What does it really mean?

Government sources allege that vested interests are deepening this crisis. So why is the currency falling far beyond the real exchange rate of rupees?

Sanjay Kapoor Delhi 

Last year, in Iran the currency was badly battered. It was depreciating so fast that the common joke in Tehran was that the currency’s value would change between “now and….now” —  spoken after a short pause. Although Iran can’t be compared with India since it is living under US sanctions and has been restricted from exporting its oil produce, there, too, the rial haemorrhaged when the government of  President Ahmedinijad  began to hand out doles to its citizens to shore up his plummeting popularity. True to his nature, Ahmedinijad blamed international conspirators and struck at forex traders. Peace in bourses and the currency market returned after the elections.

Is a similar scenario being played out in India too?

It is possible as the timing of the currency collapse coincides with the forthcoming Parliamentary elections and the desire of a powerful section in industry to force this UPA government to announce elections. There is a view that the economy would correct itself once this UPA government packs up and goes. Besides Iran, other examples are also given. For instance, Egypt, where long queues at petrol pumps disappeared after the Muslim Brotherhood’s Mohamed Morsi was overthrown in a coup.

While there is reason to believe that external forces play a big role in economies that do not measure up to their expectations of investment policies, there is obviously a lot more that stops governments from taking preventive steps. In Europe, which is going through a claustrophobic squeeze by the Europe Central Bank, member states did not really have a clue that they were in such bad shape. Greece, Spain, Portugal — they all complained that the rating agencies did not suggest that there was anything really wrong with their economic fundamentals. When the economies spiralled into a tailspin, there was surprise over why it was happening to them.

In May this year, the Indian economy seemed to have recovered slightly from the confusion of the last few years. Finance Minister P Chidambaram had begun to look optimistic about attaining the fiscal deficit target and growth rate. It seemed time for a cut in policy rates of the Reserve Bank of India (RBI) to speed up growth. Rate cuts in interest were brought about by the central bank to rein in inflation, but this dampened growth. The situation was aggravated by a very dismal external environment with Europe and the US still mired in deep recession.

Although the Indian government kept up a bold face, troubling stories about businesses defaulting had begun to leak out. The Kingfisher and Deccan Chronicle defaults were just the prominent ones that were reported. Small and medium enterprises were generally ravaged by the slowdown. 

Before the recovery could start, the US government’s Federal Reserve chief, Ben Bernanke, announced that, since the economy was improving, there was a case for withdrawing the economic stimulus.

This news sent shivers in emerging economies like India, Brazil, South Africa, Indonesia, Turkey and so on, which had benefited from the high growth of the last few years. The currencies of all these countries began to nosedive as foreign institutional investors began to head to the US.

The situation could become hellish if the US, the UK and others decide to punish Syria for alleged use of chemical weapons

The run on the currency followed as those involved in foreign exchange trade and businessmen having treasury operations began to speculate on the collapse of the Indian rupee to earn profit through arbitrage. From May to August 28, 2013, the currency had fallen by Rs 14 to the dollar to rest at Rs 68.80. The mood is so dark that people expect it to fall to Rs 100. What does it really mean?

It means really bad news as all  imported goods will become extremely expensive. Commodity prices, especially of oil, will go through the ceiling as the oil marketing companies will pass on the increased prices due to the collapsing rupee. The situation could become hellish if the US, the UK and others decide to punish Syria for alleged use of chemical weapons. Then, the oil prices could go
through the ceiling, leading to increased hardship.

The detractors of the UPA government have questioned bringing in an expensive Food Security Bill at a time when the fiscal situation is so pathetic. Surely, they aver, it could have been delayed till the next government came to power. Government sources allege that vested interests opposed to the Food Security Bill are deepening this crisis. Even Ratan Tata, in a media interview, hinted at this.

The government of Manmohan Singh, loaded with economic managers, is coming up short on how to control the crisis. Maybe it is time for someone to file a PIL in the Supreme Court to ascertain how the currency is falling far beyond the real exchange rate of rupees.   

This story is from the print issue of Hardnews: SEPTEMBER 2013