Millennium Post
Business

IS MANMOHAN ON THE RIGHT TRACK?

Government is far from ready to take on what it needs to bring the highly volatile rupee to a manageable level, even if need be through an exchange rate readjustment, given India’s inflation ‘much higher than in advanced countries’, as the Prime Minister Manmohan Singh acknowledged in his statement to Parliament on 30 August.

 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 depreciation 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 at present, India has been drawing down the reserves – some $14 billion 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 emerging economies.
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