Written by Sanjeev Kulkarni
“The Taming of the Shrew“, a comedy by William Shakespeare, depicts the courtship of Petruchio, and a headstrong Katherina. She is subjected with various psychological torments-the “taming”-until she becomes a compliant and obedient bride. The $1.824 trillion (Nominal GDP of India) question for India is: Will a modern Petruchio in the avatar of Raghuram Rajan, the new appointed Governor of Reserve Bank Of India, tame the modern shrew – the runaway Rupee devaluation – and restore confidence in the Indian Economy.
Click on picture for full view of movie poster.
Raghuram Rajan has been appointed as the next Governor of The Reserve Bank Of India effective September 2013. Expectations are running high in India and outside India. Reuters observes:
“Rajan may actually be more qualified than Summers to run the U.S. central bank. But he’ll do the job for India.”
It is if people think Rajan has a magic wand to wave away problems with Rupee devaluation and economic woes plaguing the Indian Economy.
We do a simple minded back of the envelop calculation to find out what the correct exchange rate of Rupee might be. Assuming that Rupee and US Dollar are linked by market mechanisms and taking into account the differential inflation in US and India (say 2% and 9%), the Rupee should devalue in four years by: (1.07^4)=1.3. The exchange rate in 2008 was Rs 51.9 to a Dollar so by this simple minded calculation it should now be be Rs 68. (We are ignoring the relative stability of Rupee prior to this period and leave it to the professional economists to figure out this anomaly and work out the relation:
Exchange Rate = f(differential inflation, differential GDP growth, Balance of Payment … grandmother’s remedies)
As this is written, the Rupee is at Rs 61 to a dollar.
It is hard to believe that Monetary and Fiscal policies alone can wipe out the economic problems facing India. As an article ” Why Chidu’s quasi-sovereign bond issue is a stupid idea [Firstpost] has observed the problems are basically lack of meaningful “public purpose”,
“First, inflation has eroded the real value of the currency. And so it should be priced lower against the dollar. Consumer inflation is nearly 10 percent, and may rise further.Second, the country has accumulated too much dollar debt (USD 400 billion). So it should start deleveraging and cutting exposures to external creditors.Third, exports are noncompetitive. So the rupee needs to be cheaper to give our exporters an edge.Fourth, the country is over-consuming compared to its productive capacity. This means primarily the government, whose fiscal deficit this year has reached 48 percent of the annual target in the very first quarter. We have swallowed six months of the planned fiscal deficit for the whole year in three months.”
In an April 28, 2012 Econintersect Op-Ed article, this author had observed that
- India’s Balance of Payment will come under severe pressure.
- Foreign institutional investment (FII) sentiment was down.
- India does not have comprehensive energy policies. Its oil bill is a heavy drag on its Foreign Exchange.
- Retroactively tax laws might have serious long term detrimental implications of scaring away international investors.
- Due to the political paralysis no new reforms are expected. In a candid statement, the Chief Economic Adviser to the Ministry of Finance says major economic reforms are unlikely before 2014 when the new Government will be elected.
- India seems to be on autopilot in one direction – down.”
We do hope fervently that Raghuram Rajan is able to disengage the autopilot from self destructive mode, tame the Indian Rupee, and restore investor confidence. Godspeed to the former Chief Economist of IMF, visiting professor for the World Bank, Federal Reserve Board, and Swedish Parliamentary Commission, also elected Gold Medalist of Indian Institute of Technology Delhi.
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