The Asian Development Bank (ADB) in its recent report has projected a GDP growth of 8.5% for India during the fiscal year 2010-11. This is in line with the Indian government's projections. In the same report, ADB has expressed concerns about the high inflation (currently at 8.5% in August) and appreciation of the "Rupee", the Indian currency.
There is no doubt that there is a surge in capital inflows into India. In general, emerging market shares have been performing at record levels compared to developed economies and there is abundant foreign direct investment (FDI) flow into India. While high inflation is definitely a concern (especially food inflation which remains at record levels - 16.44% for the week ended September 18,2010), I don't see the rupee appreciation, at the current levels, to be a great concern.
While the rupee has appreciated more than 11% in real terms between August 2009 and August 2010, most of the appreciation was due to more-than-normal weakening of the rupee during the early part of the year. This was due to the surge in investments in the US dollar, when investors were fleeing for safety due to uncertain economic conditions. But when we look at it from a multi-year perspective, the nominal appreciation of the rupee should be around 5%-7%, which I see as a positive factor.
Remember, only 15% - 20% of India's GDP is contributed by exports and around 60%-70% is contributed by consumer spending . Now, there is no doubt that some very crucial export areas remain which act as drivers of growth and income for many other non-export sectors of the economy. But I still think that the negative effect on these sectors due to rupee appreciation at current levels is bearable and any short-term negative effects in these sectors could be offset to a certain extent by providing incentives. But when looked from the other angle, a stronger rupee would help to diversify investments in the economy which in the longer run should be able to offset the negative impacts of rupee appreciation in certain export industries.
Also, if a major portion of the capital inflows result in real job creation, thereby fuelling consumer demand, then any resulting inflation could be tackled by standard monetary policy tools.
And if right investments are done, with correct monetary policies in place, then a stronger demand from the Indian consumers is actually a boon to the global economy. From a global macro-economic perspective, we need strong demand from the consumers in the emerging markets during the coming years to fill the vacuum left by the consumers in the developed economies.
All this being said, ADB is concerned about the over-appreciation of the rupee in the coming years. I still do not see any clear signs for that. If foreign investment policies are rightly structured supported by sound monetary and government policies, then a growth in the inflow of foreign money should be balanced by import demands from the Indian consumers in the coming years, apart from an improvement in the quality of exports - all of which I see as a good sign from a global perspective. There are very many global factors involved in this but assuming the current status-quo of global competitiveness of the countries remain, I don't see a reason to worry about the current trends in the appreciation of the rupee.
Source(s):
1. http://www.adb.org/Media/Articles/2010/13337-indian-development-outlooks/
Thursday, September 30, 2010
Monday, September 27, 2010
Commonwealth mess! - Nothing Uncommon
India is hosting the Commonwealth Games (CWG) in less than a week from now but we are not short of criticisms about the preparations for the games. In the past one week, there had been complaints of uncleanliness, security risks, poor quality constructions and an uninhabitable athletes village (and not to mention the allegations of fraud and corruption throughout this preparation).
While all this comes as a shame on the face of every Indian, it does not come as a surprise. On almost every civil program, the Govt. of India has repeatedly failed to deliver or has fallen short of what was promised. And when such a failure occurs, the blame game starts - blame on politicians, blame on bureaucrats, blame on diplomats, blame each other, blame on weather and what not. The bottom line is that no one takes responsibility - and yes it is right that no one could be held accountable because every one acts on their own and the whole structure misses a central governing body which would oversee and take complete responsibility for complex projects like these. Well, the Organizing Committee (OC) of CWG was one such body but when the OC fails to act responsibly and sincerely, someone has to step in to take the OC in hand and keep the ball rolling. But when the "5-years-in-office" politicians are given responsibilities to supervise, everything gets out-of-track from the real objective, as the period (and opportunity) of work is seen in the eyes of "5-years". And in addition to that, India's traditional system of giving power and authority to persons based on influence, connections and seniority rather than skill, performance and merit is completely out of sync with the objective of India - to be an economic super power in the 21st century.
This CWG might have resulted in embarrassment for many Indians but this is a right lesson at the right time for India and Indians. The lessons have to be learnt - the lesson that government is not exempt from the 21st century business principles, the lesson that everyone needs to be accountable to his/her actions, the lesson that government still lacks the skills, resources and experience it needs to do complex projects, the lesson that corruption could not be seen as an everyday expense to the people and an everyday revenue to politicians / bureaucrats / govt.workers (and the list goes on) and the lesson that it is time India acknowledges its shortcomings and lack of experience in certain key sectors.
As an open democratic society, it is time that India acknowledges its weaknesses openly and moves forward with steps to rectify it. Few months back, when I watched an influential Central government minister complain about the outdated laws of the country in a TV channel, I could only laugh - if he complains, what should the people do? If India has to efficiently use its scarce resources, it is time to bring in a new era of work culture in the government and form new independent autonomous bodies, free from political influence, filled with eminent persons, who could oversee complex projects that India is planning to do in the next decade and more and who could be held accountable - accountable to the parliament, judiciary and to the people. Otherwise, there would be an era of wastage of billions and billions of dollars of taxpayers' money through inefficient but complex government programs.
While all this comes as a shame on the face of every Indian, it does not come as a surprise. On almost every civil program, the Govt. of India has repeatedly failed to deliver or has fallen short of what was promised. And when such a failure occurs, the blame game starts - blame on politicians, blame on bureaucrats, blame on diplomats, blame each other, blame on weather and what not. The bottom line is that no one takes responsibility - and yes it is right that no one could be held accountable because every one acts on their own and the whole structure misses a central governing body which would oversee and take complete responsibility for complex projects like these. Well, the Organizing Committee (OC) of CWG was one such body but when the OC fails to act responsibly and sincerely, someone has to step in to take the OC in hand and keep the ball rolling. But when the "5-years-in-office" politicians are given responsibilities to supervise, everything gets out-of-track from the real objective, as the period (and opportunity) of work is seen in the eyes of "5-years". And in addition to that, India's traditional system of giving power and authority to persons based on influence, connections and seniority rather than skill, performance and merit is completely out of sync with the objective of India - to be an economic super power in the 21st century.
This CWG might have resulted in embarrassment for many Indians but this is a right lesson at the right time for India and Indians. The lessons have to be learnt - the lesson that government is not exempt from the 21st century business principles, the lesson that everyone needs to be accountable to his/her actions, the lesson that government still lacks the skills, resources and experience it needs to do complex projects, the lesson that corruption could not be seen as an everyday expense to the people and an everyday revenue to politicians / bureaucrats / govt.workers (and the list goes on) and the lesson that it is time India acknowledges its shortcomings and lack of experience in certain key sectors.
As an open democratic society, it is time that India acknowledges its weaknesses openly and moves forward with steps to rectify it. Few months back, when I watched an influential Central government minister complain about the outdated laws of the country in a TV channel, I could only laugh - if he complains, what should the people do? If India has to efficiently use its scarce resources, it is time to bring in a new era of work culture in the government and form new independent autonomous bodies, free from political influence, filled with eminent persons, who could oversee complex projects that India is planning to do in the next decade and more and who could be held accountable - accountable to the parliament, judiciary and to the people. Otherwise, there would be an era of wastage of billions and billions of dollars of taxpayers' money through inefficient but complex government programs.
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