Growth faces headwinds
Indian currency is in free fall yet again. It hit 16-month low earlier this week, slipping below the psychologically-important mark of Rs 68 a dollar. It saw such a level back in January 2017. This may please exporters in general and IT and pharma sectors in particular.
Indian currency is in free fall yet again. It hit 16-month low earlier this week, slipping below the psychologically-important mark of Rs 68 a dollar. It saw such a level back in January 2017. This may please exporters in general and IT and pharma sectors in particular. The growth of India's IT and pharma, among the country's biggest exporting sectors, is invariably linked to the weak currency. Therefore, we tend to see robust financial results from IT and pharma sectors whenever we see steep depreciation in the rupee. The other segment which gets fillip from weak rupee is the manpower and talent migration. So are also the remittances from NRIs.
But with so many benefits, should we celebrate rupee fall? Absolutely not. Weaker rupee has many ramifications for the Indian economy and Indians. India depends heavily on oil imports. To be precise, 70 per cent of petrol and diesel consumption in the country is met through imported oil. Therefore, rising oil prices will lead to higher import bill which will in turn widen the current account deficit (CAD). With crude hitting $80 this week, the CAD is estimated to go up to 3.2 per cent of GDP in this fiscal from 1.62 per cent of GDP last fiscal. That will obviously put huge pressure on the currency. It’s kind of double whammy – rising oil prices and weakening rupee.
Apart the crude shock, there are factors that are affecting the currency. With increasing interest rates in the US, capital is now flowing back to the world's largest economy from the emerging economies like India. Outflows from India's debt and equity markets already touched Rs 17,000 crore this year. Back home, political cliffhanger in Karnataka and the see-saw battle between parties for power added fuel to the rupee fall. As a consequence, the currency depreciated by 6.22 per cent so far in 2018, thus earning the dubious tag of the worst performer among all Asian currencies this year. In the process, it shed more than six per cent that it gained in 2017.
As of now, the currency recovered a bit thanks to the periodic interventions from the RBI. The apex bank is also said to be working on NRI bond issue to stabilise the currency. It undertook a similar exercise in the past when currency was in free fall. But these are all short-term measures. What the country needs to do is increase exports a la China. Labour is far cheaper in India than in China.
Talent is aplenty. Still, India depends on Chinese imports from solar panels to sauce bottles. Unless India accelerates its exports without tweaking the currency and decelerates imports through local production, the rupee will continue to be under pressure at the slightest of a global headwind. With ‘Make In India’ coming a copper, the manufacturing sector pie in GDP continues to languish at a low of 16 per cent. Unless this percentage increases, India has no other option but to depend on imports for its sustenance. Time for the country to find new ways to increase investments into manufacturing sector and get more FDI!