Indian policy makers flip-flop as rupee's dive steepens
New Delhi struggles to lift gloom descending on Asia's third-biggest economy, with currency at new low and trade sinking into the red
Indians returning from abroad bring nearly 3,000 flat screen televisions into the country a day, turning airport luggage belts into revolving electronics displays.
Now, a stiff new customs duty aims to sink that popular trade as officials struggle to halt a dizzying plunge in the rupee. The 36 per cent TV tax is the latest in a slew of measures the government has announced to steady the currency and is a sign, critics say, of its increasing desperation.
New limits were also imposed on the amount of money individuals and companies can invest overseas. Higher taxes were slapped on gold imports. Interest rates on rupee deposits were raised. All to no avail.
India's ailing rupee hit a record low yesterday after the central bank's plan to inject 80 billion rupees into financial markets failed to calm investor jitters.
The move, expected to make more credit available and bring down borrowing costs for the government, sparked accusations from analysts of policy flip-flops. The rupee, the worst performing Asian currency this year, ended trading at 64.60 to the dollar, down from its previous low of 64.13 on Tuesday.
"Flip-flops by policymakers continue," said Rajeev Malik, senior economist with CLSA.
"The latest moves by the RBI are aimed at cleaning up the unintended mess in the bond market from their convoluted and ineffective currency defence."
The government is panicked because the slumping rupee threatens to worsen two important barometers of the nation's financial standing - its budget, already in deficit because of subsidised oil imports, and the trade account, also deeply in the red.
"These are really piecemeal efforts," said Anjalika Bardalai, a senior Asia analyst at the London-based consulting firm Eurasia Group. "They haven't engaged in a big-bang reform to deal with structural problems still affecting the economy."
Finance Minister P. Chidambaram defended the government's efforts in Parliament on Tuesday. To halt the rupee's decline, he said the government was trying to stem demand for non-essential imports while encouraging inflows of money.
Pessimists fear India could suffer a funding crisis like the one it experienced in 1990-91 when international investors took fright at its shaky finances. But with the central bank now having US$280 billion of foreign currency reserves, most experts think that scenario is unlikely.
What's more probable is an extended period of India failing to generate fast-enough growth to either alleviate the poverty that still afflicts many of its 1.2 billion people or create enough jobs for a population where a majority is under 30 and 13 million Indians reach working age each year.
Some of the fall in India's stock market stems from jitters about the US Federal Reserve scaling back its unprecedented monetary stimulus. The Fed's low-interest-rate campaign drove money into stock markets worldwide in search of higher returns, a phenomenon that is reversing.
The Indian economy, Asia's third-largest, grew 5 per cent in the 12 months to March, well off the 8 per cent averaged over those 10 years.
Growth suffered under the weight of high inflation, weak investment, corruption scandals and low business confidence. Efforts to open the country wider to foreign investment have been applauded but have yet to take deeper root.
Prime Minister Manmohan Singh insists the tough times are temporary, and that growth could recover to its previous breakneck levels.
"We are trying our best to remedy the situation," he said in last week's Independence Day address, attributing the economic malaise to the global slowdown. The growth of past years "shows what we are capable of".
