The analysts are out in full force rationalising the state of the economy using all the available clichés and jargon. The consensus is that the anticipated easing of QE in the US, combined with the current account deficit, contributed to the fall in the rupee. Surely, a few well-chosen words will enable a rebound. Were the issue not so serious, we could almost make a case for a Hollywood blockbuster.

GREAT EXPECTATIONS

We have moved not from the sublime to the ridiculous but from the ridiculous to the delusional. The announcement on QE was made on August 25, 2013, by Federal Reserve chairman Ben Bernanke. The downward spiral of the rupee, on the other hand, is not a recent phenomenon; it began in May 2011 at least. The fall was accelerated after the announcement, and more severe than other currencies.

The current account deficit (CAD) is unsustainable at 5 per cent, instead of the accepted maximum of 2.5 per cent of GDP. But this deficit is again not something that grew this quarter; it has been above 2.5 per cent since 2011. Surprisingly, the predicted CAD according to the Barclays report dated August 23 is $68 billion. An expected reduction in the deficit!

Stop blame game

To understand the current situation we have to first stop assigning blame on the US or the global economic and investment climate, and consider the reality.

1. GDP and income: The growth in GDP is projected at around 5 per cent at best but more importantly, there has been a decline in manufacturing activity this August and the confidence of the sector is low. The 10 years from 2000 have witnessed a huge growth in GDP but a higher growth in the incomes of the top 10 per cent of income-earners in the country.

In other words, the benefit of the growth has been skewed highly in favour of the richest 10 per cent. It has had only a marginal effect on the remaining 90 per cent.

2. Increasing expenses: Compounding the lack of income growth has been a disproportionate increase in the expenditure of 90 per cent of the population.

Food price inflation has raged in excess of 10 per cent in the last five years. Middle- and low-income earners spend a higher proportion of their earning on food.

This coupled with low income growth has left the majority of the people with extremely tough existential choices. Therefore the claim (based on crass statistics) that poverty has been reduced in the country has no credibility.

3. Price of housing: Housing prices in India have increased at the rate of more than 10 per cent in most places and at a pace much higher than inflation and interest rates in others. This has led to unaffordable housing for the majority, allowing for little flexibility in the event of a change in interest rate, income or other circumstances.

4. Hidden gold?: The magic number of 25,000 tonnes of gold “hoarded” by the Indian public, once unearthed, is supposed to reduce the strain on the currency.

Gold is considered the safest asset and is usually one that investment managers and finance professionals turn to as a means to protect their funds when there is volatility, uncertainty and instability. The expectation that the general citizenry should do otherwise is preposterous.

Inaction catastrophic

This leads us to the important question regarding the consequences of inaction over the next year. If the economy does not start growing and there is procrastination or indecision on the part of the Government, the effect will be catastrophic. There will be a dramatic increase in unemployment especially among youth, the housing prices bubble will burst, the malls will be empty, there will be higher interest rates and bank losses on property, and higher oil prices will lead to a higher deficit. It presages a lost decade for India.

Remedial measures must be undertaken in the next few months and some systemic changes over the next few years.

Change is best

Immediately, there should be a reduction in the minimum support price paid for food products, a nominal tax on second homes with interest on loans on second homes not being tax deductible, an increase in standard deduction and the top rate of tax for highest earners.

The Government can even venture to make another offer of amnesty on untaxed income and a limited purchase of gold from the public.

The focus on currency exchange is a wasted effort as there is very little that be done in the short run to affect the exchange rate.

In the long run, the focus should be on infrastructure and the enforcement of existing laws. There is no point chasing FII or FDI and being dependent on the flow of cheap money to support the mirage of success. The fundamentals have to be addressed, and now.

Manghat is an academic in the UK and Balasubramaniam is an independent consultant in India.

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