If even the prognosis of a rupee at this level is hardly comforting for exchange rate stabilisation or macro-economic management, other risks for growth revival in 2013/14 abound and are equally daunting in a year the Finance Minister Mr Chidambaram had hoped to achieve a 6 -6.7 per cent rise in GDP and advance further on fiscal consolidation path to contain fiscal deficit at 4.8 per cent of GDP.

One relieving feature was the apparent closing of ranks between him and an astute Governor of the Central Bank Dr D Subbarao, at last, both together in the fight to shore up the highly volatile rupee at a tolerable level by tightening on gold imports and controls on outflows through domestic channels (individuals and corporates) as part of emergency measures to bridge the large current account deficit.

Finding that the regulatory measures to limit outflows have evoked new concerns abroad in a climate of growing scepticism about India’s performance - foreign investors having reportedly sold 24 per cent of the amount they had in bonds - both Mr Chidambaram and RBI Governor hurriedly sought to assure the international community on August 22 that Government had “no intention to introduce any type of capital control, including controls on repatriations”.

It is not the policy of the government or the RBI to resort to capital control or reverse capital account liberalisation, Mr Chidambaram said categorically. Whatever measures taken so far were to curb volatility and would be revisited as stability returned, Dr Subbarao said. India’s foreign exchange reserves stood at 278 billion dollars on August 16- a decline of over 13 billion dollars in the current fiscal year since April.

The reserves provide a safe cushion at present no doubt, but it has to be viewed in the context of a rising external debt which stood at 390 billion dollars by March 2013 (21.2 per cent of GDP) reducing sharply the level of reserve coverage to below 70 per cent. Capital flows are shifting toward debt and short-term debt is now 45 per cent of total debt.

India has also to meet substantial repayment liabilities in the current year, which has seen more outflows than net inflows in the first eight months of the year. Between May-end and August 9, FII equity outflows were about 14.6 billion dollars, according to RBI, and these added to the downward pressures seen on the exchange rate.

The Finance Minister says the rupee was already under-valued before the current onslaught on emerging market exchange rates of not only India, the worst hit, but also Brazil, Indonesia, Malaysia and other developing countries. But rarely has India, once coupled with China as a dominant economic powerhouse, drawn such adverse notice among global securities firms and leading newspapers.

A “summer of troubles” is sapping a sense of confidence in India, leading to “increasingly desperate measures in the last two weeks”, but still unable to halt the decline of the rupee, the New York Times lamented. Such steep declines in the rupee make it harder for Indian companies to repay their foreign loans and turn real estate and other projects in India less attractive for foreign investors, it is pointed out.

Global markets have no doubt been in the grip of fears of a fall-out from the US Federal Reserve’s intended move to phase out its accommodative stance (Quantitative Easing) through the current purchase of Treasury and mortgage securities at the rate of 85 billion dollars a month. The tapering off can begin any time this year beginning September and QE ended by mid-2014. Rising US interest rates have already begun to drawing money away from emerging markets.

What has been underlined in India’s case are factors - as have also been cogently brought out in the RBI’s Annual Report for 2012/13 - such as softening growth, higher inflation, weakening rupee, falling stocks and waning investor confidence with a risk of a spiral downward. That investors, who loved the emerging markets and poured large sums, are now reversing course is the general refrain in the world press.

Indeed, the times are too challenging for not only Governments of countries, even if not as badly placed as India at present, but also for central bankers who have to juggle with equally demanding objectives of combating inflation and containing inflation expectations, supporting growth and promoting jobs, and ensuring exchange rate and financial stability. The Prime Minister recently talked of a need to revisit monetary policy objectives.

Dr Raghuram Rajan, a star economist of international standing, takes over from Dr Subbarao on September 5 in a highly tough economic environment. He had said immediately after his appointment that there was no magic wand by which to bring about a fairly early stabilisation of the rupee or to turn things around in the real sector of the economy.

Dr Rajan may throw light on what he would bring to bear in his approach to monetary policy soon after assuming his new office, or at the already scheduled mid-quarter review of policy on September 18. Meanwhile, the Annual Report of RBI published on August 22, says if high food inflation persists into H2 of 2013-14, the risks of generalised inflation could become large.

WPI had risen to 5.79 per cent in July, reversing the declining trend of previous three months. while CPI food inflation remains close to double digits. The RBI report has, therefore, called for close attention to food management and for taking policy actions to address structural factors that constrain agricultural supply response.

Though growth in the current year has been revised down to 5.5 per cent by RBI, even this recovery is predicated on “better governance, the removal of supply constraints and maintenance of stability”. Despite the new risks, GDP growth outlook for 2013-14 could be better than last year in the wake of a good monsoon and growth-supportive measures taken by Government, RBI noted.

However, risks remain from continuing fiscal and external deficits, high consumer price inflation, the exchange rate depreciation feeding into prices, and deteriorating asset quality. As such, in RBI’s view, macroeconomic and monetary policies need to be carefully calibrated to achieve the immediate objective of maintaining stability without compromising growth.

Growth would also depend to a substantial extent on the revival of investments which had remained weak in 2012/13. It would appear that Mr Chidambaram has come to realise that much more needs to be done at home, and by Government more than the Reserve Bank, to revive the growth engine. This calls for vigorous steps at all levels to expedite clearances and get projects on the move for capacity creation and utilization.

The Finance Minister, who has since lowered his sights to a 5.5 to 6 per cent growth, is hoping that revival would pick up in the second quarter and gain momentum in the second half of the year with some stability returning to markets, He still sticks to his fiscal deficit target (4.8 per cent), despite the rupee depreciation impact on public finance, given his penchant for wielding the axe on expenditure across the board. Equally, he asserts that the current account deficit would not exceed 70 billion dollars (below 4 per cent of GDP), which would be ‘fully and safely financed”. (IPA Service)