Rupee’s fall to an abysmal 60 vis-a-vis US dollar, coupled with the stock market coming down by 526.41 points at over 2-month low of 18,719.29, has made everyone sit up and take serious note of the gravity of the economic crisis. The panic among investors is palpable. The questions which we face today are: Is the economy headed in the right directionIJ Is the worst overIJ
According to the Finance Ministry, the troubled days are way behind us. But going by the financial markets, the worst is yet to come. What should one believe inIJ The possibility of a distant miracle or the stark reality that is staring us hard in our faceIJ We are trying to find answers to these mind-boggling questions; but well-structured responses to these are difficult to come by. But we have to keep in mind that India is not a standalone economy. It being an emerging player in the field, it is affected by global factors too as 40 per cent of our GDP comes from international trade.
Also, the economic developments in the US directly or indirectly affect emerging markets like India. For instance, when the Federal Bank recently decided to continue with quantitative easing (QE) measures, it generated fresh confidence among global investors. Consequently, US economy that looked weak last year is now emerging as an investment destination hugely preferred over India. The foreign institutional investors now feel
that putting money in US would be more profitable than investing in India.
This is resulting in large-scale selling of stocks in Indian markets to make investments in the US. This, in turn, is putting extra pressure on rupee that is already treading on a bumpy road. As the demand for the dollar is escalating, India’s story is looking glum due to a revised and resurgent US economy. This is not to say that we have not contributed to the fall of rupee. Since the last two years, decision making in the Government has been literally paralysed thereby disallowing opening up of investment in various sectors.
Indian economy earnestly needs the money that is stuck with banks due to widespread reluctance of the private sector to invest in India. This is probably because they feel that the lending rates in India are not lucrative enough. lending rates are high because of commodity price movements and a weak rupee. At the moment, the Government seems to remain entrapped in this vicious cycle and is unable to offer any out-of-the-box solution to prospective investors.
At this juncture, the Government must reduce the lending rates and kick-start the much needed investment process. This should be done immediately before any further slide in rupee takes place. Secondly, the infrastructure sector is short of raw material (coal and gas) and is desperately seeking a Government policy. Hopefully, the Finance Minister would be able to honour the two-month deadline announced by him for resolving the infrastructure raw material issue. If he is successful in doing so, rupee which looks very weak in the short-term, would stablise in the mid-term and may strengthen in the long-term. However, the only caveat is that the Government should walk the talk and implement all the announcements of opening up the economy at the earliest in order to revive the investor sentiment. Then only, will one see a revised growth in economy.