Currency Conundrum

India’s dysfunctional political system has exacerbated the currency crisis, argues Nayan Chanda, YaleGlobal editor, in his column for Businessworld. Officials blame Indian investors’ keen interest in gold, over-exposure to global markets and over-reaction to reports of a strengthening US economy. Chanda suggests that Indian officials – whose country has benefited so much from globalization – should not be surprised that global investors and analysts hunt for links and consequences among markets. National boundaries offer little protection from distant crises and political leaders who delay needed reforms pay for the consequences. “A high current account deficit, industrial stagnation, stalled reforms, shoddy and gridlocked infrastructure and large-scale corruption have snuffed out hopes of fast economic growth,” Chanda writes, adding that India eased rules on foreign direct investment too late. “[M]is-governance by the ruling coalition was compounded by a political gridlock with the major opposition parties hell-bent on blocking the government regardless of the consequences for the country.” Good governance contributes to strong economies. – YaleGlobal

Currency Conundrum

What makes the rupee debacle stand apart is India’s dysfunctional political system; leaders delay reforms on known problems, unnerving investors

Nayan Chanda

Tuesday, September 17, 2013

The recent spectacle of the falling rupee and falling officials scrambling around, throwing everything in its path, would have been comical had it not revealed the disastrous failure of governance in India. There is nothing new about the rise and fall of a currency and the government’s attempt to manage its trajectory. What makes the rupee debacle stand apart is not just the failure of economic policy but the country’s dysfunctional political system.

According to the official narrative, the two culprits behind the rupee’s travails are the unhealthy Indian appetite for gold and foreign investors’ unnatural concern about US economic data. “I once again appeal to everyone to resist the temptation to buy gold,” finance minister P. Chidambaram implored. “This,” he added, “will show positive impact on every aspect of the Indian economy.” To stop the bleeding of the rupee the government put up barriers in foreign exchange movement and even blocked duty-free import of plasma television by Indian tourists.

The officials also blamed India’s exposure to global markets for the rupee’s weakness. Chidambaram chastised investors for reacting to US data and not looking at the Indian situation. “Fewer people are waiting for jobs in the US or a few more people are waiting for jobs in the US — how does that affect the fundamentals of the Indian economy,” he asked. As one of the architects of India’s entry into the globalised world, he should be the last person to find it surprising that investors do not see a wall separating India from the trend of the US economy. After all, the money flowed to India when US unemployment was high and the Fed was flooding the market with stimulus. India then was a promising story and, as Chidamabarm says, the fundamentals looked good.

But that moment has passed. Investors began fleeing due to India’s failure to deliver on its promise — only accelerated by improvement in the US economy. A high current account deficit, industrial stagnation, stalled reforms, shoddy and gridlocked infrastructure and large-scale corruption have snuffed out hopes of fast economic growth. The mis-governance by the ruling coalition was compounded by a political gridlock with the major opposition parties hell-bent on blocking the government regardless of the consequences for the country. After wasting valuable time, FDI in retail was allowed but bureaucratic red tape and political uncertainty has held back money. That Indian corporates, tired of government failure, moved their capital abroad cannot be a strong recommendation for foreign investors to jump in.

The government has chastised Indians for their love for gold and has steadily raised import duty in a bid to discourage import. But leaving aside traditional Indian obsession with the yellow metal as a safe haven, dropping prices and the seasonal rise in gold import, the drive to amass gold makes perfect sense for citizens worried about the future.

The government’s bid to shore up the currency by restraining imports can only have a limited impact. Of the three top import items — oil, cooking oil and gold — only gold is amenable to restriction, but that too can be defeated by smuggling. The falling rupee could give a boost to export, but it needs a dynamic strategy and supportive measures. Kaushik Basu, chief economist at the World Bank who was chief economic advisor in the finance ministry, pointed out, “India’s biggest stumbling block on exports is administrative costs.” Lack of attention has turned India, once a champion exporter, into an insignificant player, contributing a mere 1.7 per cent of the global trade. With elections approaching, more than ever the focus will be on gaining short-term advantages, regardless of what it does to the economy.

Politicians may not notice, but their lack of attention to the country’s faltering economy does not go unnoticed by citizens who seek safe haven in gold and investors who pull up stakes to move to more profitable shores.

The author is editor-in-chief of YaleGlobal Online, published by the MacMillan Center, Yale University.

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