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The Indian Economy Crisis : Temporary or Long term


September 8, 2013 - 7:07pm


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Pranoy Roy starts the debate with the opening words, India's economy, like it or not, is at crisis point. We're at our lowest point in the last 20 years. What happened to that great Indian dream of just two years ago? Have we moved from a breakout nation to a breakdown nation in just a few months? The rupee has collapsed, the stock market is falling, industrial output is stagnant or decline, unemployment therefore is rising, and the escape from poverty will now take much much longer like this. So, the question is this just a temporary cyclical problem or are we going to face a long time crisis. How bad is the economy? As Ruchir Sharma and Morgan Stanley's graphs suggest, it is very bad. If it continues in this state, then India will be declared 'Junk Status'. This 'Junk Status' rating could even happen in less than a year from now. There is a possibility where India will have to go back to the IMF. India has over $170 billion in short term loans to repay by March-2014, can we repay that without a loan from the IMF? Any loan from the IMF comes with a tough conditions. What has caused this problem? How much of this crisis is global and how much is local?

Ruchir Sharma is asked, before going into the data, how bad is the condition of India's economy. According to Mr. Sharma, it is the lowest India has had in terms of confidence since 1991. Although the economic condition is not as bad as 1991 on many metrics that you evaluate, but the pain of having tasted the success of growth last decade, that sensation of rapid and rising prosperity that India tasted the last decade, the fact that, that's been taken away, is feeling even worse to some people than what it felt in 1991. So, economic terms though, it is the worst India has been since then although India is not quite there. The sentiment is terrible, commented Mr. Roy, all over the world, even in India, there's pessimism, gloom about the Indian economy. In Mr. Sharma's view it is a fact, Internationally, due to the events before the last few weeks, the feeling has been more similar to be being indifferent. International investors, so to say, had given up on India, nobody is speaking much about it, but now after the crisis looming ahead, people have started to speak again in a negative way. It has been a huge transition in sentiment that's taken place in the last couple of years.

Arun Shourie is asked, if the people of India, the Congress party or the opposition party realize what a crisis we are in or are we kind of swimming along thinking everything is not too bad. To that, Mr. Shourie responds saying, that the political class doesn't realize at all, they are just concerned with the breaking news of this shift, and media has  habituated and they don't realize that we are heading into the crisis but we are in the crisis. He point out one of Ruchir Sharma's comment that, people started being indifferent, it is Mr. Shourie's belief that it is not in the last few weeks or months, but over the last two years. In over the last two years, every single investors confidence in Japan, Hong Kong or anywhere else, people said that they can look forward to India when India gets its act together. It is quite long now that it has been a situations where US economy is rising and investors are taking their money there. The investors are pulling their money out of India because of no vote of confidence.

When looking at the dollar and rupee exchange rate over the last few years, and when seeing how the rupee has plummeted, especially since May-2013. According to Morgan Stanley and Ruchir Sharma's estimations, from the beginning of the graph, starting from 2007, the exchange was more or less flat, but since May-2013, there is a sharp decline. Put forward the question, how low will it go? To answer that, Mr. Sharma says, the issue with currency panics is once they start, you cannot know as to where they will stop. Because any valuation metric, it appears that the rupee now, is somewhat undervalued, and therefore not overvalued as it used to be a couple of years ago, but the issue with the currency panics is you will never know how much of to undershoot the fair equilibrium before you get some sort of reset of confidence. Morgan Stanley's data shows on why the rupee has fallen. The outflow of money from India has been close to $12 billion in the three months since May. Amount such big going out is tough for any country to take, so Mr. Sharma says, that it is just a component of it, the portfolio investors pulling their money out, there are several other components of balance of payments where a lot of money is getting pulled out, such as exporters and importers hedging money elsewhere or investing in other countries. There is a sort of domino effect that's built in now. Mr. Shourie adds a point to the debate with, rupee business is a symptom and not a problem. It is Mr. Shourie's understanding that India was taken for a ride in its psychology by not seeing that India has become dependent on short term flows. And with FDI and FII being 20% and 80%, it is a startling fact. How bad the FDI has been over years and how much declining has been reported. When in 2008 it was $48 billion, it should naturally be rising every year, but in 2013, it is $27 billion, which is almost 50% of what it was five years ago. 

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