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RBI Chokes Growth; Government Watches Inactively

Monday, August 05, 2013
By Roop Karnani

Roop Karnani is a Senior Journalist, Author and Industry Analyst

Despite the growth choking measures and collateral damage caused by RBI, volatility in the Indian currency continues even after 2 weeks. Even as the Governor of RBI addressed  TV audiences and later through the day he addressed the press, the rupee fluctuated even more violently  last Tuesday, depreciating by a record 1.8% on that day alone. A 50p movement in the rupee has become quite a normal thing. The only way it gets controlled is when RBI directly intervenes.

This is leading to even more flight of capital from stock markets as well as bond markets, resulting in even more depreciation.  With US growth figures coming in better than expected, hot money will move to the US. The CAD problem is not new to India. It has been above the comfort zone of 2.5% of GDP for the last 4 years, and was the Government and RBI sleeping or complacent to allow CAD to be financed by FII flows. The structural reforms of booting growth of exports that the RBI governor is talking about, does not happen overnight. It will take drastic measures to lift exports and even then it will take 8 to 9 months. Was the RBI not aware that the QE3 was not going to go on forever, that growth should have been boosted much earlier by cutting rates. Now it is caught in a bind and the Government is suddenly opening up FDI limits in various sectors. Just raising limits does not bring in FDI rushing into the country.
As a short term measure the Government should announce Sovereign Bonds and long term NRI Bonds which will quickly bring in 20 to 30 billion dollars. More importantly, it will improve sentiment. But the FM says we are ‘considering’ it and talking to pension funds. ‘Considering’ and ‘talking’ won’t help. We need action and quick action.

Look at the mess the government made of the Jet Etihad deal. It took seven months to fructify when people had thought initially it would happen in a week. It kept going back and forth from DIPP to FIPB to SEBI to CCEA to the Cabinet. All these concerned people could have come together and addressed all concerns, if they sat together, within a month.

It’s only a 900 million deal. What signal does it send to Foreign Direct Investors? That this government can’t make up its mind with all the brightest economists like Raghuram Rajan, Montek Singh, P.Chidambaran and the PM himself. I think perhaps it’s the case of too many cooks spoiling the broth. This time around they can’t even blame the opposition for stalling their decisions.

Let me again point out that the biggest component of the CAD is the Energy Bill and nothing is being done to encourage onshore and offshore exploration. Who would have thought that there was oil in Rajasthan until a technically competent foreign company was allowed to explore oil. This also brings in quick and large FDI because oil is the scarcest commodity of the world.

When Obama was re-elected 2nd time, he vowed to have an aggressive policy to make US energy independent by 2020. He is well on track with large discoveries of Shale gas and also they are looking for conventional oil in Alberta valley, California, where large fossils of dinosaurs have been found, which is an encouraging sign.

If India continues mismanagement and bad governance, if we slip to below 4% growth next year and US will be closer to 3%. Then the India growth story repeated ad nauseum will die and it will be manmade.

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