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.
A GRIM OUTLOOK
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.
UNSOLD REAL ESTATE
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.
Rs.7 lakh crores- India’s ILLEGAL REMITTANCES
India has a stringent and widespread foreign exchange (FX) regime, regulated by the RBI and overseen by the feared Enforcement Directorate. At the very entry/exit point of FX transactions, banks are the sentinel of vigilance, to report any suspicious inflow/outflow of funds from India and thus prevent its occurrence. Any dubious transaction in violation of the FEMA laws requires online reporting and immediate investigation. The overall system to regulate FX has been significantly strengthened due to digitisation over the years, greatly assisted by real time sharing of information between various nations, to combat money laundering, terrorism and tax evasion. India’s FX regime/regulations are among the best in the world, yet it comes as a surprise that huge illegal inter country FX transactions continue to take place. Such violations occur chiefly due to collusion/incompetence of banks and customs authorities who dilute such a tightly controlled FX regime. The international watchdog ‘Global Financial Integrity’ reports that in 2014, India had illicit FX outflows of $21bn and such inflows of $101bn. The most popular modus operandi being over invoicing of imports and under invoicing of exports.
Such enormous FX violations are a damning report on our FX vigilance and reporting systems. Illegal FX transactions not only mean that they have evaded tax, but also that they have by passed vigilance and can be used to fund crime, terrorism or any illegal activities. It is known to abet corruption and fund activities like religious conversion, property acquisitions by foreign nationals and subversive activities like Naxalism. So huge are these illegal/unregulated inflows that they are capable of destabilising a government itself. The report does not mention the point of origin of such funds into India and the point of such funds remitted out of India ostaa amoxicillin. Such information would otherwise have helped to identify nations that patronise activities contrary to India’s sovereign interests. Such illegal remittances explain the cancellation of the registration of a number of religious NGOs (since 2014), who were illegally receiving funds for religious subversion on the Indian soil.