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Indian Economy

A FALLING RUPEE

Akhilesh Bhargava

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Despite India having record foreign exchange reserves of over USD 400 bn and the FDI (foreign investment) inflows too at an all time record high, the rupee is in danger of a continued depreciation against the dollar. It has already touched a new four month low and is further headed southwards. The rupee’s downward slide has to do with a slew of international and domestic factors. With the end of QE in the USA and an imminent increase in interest rates there, foreign funds which are presently parked in emerging markets like India, will go back to America, due to the higher interest rates there and no risk of foreign exchange losses. Such flow of funds back to the US will also happen as the tensions between North Korea and the USA exacerbate and rake up global stress/uncertainty. At such times the world sees the safety of its liquid wealth in dollar assets, such that the dollar demand/price shoot up. Yet another factor that could flee funds to the USA and drive down the rupee value is the promised tax reforms in America by Donald Trump. If these reforms do materialise then the US corporates, which have stashed billions of dollars aboard, will take them back home, thus denying its supply to other markets. While there are such global factors looming on the horizon, there are others also on the domestic economy, which could press the rupee value downwards. India’s exports have been on a downslide, primarily because of the rupee’s rise against the dollar in the last twelve months. The exporters are clamouring for marketing the rupee at a lower level against the dollar, so that their competitiveness is restored in global markets. Moreover, due to falling exports and rising imports, India’s current account deficit has already crossed 2.4% and is headed in an ominous direction. It was a mere 0.10% last year. Such a position forebodes a further fall in the rupee-dollar rate. Yet another twin factor that will pull down the rupee is the combined effect of the falling GDP growth rate and the rising fiscal deficit in India. With the Indian economy showing signs of weakening, its currency too will weaken, if emergency measures are not taken. This sentiment is already reflecting on the Indian stock markets, where foreign investors have been net sellers of stocks, week after week, depreciating the rupee in the process.

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Indian Economy

A GRIM OUTLOOK

Akhilesh Bhargava

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The Monetary Policy Committee (MPC) of the RBI, painting a grim picture of the unfolding state of the Indian economy left the repo rates unchanged at 6% and has put the ball in the government’s court to set the house in order. Repo rate is the rate at which the RBI lends to banks, and serves as the benchmark interest rate for the nation. Even though the GDP at 5/7% has fallen to a three year low and there was the usual demand to prune interest rates, the RBI refused to do so, citing build up of inflationary pressures, due to various reasons. The RBI expects inflation to cross its target figure of 4% during this fiscal, due to rising fiscal deficit and expectation of a lower food grain production. A low interest rate regime increases the supply of funds in the economy, which tends to push up inflation herenapotheek.nl. The RBI has lowered the growth target of India’s economy for this year to 6/7%, from its earlier target of 7.3%, and expects growth to pick up in the coming quarters. The RBI’s assessment of the economy has been worrisome. As a result of the combined fiscal deficit of the centre and the states crossing 6%, it sees little scope for any fiscal stimulus by further government spending and warns that it would endanger the macro economic stability of the country. It will lead to a spike in inflation and also weaken the overall government finances. The RBI also mentions sternly that the farm loan waivers by the states undermines the overall quality of public spending. Among the matters of concern to the RBI is an increase in food prices due to a lower kharif crop, delayed revival of private sector investment and stressed balance sheets of banks and corporates too. The slowing economic growth, will have an adverse impact on the tax revenues, which will further consider the growing fiscal deficit. A usually passive RBI, which has tended to toe the government line in recent times, has spoken out. The RBI’s analysis of the state of the economy is not surprising and has been evident since sometime. All that it can do is manage the monetary affairs of the country and can only warn the government against any fiscal profligacy or deterioration of the economy. The ball is certainly in the government’s court to heed to its appropriate warning.

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Indian Economy

UNSOLD REAL ESTATE

Akhilesh Bhargava

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The newspaper reports state that the builders in Mumbai, are sitting on an unsold stock of Rs.250,000 crores, representing at least 300,000 flats, with no buyers. The builders have now been carrying this unsold inventory since a few years, which means that they have witnessed a sharp dip in sales and profitability and should be in a severe financial crisis. Unsold flats also mean recurring losses to builders, not just by way of interest on high cost loans taken by them, but also way of security, maintenance and BMC taxes etc., to be paid for the stocks not sold. A logical fallout of this means that the builders face a huge financial mess, which should compel them to bring down real estate prices to customer expectations, so as to sell stocks and repay loans, instead of incurring continued losses. Another fallout of the enormous unsold stock for builders should be that the builders should not announce new projects, not just because of the huge unsold stocks on their books, but moreso that they are facing a crippling liquidity crisis, due to funds stuck in dead stock. It is curiously noted that Mumbai is witnessing neither. Builders have shown no urgency to bring down prices to liquidate stocks and new projects continue to be announced. This strange behaviour raises pertinent questions about the background of the investors and their huge funds stuck in real estate projects. Who are these investors, who are not perturbed by the fact that their huge funds are stuck in real estate projects that do not sell, and why do they not force builders to bring down prices and liquidate stocks? It is well known that the real estate has been a popular parking slot for persons with dubious funds, from sources like corruption, crime etc. Such investors are indifferent to returns, but desperately need a safe parking of their ill gotten gains; which is real estate. This strange situation is worthy of an investigation. It will do good to the entire system, not just by bringing down the astronomical real estate prices in Mumbai, but may also unearth huge mounds of illicit funds parked (not invested) therein.

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Indian Economy

START UPS IN INDIA

Akhilesh Bhargava

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With an open economy, a vibrant democracy, a huge domestic market and ‘business’ in its genes, India has the third largest start up enterprises in the world. Though India is booming with young entrepreneurs, an IBM-Oxford study reveals that 90% of India’s start ups fail within five years of set up. The non availability of sufficient suitable funding, and skilled workforce, as also the lack of innovation are considered to be the main reasons for such a high rate of failure. The study says that what these failed businesses lacked was pioneering innovation, based on new technology and unique business models. Let us ignore the failures for a moment and look to the bright side of our start ups. It is heartening to note that despite a stifling bureaucracy and predatory corruption, that sucks the profits out of business, young Indians are not afraid of venturing out on their own. Their resilience and tenacity to stand up against an oppressive system, to pursue their entrepreneurial dreams, is evident from the fact that the IBM study does not list redtapism and corruption to be the key factors for the failure of start ups in India. Indians retain their appetite for risk and the legendary business skills, of their forefathers, who bravely ventured into faraway lands in search of opportunities. Interestingly one third of start ups in the famed Silicon Valley of USA which has spawned entities like Google, Facebook, e-bay etc. are of Indian entrepreneurs. While business and failure (due to inherent risk taking) are two sides of the same coin, we must mitigate the failure rate of enterprises, by institutionalising the availability of funds to them, providing business mentors to improve their governance and compliance, and giving them access to cutting edge technology, with skilled labour. These start ups are the biggest generators of employment opportunities for us and are vital to India’s growth. India is blessed with millions of budding brave young entrepreneurs, who venture out on their own, expecting no resources from the government. An encouraging environment to these pillars of Indian business, will certainly increase their success rate and add to India’s growth and development.        

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