The Depreciating Rupee & India

Figures of 8% growth rate , implausible figures of below 3% CAD rate, these are I think
frivolous figures estimates of government.
With GDP at 20 year low, meager IIP, Rupee at record low and performed one of the worst in
this year, these are exacerbating the soundness of our economy. India is recorded at 132nd rank
out of 185 countries in Ease of Doing Business, 173rd for Ease of starting business, 182nd for
getting construction permit, 152nd for paying taxes, 127th for trading across borders, 184th for
Enforcing Contracts.
Scarce situations:
The rupee has lost more than 13 per cent in a quarter and the investors in stock markets are
poorer by 25 per cent in dollar terms. The GDP growth of 4-5 per cent is almost half of what the
country has enjoyed during the recent boom period.
That jobs become scarce when the economy is down is obvious. The current situation can be
compared with the post-Lehman phase of 2008.
Auto sector sales are down by 13 per cent compared with the same period last year, which has
resulted in adjustment in staffing levels. There are reports of layoffs in sectors such as auto
ancillary, hospitality and investment banking, among others.

Trade Deficit Problem

On the one hand we dont have enough exports due to bad economic condition of foreign
economy, due to ban on iron ore export.
And on the other hand we are importing around 76% of oil requirements from outside, we are
importing coal to feed our power plants, we are importing natural gas from outside, importing
Gold in unprecedented manner even after import curb measures taken by RBI.
With some global factors and depreciating rupee the burden on the OMCs are rising & they in
turn increasing the fuel prices adding to inflation & this in turn affecting the rupee badly.
These are the factors which are directly worsening CAD.

Another problem is of Fiscal Deficit.

Due to bad shape of the economy there government is not getting enough revenue out of the
corporates in terms of taxes which is their largest source to fill their coffers. And due to election

is approaching government is bound to expend more. And the recent announcement of Food
Security Bill will worsen the coffers of government. So the expenditures are increasing &
revenue are not increasing at that pace.
Another problem is due to slowdown & mood of the market is not good there is no divestment is
happening in PSUs & also the spectrum auction last time didnt successful due to high prices of
bids. So this source of revenue is also absent.
Due to interest rates are still high & economy is still not out of woods & fear of downgrade,
mood of the industry & FII is not good. With not enough reforms by government industries are
not investing enough, their capex plans are still on hold. And so IIP numbers are not so cheering.
Even after announcing some reform measure in different sectors, there is not enough FDI or
investment is coming because government is not able to not clear picture for long term growth &
related to tax related issues& other bottlenecks. They have announced these short term measures
to curb the rupee depreciation & change the mood the of the dalal street.
Deterred to the mood of the economy, comes the rupee shocker which touched all time low
against US dollar. Some of it happened due to the announcement by Federal Reserve of QE taper
as US economy is showing some revival & FII pulled out from its coffers.

Problem of External Debt.

Indias short term debt maturing within a year would seem to be a matter of concern against the
current backdrop of the declining rupee & US Feds possible change of stance on easy liquidity
in future.
Short term debt maturing in a year is considered as a real index of a countrys vulnerability on
the debt servicing front. It is the sum of the actual short term debt with one year maturity and
longer term debt maturing within same year.
Indias total external debt ballooned & causes the real problem. The rise was mainly due to
increase in short term debt, commercial borrowings & NRI deposits.
India has accumulated a lot of short term debt due the hot money from outside. When the
developed economies were at laggards in last 4 years, the easy money came to India & with that
easy money the short term debt ballooned.
If capital flows were dry up due to some unforeseen events & NRI stopped renewing their
deposits with India, then 60% of the countrys forex reserves may have to be deployed to pay
back foreign borrowings due within a year. A lot of the surge in external debt maturing within
next year is on account of big borrowings by big corporates during boom years after 2004.

Corporate Crisis
The continuing economic weakness and plunging rupee is only worsening the situation. Indian
firms hold nearly $225 bn of dollar denominated debt, half of which is estimated to be unhedged,
leaving those firms badly vulnerable as rupee depreciates alarmingly.
The corporates in last 5 years had accumulated large amount in their right hand side of balance
sheets which now becoming stale with interest rates are are not serviceable. Their interest rate
coverage ratio has ballooned. With the help of easy money they entered in different verticals &
now they are creating problem for them as they are not performing due to slowdown or the
execution plan was not correct.
Banks are most vulnerable situation, as many corporates had taken debt, especially in
infrastructure, power sector they are facing blues due to bad situation of the economy. The
projects are not commissioning & in turn banks NPAs are rising.
With all these things India is facing some depreciating situation & facing the fear of downgrade
by some credit rating agencies.

Solution
So, the government at least have to wake up right now to take some credible steps to shore up the
economy. Its not enough to announce some forex measures, announcing some ECB measures,
raise duty on gold imports, raise duty on LCD TVs coming from outside. Government must
consider from the root cause of the problem.
First of all reduce the CAD & also Fiscal Deficit unless & until it cant be curbed there is nothing
which can save the economy. So for that start some export oriented measures as some of the
western economies are improving so export will get some boost, waive the ban on iron ore
export, strengthen the tie up in terms of trade with South East Asian economies to shore up the
trade. Need to reduce Trade Deficit which has been ballooned from 2004.
Second there must be some more FDI announcement in credible manner in which there must
come some FDI amount so that we can get inflow of dollar, FDI should not be for showcasing by
government that we are announcing reforms. It should not be like that FDI in multi brand retails
have been reduced but still we are waiting for some amount to come. Those happened because
the root problem & causes was not cleared by government & those were not clear to those
retailers. Ensure that the FDI that are coming they must be of long term nature & not for the time
being by Venture Capitalists, Hedge Funds. There are also cases of round tripping investments
where the investment is coming from overseas for the benefit of taxation & the n flown back to
the country.

So government must be committed to its policies & not to become lame in their policy decisions
to take the economy out of the woods.

Name : Abhijit Roy