Rupee – How Low Can It Go?

Photo PTI
Photo PTI

Good politics and good economics for long haven’t been bed partners. In India we are trying to prove this incorrect. In an election year, the economy is on a nosedive, the policymakers (many of who are influenced by the centre) have no quick fix, and politically the current government wants to ensure they are in fifth gear with populist measures. The Food Bill at this stage is surely that.

If there is any reason why the rupee reverse rocketed from 65 to 69 today, it has to do with the Food Security Bill. The passing of this bill has sent out the signal that government is going with populism over prudence and that at this moment elections will precede economy in priority. The 1,24,000 cr bill is seen as one that will add more to our deficits, and is being considered a wrong move by investors in India at a time the nation should be worried about getting its house in order.

It takes me back to an interview with Mr P Chidambaram in his previous term as Finance Minister. When the US was hit by the 2008 crisis he famously said to me, “the US should first get its house in order before pointing fingers at us.” No doubt this made headlines back then. Today India finds itself in that position. Worse we have elections staring at us. There has been no serious thinking, consensus or draft on how to lift the economy although every other day we are out with a 10-point agenda.

No doubt Chidambaram’s return as FM has been a great relief for the market, the investors and corporate India. He was seen as the ‘doer.’ But what people can see through is how hard the political climate is making it for him to execute tough decisions. From FDI to the new land acquisition bill, everything is through on paper but has displeased India Inc and its investors alike. Can anyone argue that years between 2009 and now haven’t been those of a missed opportunity? Hasn’t India shown arrogance to the very investors who built its currency in the international growth markets as an emerging emerald? (Cancelling licenses, introducing new taxes, bringing retrospective taxation and more, flip flop on FDI).

So how is the rupee connected in this mess? In a nutshell the currency market in India is exposed to the global markets. Investors are removing money in emerging markets like India and buying dollars in America, an economy that’s showing signs of strengthening. And the only thing that can help it reverse is some political will. The economics of these times is emotional. It’s about egos. It’s about investors crying hoarse that India has self inflicted this by not support growth policies.

In fact this rupee rigmarole, most experts feel the less the government intervenes with indicative capital controls, the better it is. Editor of the ‘Gloom, Boom & Doom’ report Marc Faber countered Finance Minister P Chidmabaram’s statement from last week that the rupee is undervalued. He admits India’s in a Catch-22 situation, “You can inject money in the system then rupee would collapse, or if you tighten monetary policy then the rupee will stabilise but economic activity will go down. It’s painful regardless.”

Now back to the Food Bill – In intention it wants to eradicate hunger. In philosophy it has loop holes, pending questions. For all these decades the Public Distribution System couldn’t succeed, 40 percent of what we intend to send for the poor is wasted due to problems of storage and supply chains. How will this bill revolutionize that overnight? In execution, it promises to be a nightmare. The problem is today we have not made enough cushion for this. We haven’t cut subsidies on fuel or fertiliser. We didn’t retire debt when we were in a better position. We also didn’t expect the rupee to go nuts.

So. It’s the economy stupid! If we spend somewhere, it will show up as a deficit. Unless growth picks up, how will the government’s finances be able to take this burden? Something must give way to accommodate this. Markets are still scouting for how this formula will play.

No matter what the food bill economics throw up, no matter how much financial genius will ensure the exchequer escapes an injury, the timing of the food security bill is a sheer blunder. And the government saw this coming. If it wasn’t for the desperation of elections this bill could well have waited for a time when India’s economy could absorb it.

As one would expect in this concoction of sliding markets, rupee, economy and constant opposition head banging on poor governance, the blame game has begun. Without saying it in as many words current FM Chidambaram may have suggested the problems began with Pranab Mukherjee. Yes we had retrospective taxation in one of his budgets that led to foreign investors raising an eyebrow about safety of their investments in India. The Direct Tax Code was only seen coming but didn’t quite get implemented in the right spirit. Worse we had no consensus on GST – Good and Services Tax – which would add to the GDP by sheer tax collections. Yashwant Sinha’s comments that the economy is in a vicious cycle are true. But politics of it all beg to ask the question how different can BJP’s solutions be?

Where are we today is picking up the pieces, cleaning the mess? The fact is the economic mind is trapped by the political heart. UPA’s only and only purpose at this stage is to secure a comeback in the next elections. Little wonder the tone of foreign roadshows by Indian policymakers has also started reflecting that. Montek Singh Ahluwalia recently told global fund managers to not expect big ticket moves until the elections were over.

As Pratap Bhanu Mehta writes in The Indian Express, for the Congress this is a political masterpiece because they have ensured food (Food Security Bill), employment (MNREGA) and education (Right to Education) as the key points for the political checklist.

But where I think they have surely lost some serious political currency today is with the investor. Those who drove the economy to 9 percent GDP and made India the poster boy of the growing world. Of course one can argue in a country where vote bank politics matters, who cares about the investor?


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