These are not delusion in grandeur, when one goes into the facts and figures of fundamentals. There was euphoria with the change of the guard in RBI. The market upshoot. Rupees jumpstart to rebound. Hopes revived for bounce back in growth. This sudden jerk in upturn unleashed that the economic turbulence, erupted by Rupee slide, has slender relation with economic fundamentals. Current account deficit is a concern, but is manageable.

The US quantitative easing scuttled the emerging economies. USA was infusing huge cash stimuli amounting to US $ 85 billion a month. India too benefitted from this pumping of cash in US economy. With the US economy recovering, the Federal Reserve plans to reduce the cash bonanza in phases to zero. With the stopping of cash flows, fresh flows of US Dollar will reduce and older flows will reverse to USA. This shocked the Rupee value, which slashed by 18 percent in three months from June. It was true that Rupee was the worst to be affected among the emerging economies. But, other emerging economies’ currencies too tumbled. Between June 5 to September 4, Indonesia Rupiah crashed by 13 percent, Thai Baht by 5.6 percent, Brazil Real by 9.8 percent and Malaysia Ringgit by 6.5 percent. The slip in Malaysia Ringgit was despite the fact that Malaysia was running a surplus current account balance.

When Rupee was crashing, a apocalyptic forecast was that private equity investors and the multinationals, who are the main drivers for FDI in the country, would exit. But the Rupee xenophobia did not last long. Foreign equity investors were alarmed, but were not jittery. They owned about US $ 200 billion. But they sold only US$12 billion. FDI spurred by 20 percent to US $ 7.5 Billion during April to July 2013 from US $ 5.9 Billion in April to July 2012.

Then what factors steered the turnaround? Was it only the change of guard in RBI? Probably no. Take the case of current account deficit, which was falacious. From a comfortable zone of 1.5 per cent to 2.0 percent ratio of GDP, it skyrocketed to 4.8 per cent. But, the veiled factor, which shoot the current account deficit, was gold import. Gold, which is an uneconomic metal and is demanded for bad days security, alone accounted for 61 per cent of current account deficit in 2012-13. Minus gold import, current account deficit would have been little less than 2 percent of GDP. Government restricted the gold import. It raised the custom duty and imports were made restrictive with riders. The measures impacted the imports of gold and the trade deficit plunged - the main attributer to current account deficit. Trade deficit dropped to US $ 10.9 billion in August 2013 from US$ 12.3 billion in July 2013 – a big drop by 13 percent – and far more dip from US$ 14.2 billion in August 2012. India imported only 2.5 tonne of gold in August 2013 against 47.5 tonne in July 2013. Therefore, India’s current account deficit is not the structural problem. They can be fixed by means of modest reforms, said Mr Raghuram Rajan, newly appointed RBI governor.

There are three factors which insulate the stability of Indian economy. They are strong domestic demand, low external debt risk and a large pool of working age population.

Spurt in GDP growth during the golden period between 2004 – 2008 and a moderate growth thereafter ( even though they were more than world GDP growth) was mainly driven by strong domestic demand and the support by the growth in manufacturing sector in tandem. Domestic demand accounts for three fourth of India’s GDP, much of which is private sector demand (nearly 60 percent). These structural contributions to GDP helps India to edge over other emerging economies. In Malaysia, domestic demand accounts for only 15 percent, in Thailand it is 22 percent , in Indonesia it is 68 per cent and in Mexico it is 66 percent. The strong domestic demand helped India to withstand the Lehman storm, while other export based emerging economies were volatile by the shock.

At present, the underlying problem in the economy is supply constrain, which was compounded by low manufacturing activities. Tight monetary policy arrested the manufacturing growth. Investors were shy and it created an hollow in domestic investment. Institutional weaknesses castigated the manufacturing capability. Slow allocations of natural resources (like iron ore leases), granting clearances and land acquisition complexities dampened the manufacturing initiatives. However, these are not the fundamental economic anemia. They can be addressed by strategic policies with modest reforms, according to Mr. Raghuram Rajan.

India needs big investment to build up the manufacturing capacity. Apart domestic investment, FDI plays a significant role in the manufacturing capacity building process. FDI was upbeat till 2011-12. But, thereafter it tapered on the paranoia on land acquisition complexities and much highlighted corruptions related to 2G licenses and coal scam.

India is in more favourable position in external debt position than other emerging economies. Higher external debt ratio to GDP is one of the important fundamental risks for a developing economy. In 2011 India was the third lowest in external debt ratio to GNI in the world. The external debt ratio to GNI was 18.3 percent. Other emerging economies owe more in terms of their GNI. In Indonesia, external debt risk ratio to GNI was 26 percent, notwithstanding it being a oil rich nation. In Malaysia, it was 31 percent, in Philippines it was 32 per cent and in Taiwan it was 24 percent. Furthermore, only one-fourth of India’s total external debt is short-term debt. The key cause for Asian currency turmoil in 1997-98 was the rapid growth in short –term debt, according to IMF. In this perspective, fear over renaissance of Asian currency is a far cry.

Once large and growing population a liability, has now become attributer to the stability of the economy. Eclipsed by aging population due to better medical facilities, the developed nations are sinking into working age population shrinkage. This steered them towards emerging economies for manufacturing hubs. It led China the biggest manufacturing hub in the world. But the one child policy impacted the China’s abundance in working age population and is feared to add lesser working population in the days to come. In other emerging economies, working age population account for a big share – 50 per cent or more. But they are small in sizes. In this perspective, India has an edge over these emerging economies. According to 2011 Census, working age population (15 -65) of India was 669 million. This represent double of the working age population taking together of Indonesia, Thailand, Malaysia, Philippines and Brazil.

Therefore, India is in a sound position because of its strong economic fundamentals. CAD concern is more of fallacy than economically inflicted reasons. What the country needs at the present juncture is more investment oriented growth. In these perspectives, modest reforms can fix the problems.