Fear Over Faith

Fear over Faith

Mr. Ben Bernanke, Chairman of the US Federal Reserve Bank is blamed for why the rupee is nose-diving and headed towards Rs. 65 to the US $.

With access to $ 80 billion in FII funding of our debt markets including $30 billion of Government bonds, this is not good news.

Not good because   the FII hot money will leave, as they have shown us in May and June 2013, if the arbitrage goes sour. The FIIs borrow cheap abroad and invest here in Indian debt with a built in calculation for rupee devaluation. If we get worse than what they have provided for, they pull the plug, and leave with their billions.

Bernanke, to be fair to the man, merely said he would like to start tightening monetary policy if signs of growth in the US turned consistently stable, perhaps after September 2013.

This was interpreted to mean that the US would start tapering off its buying of $85 billion in bonds every month under its “quantitative easing” or stimulus to the economy programme, almost right away.

And it caused a lot of money overseas in all the emerging markets (EMs), to rush back to the US, just in case, before this happened. Maybe that is precisely what the professorial Mr. Bernanke intended but we can’t prove it.

At the same time, almost every US analyst is confident that Mr. Bernanke will not take any fiscal measures, in his couple of months in the hot seat remaining, that could hurt the recovery and growth that is emerging. After all, Mr. Bernanke wants his policy to be seen to have worked first.

So far,  US Housing and Real Estate prices have begun to rise quite robustly; unemployment figures show an uptick most of the time, bankruptcies, the City of Detroit and its pension funding notwithstanding, are not very common now.

But we are in August 2013, and the US has certainly not stabilised on its growth path enough to call for a rising of interest rates. Though the latest is the trade deficit figures are a little better.

A tapering off therefore has to come some day; but it does not seem to be anywhere near that day as yet.

The US however, is not suffering from inflation as India is, probably because of the high liquidity courtesy the Fed. The practically zero cost of finance, mandated in the face of fraction of a percentage point growth quarter on quarter. 

And because the US imports petroleum only to conserve its own substantial reserves and does not price it particularly high for the consumer.

Bernanke, due to retire from his Fed post shortly, talked about possibly tightening monetary policy in the last quarter of the year. He said this on the 23rd of May 2013, and ended up impacting all emerging market currencies, including India’s.  

FII money left the party abruptly after this, putting pressure on the rupee, and when more and more left every day; it certainly made matters very much worse.

The Indian rupee fell in line with the EMs at between 5 and 10%, maybe a bit harder than the rest. After all, even the service sector of the domestic economy is in the doldrums, read IT, despite the weak rupee. This is due to long term policy paralysis, the economy shrinking rapidly because of our very tight liquidity position, high interest rates, and runaway inflation.

The Indian Government, unlike the US one, has come up with or done absolutely nothing effective to help matters.

The contrast between the US approach, wherein the Federal Reserve has kept interest rates as low as 0.25% or less, since 2008, and the anti-growth policies of the Reserve Bank of India, could not be more stark.

Now it will be the turn of Mr. Rajan from early September 2013, when he replaces D. Subbarao, and so let us see.

But even when the Indian economy was booming in 2007, the RBI began to apprehend various bubbles and tightened monetary policy lest we grow too much too fast. And when the  Western economies collapsed in 2008, it saw virtue in clamping down even more strongly on what must have seemed to be “irrational exuberance” masquerading as growth.   

India has raised interest rates over a dozen times since 2008,  and tightened likewise the interbank rates, raised the  cash reserves ratios of the banks, and asked for stringent provisioning for bad debts.

All this, with a view to contain inflation, which has permeated the economy regardless; mainly because of our 70% dependence on imported petroleum, prices of which we have no control over.

We do have some preferential pricing in procurement from some of our long term suppliers, but then India taxes the retail product heavily at the Central and State levels too, even as it subsidises the price at the pump. That is why we have some of the most expensive petrol, diesel, and aviation fuel in the world.

We are now taking off the petroleum subsidies, and thereby spiking retail prices of everything, but notice that the taxes stay more or less intact.

Goa took off the VAT, slashing prices by Rs. 11 per litre and offering the cheapest petrol and diesel in the country since 2012.

But meanwhile, to compound matters, the RBI has been keen to dampen high asset prices, seeing it as inflationary . It has discouraged lending to builders, and the real estate sector, and practically forced business and industry to seek opportunities, acquisitions and financing abroad on the similar perception of arbitrage opportunities elsewhere.

But at the end of the day, all measures taken by the Government have not worked. Instead, a thriving 8% plus GDP growth per annum economy has been cruelly slowed; with its GDP halved.

The irony is that there has been no attempt to course- correct or reverse this anti-growth policy  despite its lack of traction or success.  Inflation, particularly food inflation, clearly is a great worry but the Government has not been able to control food prices at all.

There is a demand supply mismatch compounded by high transportation costs. The remedy of giving away subsidised food in various welfare schemes has also proved to be ineffective.

There is an acute need to change policies towards encouraging both the private sector in business and industry and agriculture too.

The Economist says we must resurrect our enthusiasm for Reform. The Government has to see itself in less regulatory, extortionate, and profligate terms; and become a friend to entrepreneurship instead.

Mr. Narendra Modi wants to take the politics and economics of this country forward  and should be given a chance to do so.  

(1,096 words)

August 6^th, 2013

Gautam Mukherjee