Economy: worrying state of affairs

The impact of the package of measures announced by the government last week to shore up the rupee and to put the economy on an even keel is yet to be felt. Though they were not expected to show any improvement in the economy immediately, a change in sentiment was expected. But there is no evidence of that, and the effectiveness of some steps may be open to question. Immediately after the measures were announced, Prime Minister Narendra Modi held back-to-back meetings on two days to review the state of the economy. The meetings themselves and the measures show that all is not well, and more remedies may be needed. Finance minister Arun Jaitley has been asserting all along that the economy is in fine fettle and any negative signals that have showed up are not real and will pass. Anyone who expresses any doubt is dubbed as ignorant or worse.   

The package of measures is aimed at enhancing foreign portfolio investments, controlling the current account deficit and strengthening the rupee. The rupee has fallen 12% against the US dollar during the current year. It is Asia’s worst performing currency. The depreciation has been caused by a number of factors like rising oil prices and an adverse external environment. The government’s plans have not had any impact on the currency yet. Its steady fall has put pressure on the current account deficit. This is sought to be countered by steps like lifting the limits on foreign investment in corporate bonds and changes in the terms of external borrowing of companies. It is doubtful if they will help to attract capital flows in the near future. If such flows are for the short term, they may pose a risk, too. There is talk of the OPEC increasing its supplies in the coming months, but that is only a hope. The impact of the sanctions against Iran will also have to be reckoned with. 

Imports have risen much faster than exports during the current year. It is necessary to improve exports and reduce imports, but the plan to curb “non-essential’’ imports may be seen as going against the norms of a liberalised trade regime and may encourage illegal practices. The government has indicated that measures to boost exports will be announced soon. The finance minister has said that the revenue targets will be met, but the government does not want to give away anything on the domestic retail fuel prices. Perhaps it cannot afford to. It is unlikely that the government’s steps will help much, and the pain points in the economy may continue to hurt or even worsen.