mark soon.
 
The negative effect of a slumping rupee over the turbulent and much volatile markets’ last few trading sessions have perplexed the Prime Minister, the Finance Minister, the Finance ministry itself and the RBI Governor. All are pondering to device a scheme to rescue the national currency from going bad to worse.
 
The Finance Minister is reiterating and reassuring that ‘there is no need for excessive and unwarranted pessimism’ and that ‘we are in better health that many other countries’. Mr. P. Chidambaram assured in a press conference on Thursday that there will be an upswing in third and fourth quarters and that ‘the Indian rupee is undervalued’. Mr. Manmohan Singh also assured that there is ‘no chance of a throwback to 1991 balance of payments (BoP) crisis’.
Even though the current instability is temporary, the government reassurances are unable to provide any solace to domestic and foreign investors.
 
Let us now take a look at the 10 big challenges in front of the sinking Indian economy.
 
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  • 2 of 11
    Revealed: The ten big challenges for the sinking Indian economy
    Widening Fiscal Deficit
     
    There is a growing trade imbalance and imbalance between the Indian government’s revenue and expenditure. The foreign exchange reserves with the government are reduced to cater imports of not more than 7 months; however, during 2007-08 the reserves were enough to serve imports for one and a half year.
     
    India’s fiscal deficit for the financial year 2007-08 was 3.5%, the figure shot up to 5.8% during 2011-12. India’s current account deficit (CAD) in the first quarter of 2013 was $9.95 million (Rs 44.69 crore), which is almost 50% of the GDP. The central government is committed to reduce it by 4.8% this financial year, which is a rare possibility. India's budget deficit in the third quarter of 2012–13 was 37.1% of the targeted.
     
    The Reserve Bank of India (RBI) governor, D. Subbarao, while announcing 2013-14’s Credit and Monetary Policy, remarked that high CAD is the greatest threat to Indian economy. The deficit is at a historical high. CAD should be 2.5% of GDP, but is estimated to be at 5.2%. This takes a toll on the capital flow and triggers market instability. The government does not seem able enough to combat the national debt in the near future.
     
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    Revealed: The ten big challenges for the sinking Indian economy
    Food Security Bill
     
    Government’s notorious Food Security Bill (FSB) will add to the burden of the exchequer. To provide to a large population of the nation, the government will make available grains, which it will have bought at high market prices, at cheap affordable rates by subsidising the prices.
     
    The government’s fiscal deficit may exceed the target of 4.8% of GDP by 50 basis points, according to a report by Singapore’s DBS bank, if the FSB is made a law. This could give rise to new complications for the economy.
     
    The Singapore bank also said that the subsidy bill could hike from the targeted 1.9% of GDP to 2.3%. The food subsidy will be the prime cause of the already swelling subsidy bill. The spurt in inflation headline and hiked price of the crude in the international market will only fuel the fire.
     
    The cabinet has decided to implement FBS through an ordinance. The bill will benefit country’s one-third population by guaranteeing 5kg grains every month at a price of Rs 1–3/kg to the beneficiaries.
     
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    Revealed: The ten big challenges for the sinking Indian economy
    2014 elections
     
    2014 Indian elections will burden the national treasury. Political analysts are speculating early elections, thus lowering the possibility to achieve the targeted deficit by then. The government has launched the popular FBS, which is to cost the country’s GDP heavily.
     
    The incumbents are expected to launch more such proposals considering the upcoming elections; however, these could turn out to be detrimental to the already weakened economy and the wide fiscal deficit.
     
    The government will announce an interim budget in February 2014. However, as per laws, it can only submit a vote on account before the scheduled elections. It will be a long wait for the investors. Probably they will find better markets to make investments by then. The rising crude prices in international markets will be decisive as well.
     
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    Revealed: The ten big challenges for the sinking Indian economy
    Expensive crude oil will spurt national debt
     
    Due to a depreciated rupee and hiked oil prices, CAD is suffering owing to huge oil imports. Petroleum products have suffered most through all this. Out of the oil consumption in the country, 80% is imported.
     
    According to an officer of Petroleum Ministry, due to a weakened rupee against dollar, Indian oil companies suffer an excessive burden of Rs 8,200 crore. Indian Oil Corporation’s Director – Finance, P. K. Goyal, explained that a feeble rupee has caused a loss of Rs 840 crore in April–June quarter.
     
    Now that the rupee has breached 64–65 mark, losses will widen further. Even after purchasing crude oil at an exorbitant price, the oil companies cannot sell petroleum products at higher than the decided prices (by the government). Although the government reimburses the losses these firms acquire, it is hard to tell how soon the government will shell out the subsidies.
     
    Besides, the government will put pressure on oil companies to not raise oil prices as the elections are round the corner. The government will have to compensate the high difference between purchasing and selling prices lumbering the deficit.
     
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    Revealed: The ten big challenges for the sinking Indian economy
    The liquidity crisis owing to the global economy
     
    Global economic crisis has caused a shortfall in the Indian foreign currency reserves causing liquidity crisis. The ailing sentiments of investors need to be healed. The RBI governor stated that it is impossible to bring growth rate back on track without investment.
     
    Neither lenders nor borrower are in the position to take risks. RBI has maintained high inflation as a grave threat and that investment must be employed to curb it. RBI tried to contain inflation through monetary measures; however, commodities’ prices are creating pressure. The rise in minimum support price and steady increments are pushing inflation.
     
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    Revealed: The ten big challenges for the sinking Indian economy
    Reoccurrence of 1991 BoP crisis
     
    1991 balance of payments crisis is remembered as a phase of radical economic reforms. The then Indian government introduced investment reforms by globalising the economy and allowing foreign institutional investors (FIIs) and other overseas investors to invest in Indian markets.
    The impending economic crisis, however, is of greater proportion than of 1991 crisis. International Monetary Fund (IMF) has warned India and China of the threat posed by the fall in the growth rate post 2008. India is gradually falling prey to the same trap that, first, the Latin American countries were engulfed in and, later, Southeast Asian countries.
     
    Southeast Asian countries primarily suffered external payment crisis in 1997–98, which led to the devaluation of their currencies. The slowdown in real estate caused serious troubles for banking sector and there was a sharp rise in unemployment. Although this could have affected, however, India managed to excuse herself from the crunch. On the contrary, there was a surge in India’s growth rate later. From 1998 to 2011–12, India’s average growth rate was over 7%.
     
    India was saved at that time, first, because she did not have capital account convertibility (CAC). The then government was trying to introduce CAC. However, because of the warnings issued by various agencies, Indian government averted it. The Southeast Asian currencies saw heavy cash outflows because they had CAC.
     
    Second, the Reserve Bank of India had a tight control over interbank foreign exchange. Third, Indian economy was not export-oriented and the growth in local demand resulted in fast development in domestic business. Fourth, at that time India’s debt to GDP was low; India’s external debt then was around $100bn.
     
    India was able to dodge 2008 crunch as well. There was a time when India owned foreign currency reserves that could finance 3-year imports, which is now reduced to serve barely 6-month imports. Thus, we are in a dire situation.
     
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    Revealed: The ten big challenges for the sinking Indian economy
    Lack of skilled labour
     
    The shortfall of skilled or trained workers/labour is a big problem for Indian economy. India’s Planning Commission approximated, out of 12.8 billion people that join India’s work force every year (on an average), only 20% are industrially trained or formally skilled. The commission says, to train labour in an economy that has a growth rate of over 9% is most challenging task.
     
    A formally trained or highly skilled work force could open new doors of opportunity for Indian government. It is estimated that by 2020, the world will require a work force of around 46 million; India has a potential to produce 47 million trained workers. 
     
    India could produce 50 million skilled labourers by 2022, according to Harmit Sethi, the Confederation of Indian Industry (CII) Director – Skills Development. Of course, it is a big target. To achieve it, skills of unorganised labour will have to be developed through long-term endeavours. Skilled labour would benefit economy by boosting production, thus raising their income.
     
    Trained labourers could work in overseas as well, as non residential Indians, which would help India earn foreign currency. A skilled worker can establish her/his own business as well. This all will infuse liquidity in the market. However, after 2008 slow down, Indian economy has not been able to produce jobs for an emerging work force. Thus, it is creating an atmosphere of pessimism in the market.
     
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    Revealed: The ten big challenges for the sinking Indian economy
    Black money crunching the economy
     
    The harm Indian black money has caused the country’s economy is beyond imagination and cannot be estimated precisely because the amount of black money in foreign banks cannot be gauged to exact figures. It has cost the economy approximately $123 arab during the last decade. Estimated illegal funds worth $1.6 arab have been laundered out of the country in 2010 alone.
     
    The data was exposed in a report by Washington-based research organisation, Global Financial Integrity. According to the report, India is the 8th country to most route out illegal funds. India is ranked after China, Mexico, Malaysia, Saudi Arabia, Russia, Philippines and Nigeria.
     
    Cobra Post, of late, exposed that some large international private sector banks cash in black money to invest in insurance, gold and other assets. These banks are not subjected to any regulations issued by central banks across the globe and open confidential accounts for depositors without asking for PAN card, etc.
     
    The banks accredit lockers to account holders where physical currency is deposited, as per the report. Moreover, the report alleges, the banks also assist in overseas money laundering. These banks are mocking income tax, foreign exchange management act (FEMA), central banks’ regulations, know your customer (KYC) measures, banking act, prevention of money laundering (PML), etc., in a well planned manner. However, Indian central government does not seem serious about money laundering.
     
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    Revealed: The ten big challenges for the sinking Indian economy
    Huge investment in precious metals
     
    Indian’s love for gold is well known. India makes huge imports every year from across the globe. However, there is a negative facet of it; huge currency lies idle and is unable to do any good to market.
     
    Recently Prime Minister Manmohan Singh dismissed the possibility of India returning to 1991 crisis; he said that Indians are investing in assets that suck liquidity out of market. During 1991 BoP crisis, India had to collateralise its gold and first time globalised the economy. PM Singh said that one reason for import losses is the huge gold imports in the country and called the yellow metal an unproductive asset.
     
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    Revealed: The ten big challenges for the sinking Indian economy
    Sinking sentiments of investors
     
    The much troubled Indian currency can find hope by two means alone. One, there is a need to redirect the import-based economy to an export-oriented economy. Second, foreign investors should infuse some liquidity in India. However, in the present time, neither of the two seems prospective.
     
    The measures issued by RBI to contain depreciating rupee have disappointed the corporate sector. Leading industrialists have claimed that the capital control and other recent policies of RBI could drift the country back to 1980s era. Indian companies had zero investment abroad, then. Economists are saying that the government has not issued any concrete instrument to help the economy pull out of the predicament.
     
    As long as the Indian economy’s domestic health does not improve, it is difficult to get rid of the present circumstances. To make Indian market lucrative for FIIs, it is important that Indian economy is in good shape and seems promising, only then will there be an increase in cash flow by FIIs. FII’s sentiments are deeply affected by the economy’s internal conditions. Thus is necessary that the government directs the economy to the right direction.

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