Beyond a recital of known factors and Government’s “intentions” for possible future steps, the sober appraisal of the Prime Minister merely held out hopes of things getting stabilised and growth picking up in the latter half of the fiscal year, after a dismal 4.4 growth in the first quarter (April-June). Meanwhile, according to him, Government should be trusted to do what is best and realise its expectations on macro-economic stabilisation.

In the context of an extremely difficult economic situation, let alone the down-grading of India’s performance globally, it would have been reassuring to be told of some credible plans for bringing about exchange rate stabilisation, even gradual, in the near future, granted that essential moves which may seem politically inadvisable at present are to be avoided or cautiously approached.

Contrast this with the haste with which the Government, while complaining of lack of consensus for economic reforms, has been able to push through the Lok Sabha with some speed both the food security bill and land acquisition law, the electoral compulsions becoming the binding factor for both the ruling Congress and an ever-inimical BJP on the other side.

Given the serious external imbalances with the rupee depreciating continuing, economists have come up with suggestions like re-fixing the exchange rate (an element of devaluation), levy of an import surcharge temporarily, and even a recourse to IMF for its Flexible Line of Credit, which they consider would bolster investor confidence and restore India’s credit-worthiness, since other measures so far to draw foreign funds have not found effective response.

Though the foreign exchange resources look comfortable at 277 billion dollars at present, India has been drawing down the reserves – some 14 billion dollars in the first four and half months of the current fiscal year – to defend the rupee besides meeting other normal obligations. Unless efforts to check undue volatility succeed and some stability is ensured, there would have to be further draft on reserves.

While the UPA Government keeps telling the world that all the current woes are more due to external developments than domestic factors, and the PM statement also refers to the impending monetary policy easing in USA and a surge in oil prices due to geo-political tensions etc, the fact remains that there has been a consistent attempt to play down policy weaknesses at Governmental level leading ultimately to the growth slowdown to 5 per cent and build-up of fiscal and current account imbalances.

The global credit rating agencies have highlighted the risks that the economy has run into mainly due to lack of speedy actions in a wide range of economic areas. The Prime Minister’s focus was rightly more on the sharp depreciation of the rupee which he viewed as the result of reversal of capital flows to emerging economies from the announcement on tapering of US quantitative easing, which was pulling down currencies of several countries including India.

But the rupee is widely noted to be the worst hit among the emerging and developing market currencies and the degree of depreciation has as much to do also with other domestic weaknesses in the economy. At a routine briefing on August 29, the IMF spokesman said in reply to a question that India has “longstanding external vulnerabilities”. He mentioned “large fiscal and current account deficits, high and persistent inflation, sizable un-hedged corporate foreign borrowing and reliance on portfolio inflows”.

These, he added, “have now been elevated as global liquidity conditions tighten, and this clearly has affected market confidence.” He declined to enter into speculative reports on whether India has sought IMF support. Whatever the turbulence in capital and currency markets, the Prime Minister admits the sudden decline in the exchange rate is certainly a “shock” and he does not rule out more short-term shocks from the globalised economy from which India had benefitted over the last two decades.

Against this background, Government needs to spell out clearly what it proposes to do not only to finance the current account deficit which it contends would not exceed 70 billion dollars this year but also in terms of export promotion, import constraints and other measures which would bring down the trade gap and help narrow the current account deficit. By now Government should have come up with an action plan on facilitating exports taking advantage of the rupee depreciation.

For the present, all that the nation has to be satisfied with is that the good monsoon, the “growth-friendly” measures taken over the last six months, like FDI liberalisation, fuel pricing reform and decisions on some of the stalled projects would all help in reviving growth in the second half of the year. Here again, the Prime Minister has taken care to add a rider, “barring extreme unforeseen eventualities”— which would be more or less similar to what has been happening over the last several months leaving our policy-makers clueless.

Analysts abroad have serious misgivings about India’s ability to stage an early recovery from the current slowdown with the added political uncertainty ahead of elections next year. Current account deficits persisting above 4 per cent would be difficult to finance in the present circumstances when growth is trending down below 5 per cent, industrial (manufacturing) output is stagnant, inflation continues to remain high and domestic investment is on a pause. Stabilisation policies, even if vigorously pushed, are unlikely to take hold in the near term.

Meanwhile, the external environment may further deteriorate for deficit countries like India as US Federal Reserve is likely to begin tapering its large-scale asset purchases (QE) in September itself or immediately thereafter, given the emerging positive trends in the US economy. The second quarter growth in 2013 has now been revised up to 2.5 per cent, driven by gains in consumer spending, exports and inventory and fixed investments, residential and non-residential. Jobless claims have also fallen lately and recovery is strong in housing market. If the unemployment rate in August also indicates sustained job growth, the Federal Reserve at its mid-September meeting may opt for launching its gradual exit from its current asset purchases of 85 billion dollars a month. That could trigger another bout of market volatility in emerging and other developing economies. (IPA Service)