Indian Economy - News & Discussion 27 May 2012

[gakakkad]

at this stage , a depreciating currency per se would do nothing to boost the Indian economy. A sizeable portion of Indian exports are jewellery. Raw materials (gold,diamond,gemstones) need to be imported before they can be re-exported. A very weak rupee is detrimental to this business.

Petroleum products too form a part of Indian export. Not to mention organic chemicals and pharmaceuticals. Now both organic chemical business and pharma business are directly or indirectly dependant on crude oil , as most organic compounds direcly or indirectly are petrochemical derivatives.

If India had a lot of consumer electronic manufacturing facilities ,than a very weak rupee would certainly have been helpful. But at present we don't export a lot of consumer electronic .

to assume that a depreciating rupee would magically trigger a manufacturing revolution would be wishful thinking.

[Supratik]

The economy WILL turn around even though the rupee might settle at 70 or 80 to the dollar. This would be a good thing for our competitiveness and will set the stage for a boom in manufacturing. But in the meantime, it will be painful as the babus have pretty much messed things up from every angle.

Perhaps if you were an export-based economy. For an import economy it means more inflation. As Suraj has pointed out many times what is needed is a "stable" currency so that there is economic predictability.

[Theo_Fidel]

+1.

Tariffs + ruthless domestic competition is my prescription. Folks need to take more risk and start new ventures. Need more Mallya's & king fisher type investments, but with better management this time. I think foreign capital will come despite the present blip. Solutions for India lie inside India. Open trade won't benefit us right now as it merely means importing china junk.

[Manish_Sharma]

Swapan Dasgupta ‏@swapan55 1h
Too many people 'in the know' telling me about about discreet visits 2 India by IMF teams. Preparing the ground? Or precautionary measure?

Meanwhile...

Roy ji what does this mean? Is nation going to plummet in a big economic mess. Should one convert most of ones savings into gold to save them from becoming dust?

Please explain for non-economics-understanding people.

[Suraj]

Perhaps if you were an export-based economy. For an import economy it means more inflation. As Suraj has pointed out many times what is needed is a "stable" currency so that there is economic predictability.

Absolutely. Volatile exchange rates make it hard to effectively conduct trade because hedging costs will be high.

However, I'm curious as to what is an 'export based economy'. Is there some minimum threshold ? As a simple datapoint, 10 years ago, our exports were $63 billion / fiscal year (data for 2003-04 fiscal year). Now it is ~$320 billion, and that is just the merchandise trade. Exports of services are another $100 billion odd. That's a 5x increase in a decade, whether you look at just merchandise or aggregate exports. Why are we not an export based economy ?

My point is that instead of getting lost in semantics, the data emphasizes the critical importance of a stable exchange rate to promoting an increasingly major constituent of our economic activity.

[vera_k]

The economy WILL turn around even though the rupee might settle at 70 or 80 to the dollar. This would be a good thing for our competitiveness and will set the stage for a boom in manufacturing.

Plus, in an ideal world this should also cut down on the current account deficit by reducing demand. But the existing subsidies support demand when it needs to be reduced.

The 1991 reforms were also accompanied with a large devaluation as well, which implies that an orderly devaluation might be under consideration.

[RoyG]

Manishji,

I wouldn't put all of your savings in gold. The rupee is going to depreciate further so I would put 20-25% of your holdings in physical gold and 10-25% harry browne's permanent portfolio. The rest should be liquid. Make sure you are in physical possession of your gold holdings and make sure you have some cash stashed away somewhere in the house. Other than that keep healthy, happy, work hard, and have good relations with family. This goes for anyone living outside of India.

This whole Telengana thing seems like a smokescreen for the beginnings of an economic depression. IMF teams are supposedly in India. Wouldn't be surprised if India forfeited a part of its gold holdings. Coupled with political instability, India is in for a bumpy ride.

[Suraj]

Please keep conspiracy theories out of this thread.

[ramana]

Roche loses cancer drug Herceptin patent in India due to procedure lapses

Drug is used for breat cancer and is very very costly. One round of treatment is over $125K.

[JwalaMukhi]

http://www.bloomberg.com/news/2013-08-0 ... ports.html

Raghuram Rajan was named the next governor of India’s central bank as the nation contends with a currency near a record low, one of the world’s fastest inflation rates and the weakest economic growth in a decade.

Rajan, 50, the top adviser in the Finance Ministry since 2012, will succeed incumbent Duvvuri Subbarao for a period of three years, the government said in a statement in New Delhi today. Subbarao’s term at the Reserve Bank of India is due to expire Sept. 4.

Rajan is a former chief economist at the International Monetary Fund and has a doctorate from the Massachusetts Institute of Technology.

Finance Minister Palaniappan Chidambaram and Rajan have helped lead a government push since September to revive investment, woo foreign inflows and avert a credit-rating downgrade.

http://en.wikipedia.org/wiki/Raghuram_Rajan

In November 2008, Indian Prime Minister Manmohan Singh appointed Rajan as an honorary economic adviser.

Replacing Kaushik Basu, Rajan was appointed as Chief Economic Advisor to the Ministry of Finance, Government of India on 10 August 2012.

[RoyG]

What can the IMF wallah Rajan do to get the economy on track? As long as the government continues to excessively spend and regulate RBI has to keep interest rates high to combat inflation. It's not a conspiracy when I say that the West is targeting our financial systems. They are trying to get our RBI to adopt a committee system so they influence our interest rate policy. This will be disaster if we don't cut our spending because this will lead to run away inflation.

[shyamd]

Rs 94.7 to the £ today before receding. Its going to get much worse - RBI Rajan or no Rajan, the RBI won't be able to stop what will happen next. It will throw up a lot of once in a lifetime opportunities to buy up certain Indian companies, corporate bonds on the cheap.

[svinayak]

Rajan is from U Chicago

[SaiK]

If INR walas had bought USD during <2009, and sold it now, would have made 50% profit.

[James B]

Why blame IMF or World Bank wallahs. The reason for our Economy being in dumps is of our own making. Policy paralysis, indecision, corruption and scams put an end to reforms. Regressive steps like MNREGA, FSB and other welfare schemes has only made the matter worse.

[Muppalla]

Why blame IMF or World Bank wallahs. The reason for our Economy being in dumps is of our own making. Policy paralysis, indecision, corruption and scams put an end to reforms. Regressive steps like MNREGA, FSB and other welfare schemes has only made the matter worse.

Add to that - taking cue from situation (self created/advised) bring stuff like 49% FDI in this and 90% FDI in that etc. On whose advise?

My posts are getting deleted for whatever the reasons that this software thinks

[Muppalla]

Rs 94.7 to the £ today before receding. Its going to get much worse - RBI Rajan or no Rajan, the RBI won't be able to stop what will happen next. It will throw up a lot of once in a lifetime opportunities to buy up certain Indian companies, corporate bonds on the cheap.

A good point. Make rupee crash to 200 per dollar and cobble up some good Indian companies. All meanwhile to improve economy keep increasing FDI limits.

[James B]

Add to that - taking cue from situation (self created/advised) bring stuff like 49% FDI in this and 90% FDI in that etc. On whose advise?

My posts are getting deleted for whatever the reasons that this software thinks

The reason for FDI cap rise because Govt. is desperate for dollars to maintain rupee stability. But so far not a rupee has come in as FDI despite such major announcements. Investors, both domestic and foreign, have lost complete faith in this govt.

Economy will be the death-row for this UPA govt. what's with high inflation, CAD, depreciating rupee, slowing growth, high interest rates and accumulation of non-performing assets in banking industry. Only saving grace is IT industry but even there hiring has reduced.

[James B]

Rs 94.7 to the £ today before receding. Its going to get much worse - RBI Rajan or no Rajan, the RBI won't be able to stop what will happen next. It will throw up a lot of once in a lifetime opportunities to buy up certain Indian companies, corporate bonds on the cheap.

A good point. Make rupee crash to 200 per dollar and cobble up some good Indian companies. All meanwhile to improve economy keep increasing FDI limits.

Actually investors who have come through FDI route are exiting one by one. Companies like Aviva and other foreign insurance companies are exiting India with huge loss write-downs.

Imagine foreign investors who bought rupee at 54 per dollar will have to exit at loss now with rupee at 61 per dollar.

[Cosmo_R]

The Chidu I want you poster can be turned around: "I want you start governing!". Since 2004, the INR has fallen 33% WRT to USD. This had no effect on the current account deficit which actually widened.

Normal economics suggests that to promote growth you open the door to FDI and finance the merchandise and current account deficits by a combination of a steady currency and capital inflows that are not volatile (not Mauritius style investment plays).

This gummint led by an 'economist' has been unable to take any obvious and rational steps--bowing to populist 'buy the vote' pressure from the shroud.

The BRIC and India story is old and we've missed the chance yet again. A falling INR for a country that imports 70% of its oil, gas and arms not mention even higher percentages of plant and equipment is a disaster unfolding in slo mo.

We've missed the inflection point: by 2015 we should have had 10 years of 10% growth to lift 300MM out of poverty. The demographics are set in stone: India will have the largest concentration of young people (under 15) by 2015 and no means to accommodate them in the economy. Guess what that means.

On top of all of this incompetence and cynical gerrypandering (sic) , we have this Telengana issue. Regardless of the individual merits, this is the leap from 'linguistic states' to mob rule and back to future of 500 princely states. Except that they will be ruled by the likes of Azam Khan in UP (Google 'Yadav' + 'Azam Khan').

You have to attend but one presentation by Chidu/Sharma/Sibal in NYC and you realize that you need to vote with your feet.

All of this is bad news for jingos: no MMRCA (126 @45 INR/USD vs 100 INR/USD = $40 billion), no FGFA/AMCA etc.

Governance, accountability on top of free elections is a sine qua non. The worlds largest 'mela' of uninformed, uninterested vote bank voters is not enough for a modern state.

Whoever wrote ^^^ 'let the INR crash to 200/USD and huge opportunities will be seized' (paraphrasing) forgets that we could have done this at INR 45/USD.

JM very frustrated thoughts.

[Suraj]

Multiple posts about politics, conspiracy theories and allegations about Raghuraman Rajan's antecedents have been deleted. After two cautionary posts to stop disrupting this thread, future transgressions will earn a warning on record.

[SaiK]

Why can't we effectively use the fx reserves and to something about things going south? even investing or buying out large international stakes like how chippanda does, should help right?

[Prem]

Luddite’ to RBI

About New RBI Governer

For example, University of Chicago professor, and former IMF chief economist, Raghuram Rajan appears in the piece as a good guy opposed to Mr Summers's crazed anti-regulatory zeal.

In 2005, at the annual Jackson Hole, Wyo., conference of the world's leading central bankers, the chief economist of the International Monetary Fund, Raghuram Rajan, presented a brilliant paper that constituted the first prominent warning of the coming crisis. Rajan pointed out that the structure of financial-sector compensation, in combination with complex financial products, gave bankers huge cash incentives to take risks with other people's money, while imposing no penalties for any subsequent losses. Rajan warned that this bonus culture rewarded bankers for actions that could destroy their own institutions, or even the entire system, and that this could generate a "full-blown financial crisis" and a "catastrophic meltdown."
When Rajan finished speaking, Summers rose up from the audience and attacked him, calling him a "Luddite," dismissing his concerns, and warning that increased regulation would reduce the productivity of the financial sector.
Now, my sense is that Mr Rajan is a rather more free-market sort of economist than is Mr Summers. And Mr Rajan's observation that certain compensation practices may have knocked the incentives of financial executives out of whack with everybody else's interests has no clear ideological upshot. It's just a good point—a too-rare instance of attention to the effects of micro-level incentives on the stability of the whole system. Mr Summers' intemperate reaction certainly seems benighted, but I'm not inclined to chalk it up to an over-abundance of laissez-faire zeal. Once we see Mr Summers for what he is—doyen of the neo-Keynesian technocratic aristocracy—it seems rather more likely that his reaction reflected the wounded pride of a social engineer who personally helped design and vet these institutions; he was insulted by Mr Rajan's impertinent suggestion that they don't check out.

[Austin]

Wonder how Rupee crash will help our economy considering we Import far more than we export and exports even with Rupee crash has been falling.

Why a falling rupee doesn't always mean an export windfall

[ArmenT]

Wonder how Rupee crash will help our economy considering we Import far more than we export and exports even with Rupee crash has been falling.

Why a falling rupee doesn't always mean an export windfall

Yep. Just because a currency falls doesn't mean that the exports will suddenly increase:

1. There must be demand for the products. No point making more of something if you can't sell the excess.
2. There must be industrial capacity in the country to manufacture the products (or the ability to build that capacity rapidly) to grab the market share from others. This is why sub-saharan countries don't take market share away from countries with established industrial capacity.
3. The products must have enough quality that the buyer would consider switching from his existing vendors.

[Singha]

....and in that we are unable to match even vietnam, laos, indonesia and cambodia...never mind malaysia / thailand or god forbid singapore.

- perennial problems with land acquisition and permits
- environmental ministry running riot under madam's direct control to sabotage at each step
- perennial lack of power supply, costs imposed by diesel backups
- no clear improvement in ports and railways
- NHDP pace allowed to sink without trace from heady NDA BC khanduri days
- perennial lack of affordable housing for workers and families
- corrupt police, RTO and tax inspectors always trying to make money for state politicos and high command

while we are getting ready to form 500 caliphates, even SL has settled its issues and upgraded Colombo port to handle the largest container ships...generously funded by our sinic brothers.
http://www.arabnews.com/news/460393

[member_20292]

BTW, I am damn happy that Raghuram Rajan has been chosen to be the next governer of the RBI.

Hope he does a Modi on the macro economic policy.

fingers crossed.

[Austin]

What is the down side of currency devaluation , Does it lead to more inflation at home and commodities getting more expensive at the cost of making export more attractive ?

[James B]

What is the down side of currency devaluation , Does it lead to more inflation at home and commodities getting more expensive at the cost of making export more attractive ?

Yes, we will have imported inflation due to high cost of crude, coal, raw materials, gold etc..

Currency devaluation will only help if we export more than what we import like China.

The biggest mistake of RBI was to not accumulate enough dollars when the exchange rate was around 45-50 (2008-2010 period). External commercial borrowings, hot FII money gave a false sense of security regarding forex reserves. Now we are suffering due to the same as hot FII money being pulled out due to QE tapering fears in US and payments of ECB debts. Bottom line of many companies got affected due to this.

[Virupaksha]

What is the down side of currency devaluation , Does it lead to more inflation at home and commodities getting more expensive at the cost of making export more attractive ?

in a nutshell, yes.

Basically in India, because the amount of people, especially poor to middle class who are touched by imports (especially oil) is much larger than the amount of people who are touched by exports, the negative impact is disproportionate on the poor while the positive impact is on the richer export networks.

[kumarn]

BTW, I am damn happy that Raghuram Rajan has been chosen to be the next governer of the RBI.

Hope he does a Modi on the macro economic policy.

fingers crossed.

Some people were damn happy when MMS was made the PM... It is not the qualification. You should have your heart in the right place and bat for INDIA.

[Austin]

Thanks for answers on Devaluation.

The biggest mistake of RBI was to not accumulate enough dollars when the exchange rate was around 45-50 (2008-2010 period). External commercial borrowings, hot FII money gave a false sense of security regarding forex reserves. Now we are suffering due to the same as hot FII money being pulled out due to QE tapering fears in US and payments of ECB debts. Bottom line of many companies got affected due to this.

Perhaps RBI didnt anticipate the economy will slow down and Rupee will see a fall .... IIRC at that time we were growing 7-8 % and we were told 9 % is also possible ....so all were in a high. Ofcourse the borrowings and FII played its own significant role to give a false sense of security.

In the hind sight RBI erred by not buying enough dollars .....ofcourse one can make the same argument if say 1 years from now Rupee reaches 70 and we can say RBI erred by not buying dollar when it was 60.

Again these are all jugglery fundamentally we need to do Reforms , Cut our Spending and end the Practice of bribe/corruption in every big/small things we do , the easiest of the 3 is Reforms while the remaining two are difficult.

A simple example is the road rebuilding effort we had in Mumbai were hundereds of cores were allocated by BMC , then due to corrupt practises and bribe these tenders were given to constructors who had no experience in doing the job ofcourse the BMC and Politician made money as they were bribed but the end effort is the roads they built started breaking up in monsoon , there were potholes and many bikers have lost their life ....so end result is the tax payer had to pay more , the quality of work is very poor and worst citizen end up loosing their life .... thats how the corruption cycle begins and ends it impacts the common man.

[Suraj]

There's not much point in comparing the current trajectory of the Rupee to the 1990s devaluation. Back then, it was a deliberate policy measure implemented by GoI. This time around, it clearly is not - GoI is running around with their tails on fire trying to address the devaluation. There's no point in making a virtue out of it.

We are a competitive exporting economy today compared to a decade ago, based on the consistent decade-long export growth rate, and a gross export figure approaching half a trillion dollars a year. However, a sudden and unplanned devaluation does not translate to rapid growth in exports, for reasons ArmenT, Singha and others already mentioned. This unplanned devaluation isn't helping anyone - it's worsening inflationary pressures while constraining exporters from planning ahead because they've no way to guess how to hedge their exchange rate risk. For many exporters, a 5% margin either way makes a lot of difference.

[Austin]

Well if we are competitive exporting economy showing sustained growth then conversely we are also a very import oriented economy that has shown sustained growth and our import is far higher then export , So unless we turn the tables around we cannot call our self and export oriented economy.....growing export yes.

[RoyG]

Makes a lot of sense but I just don't trust an American IMF wallah heading our central bank.

[Suraj]

The question of whether or not we're export-driven or whatever, is somewhat academic, and takes attention away from the fact that trade is massively more important today than a few years ago. What difference does one definition or the other make ?

If the definition of export-driven economy is one whose merchandise exports exceed imports, then sure, we're not, and pretty much never have been, one - we've pretty much always had a merchandise trade deficit.

While I'd ask myself 'then why bother debating it ?' the problem is that the negative characterization of 'not an export-driven economy' gets conflated with 'exports/trade are not important' - there's a pronounced inward looking mindset.

However, we've run BoP surpluses, with services exports and remittances contributing to a positive BoP, which is what drove our foreign exchange reserves up to ~$300 billion.

Data shows that as a fraction of GDP, trade is MUCH larger today than a decade ago; trade volume (exports plus imports) used to comprise about a quarter of GDP a decade ago. It now adds up to almost 50%. It's grown at ~20% CAGR in dollar terms, i.e. net of exchange rate fluctuations, in that period; annual growth in Rupees is >20%.

As an indicator of how much overall exports have grown, our combined services+merchandise exports last fiscal year were comparable to that of Japan in 2000-01. As a projection, at a slower 15% growth rate for exports we'll have exports roughly comparable to Japan's current export volume, in 5 years.

[SaiK]

There is no point devaluing currency, and having high inflation... cost of living must come down.. commodities and goods should be cheaper than competitive markets.

[Uttam]

There's not much point in comparing the current trajectory of the Rupee to the 1990s devaluation. Back then, it was a deliberate policy measure implemented by GoI. This time around, it clearly is not - GoI is running around with their tails on fire trying to address the devaluation. There's no point in making a virtue out of it.

Well if one can believe Carmen Reinhart and Ken Rogoff (they and others who have done extensive work on financial crises), the currency devaluation is almost always a way government tries to expropriate wealth from lenders and reduce their debt in real terms. How does it work? Let's say the government borrows Rs 100 at 10% rate. At the end of period one they should return Rs 110. But if you devalue the currency by 10%, effectively you will return only Rs 100, thus having debt without interest.

Now this game will not work in a setting when the borrower has to go back to the market again and again because the lender will understand this game and will either price this possibility in their interest rate OR even worse will not offer any loan at all. BUT if the government believes it is less likely to get re-elected then it can try taking enormous amounts of debt to fund populist schemes. If they win the election that's great, they got re-elected. If they loose, then the next government has a big mess to clear.

Just a caveat. Reinhart and Rogoff's analysis regarding national debt and growth had big problems and therefore should be discounted. But the above argument has not much to do with the paper for which they drew a lot of flake.

[Theo_Fidel]

Is it possible that one of the sources of our inflation is these exports. For instance NRI folks can pay any price necessary for say Basmati rice. If the price doubles in India it has no effect on NRI. India agricultural product exports are now about $42 Billion per year per this report. Which is a very large number IMHO.

Traditionally exports were meant for surplus production but with strong incentives it is possible to destroy local demand and push products abroad. One way to destroying local demand is inflation.

http://www.indianexpress.com/news/agric ... p/1067663/

[Suraj]

Uttam: GoI has been doing that for decades, but not via currency devaluation (which would suggest exchange rate manipulation). Instead, it does so through persistently high inflation. There's no other way they can run schemes like assured 8% returns in provident funds. Which is why the likes of CPI/CPIM agitating against reduction in the provident fund rate *and* agitating simultaneously about inflation, is such facepalm-worthy irony - they're two sides of the same coin...

Theo: RBI sterilizes inflows on the current account to stabilize inflation, using market sterilization bonds issued by GoI. These swap money out of the system and attempt to manage rampant money supply growth due to positive inflows. Some other central banks, e.g. PBoC in Beijing, have their own autonomous authority to issue such bonds (as opposed to requiring the government or ministry of finance to issue them, which is how we do it - FinMin issues them, RBI manages them), and therefore greater flexibility to support the effort to maintain exchange rate stability.