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India’s tomorrow breathes a new hope for ALL: hope that dwells on the constitutional victory of democracy to introduce reforms and its set-up that makes every Indian proud of his/her constitutional rights and responsibilities, enjoyed since 1956. Rights like Universal suffrage that empowers every citizen, rich or poor, man or woman; working or non-working; deprived or privileged to participate and introduce the wave of change he/she desires. A wave clasped in the hands of the common man. India and Indians witnessed this power of a common man in the Delhi State Elections and the 16th Lok Sabha Elections (2014) much in spirit of the four pillars of democracy. The elections celebrated the people’s mandate (with the highest ever voter turnout of 66%) for the formation of a new government with a single party receiving a majority.

The new parliament has 314 debutante parliamentarians (with 58% of the total new strength), 61 women (18%), a very weak opposition of the previous government (with only 44 seats) and no leader of opposition. With little to complain, the government shoulders expectations to resurrect the economy to 9.3% GDP growth rate with Mahatma Gandhi’s vision of self-reliance backed by a strong secular sovereign federal union as envisioned by our forefathers and freedom fighters.

Growth in India needs a new commitment, cooperation and communication to the “Made in India” brand in the national and international markets whether it is about products, factors or the money markets. Market efficiencies of allocation, production and information can be created with better digital education, healthcare and economic infrastructure; monetized economy; competitive markets; transparent, accountable government regulators, regulations and respect for the law of land. Competitive product markets have already been revolutionized by India’s long standing commitment to WTO, full current account convertibility and partial capital account convertibility. Supply bottlenecks in infrastructure (road, railways, power, water and others), regulations and capital continue to spike asset prices and suboptimal quality. Taxes are attempted to be rationalized using Direct Tax Code (DTC) and Good and Services Tax (GST) reforms with e-governance facilities that are likely to add value to the industrial output.

On the other hand, factor markets demand land and labour reforms with greater financial intermediation that supports new banks (New RBI Bank License scheme has recently permitted IDFC and Bandhan Financial Services and the first woman’s bank-Bhartiya Mahila Bank) or new accounts (under Pradhanmantri Jan-Dhan Yojana launched on 68^th Independence day – 15^th August 2014) that provide incubators/ lending facilities for old/new entrepreneurial ventures at small, medium (i.e. MSMEs) or large scales with domestic and international players.

Financial intermediaries and markets in India have been resilient to the global financial crisis. All Indian banks meet the capital adequacy requirement as per BASEL III and are required to adopt other risk measures by March 2018. The Reserve Bank of India (RBI) to protect banks from tight liquidity position has followed a loose monetary stance by reducing the CRR (Cash Reserve Ratio) to 4% and the Statutory Liquidity Ratio (SLR) to 22%, further adjusting the repo rate to 8%, the reverse repo rate to 7% and the bank rate to 9%.The Credit to GDP ratio is 52.5% (2012-13),with scheduled commercial banks credit deposit ratio being 77.9% (2012-13). The Saving deposit rate is 4%; term deposit rates are 8-9.05%, and the lending base rate is 10-10.25% (RBI, 2012-13). An overexposure in sensitive sectors such as capital markets, derivative markets and real estate markets is protected by high risk weightages and strict regulations. Public confidence with universal banking, e-banking and mobile banking is linked to capital and goods markets that adds to e-commerce business lines. Capital markets are buoyant at their highest levels ever with BSE (Bombay Stock Exchange) crossing the 26,000 level mark and NSE (National Stock Exchange of India) crossing the 7,800 level mark.

India has been self- reliant in the past two decades and a contributor to the world economy in various respects. India has contributed US$ 10 billion to IMF and has recently been a founding member to the New Development Bank – BRICS bank (Agarwal, 2004) besides several grants that it continues to make to its neighbors and others from time to time. On an average in the past five years (2009 -2013), the country has observed a GDP-growth rate of 6.8%; GDS of 32.16%; GDI of 35.6%; gross fixed capital formation of 31.42% with private and public sector contribution of 25.2% and 8.6%; inflation rate of 7.12%; forex reserves of US$ 294.86 bn with an average import cover of 12.5 months (2000-10); merchandise export and import growth of 12.2 % and 9.4%; foreign direct and portfolio investment of US$ 192.83bn and US$ 18.53bn; external debt of US$ 400bn (in 2013) (Economic Survey, 2013-14).

The recent ADB estimates provide that India is likely to achieve a GDP growth rate of 5.5% , 6% (2014, 2015) where developing Asia is likely to grow at 6.2% , 6.4% (2014, 2015). Inflation is estimated at 6%, 5.8% (2014, 2015); foreign exchange reserves at US$ 304 bn (2013-14) that are likely to keep the rupee stable and is currently hovering at INR/1USD of 60.4270; current account deficit is expected at 2.8% (2014, 2015) with a growth in merchandise exports and imports of 8%, 10.5% (2014,2015), 7.8%, 8.2%(2014, 2015) respectively. Foreign direct and portfolio investment is expected to be US$ 307.63 bn (2014) and US$ 4.8bn (2014) (ADO, 2014).

Fiscal deficits are much in control and provide a comfortable buffer for balanced growth. The government has estimated that the fiscal deficit would be 4.5% of GDP (2013-14) with a revenue deficit of 3.2% and primary deficit of 1.2%. Union Budget 2014 estimates government expenditure at INR 36,555 bn of which 57.8% is aimed at developmental activities (railways, communications and non-departmental commercial undertakings) and 42.32% for non-development [5.57% (defense), 14.75% (interest payments), 0.84% (tax collection charges), 3.23% (police), 17.94% (others)]. Revenue collections (2013-14) are estimated at INR 25,373 bn with 80% revenue collections (income Tax, corporation Tax, customs, union excise duties, sales tax and others) and 19.90% non-revenue collection (internal resources of public sector undertakings). The gap would be financed 98.9% from the internal markets by way of market loans, small savings, state and public provident funds, borrowing from RBI and other miscellaneous capital receipts (Economic Survey, 2013-14)

Factor markets in India are labour intensive and need social reforms and investments in schemes that provide employment opportunity, education, training, healthcare and social security. The introduction of so-called AADHAR card, NAREGA, MANREGA or other employment guarantee schemes along with schemes that target women/ others health and education and other disadvantage groups along with the establishment of new IITs, IIMs and vocational study centers is likely to contribute to the development of the demographic dividend in India along with other developmental government expenditures. Primary education has been largely ignored by the government or has been restricted to the provisions of mid day meals that ensure attendance and not quality education.

The contributions of Indian Army’s wing NCC, social outfits like RSS and many other NGOs like SEVA that can educate, train, employ common people has been neglected. Though, the importance of Panchayat Raj systems and Village administration blocks has been reemphasized. Further, the present government has decided to scrap the Planning commission and set up a new institution that is more grounded to the realities of the economy and its problems. The recent railway budget and Union budget offered progressive steps by retaining social security expenditures of NREGA, MANREGA, Food security bill and subsidies. Passenger fares have been increased in an attempt to reduce subsidies and provide for better and secure services (Union Budget 2014, Rail Budget, 2014).

The government has reintroduced the Kisan Vikas Patra and many other bond schemes to fund its expenditures. This is likely to crowd out a lot of private investment, given 6.90 coupon Government Security maturing in 2019 yield is 8.90-8.097% where the average GSec yield has been 7.2% (2000-10). Call or Money Notice rate has risen from 5.8% (2009-10) to 8.1% (2012-13). In India the modal deposit rate for bank is 7.26%; modal lending base rate is 10.25% with variations in specific sectors {home (10.93%); vehicle (12.38%); agriculture(11.67%); SME (12.95%); education (13.12%)} (Trend and Progress Report, RBI, 2012-13). Variations of 2.72% and -0.5% are presently accepted for tightening and easing monetary stances. High inflation and interest rate often restrict consumerism and industry’s capacity to take loans.

Progress is envisaged that makes this country and its citizens more accountable, transparent and progressive. Much is on the way with the formation of the special investigation team (SIT) on black money and introduction of bills like the Lok pal Bill, Accountability Bill, Whistle blower Bill, Grievance Redressal Bill, Public Procurement Bill and Administrative Reforms Bill that would further empower the common man (Agarwal, 2004; Agarwal 2014). The Right to Information Act (RTI) and Judicial Bill has already put many government offices and their administrations under the scanner of the common man that is within his reach. Many ills would be taken care if the reforms are introduced and implemented well. Many macroeconomic aggregates would see positive corrections whether they are about the GDP forecasts, inflation, asset bubbles, money estimates, investment returns, food scarcities or others. Well, it’s hard to believe that such corrections are possible and I may appear as an optimist building sand castles. But the economic ability exists that such a miracle with its reforms can curb or limit the bad/ black money that throws out the good money, regulations and people from the market. Progress has already started showing the ray of light.

Progressive outlook, banking on the demographic dividend of the educated workforce and young workforce along with high reservoirs of natural and manmade resources make a compelling case for rich dividends for the Indian economy. Dividends that create value for everyone not only in terms of macroeconomic aggregates (measured of output, price and unemployment) but for a promise of life that honors itself with dignity and pride. Meaning that embraces growth and its deliverable for every citizen of this country whether included in the slogan of ‘Inclusive growth’ or in the slogan of “Growth for everyone with everyone’ colloquially put as –“sabka saath, sabka vikas” (that is for 1.228 bn Indian Citizens including 269.8 million people (21.9%) people below the poverty line).

Not just in words but in actions and spirit that lift up the India economically, socially, politically and internationally to a higher pedestal than what it stands today. A progress that protects the honor and dignity of women, provides food, shelter and security to children, senior citizens and the other underprivileged classes – an economic progress that castes away the evils of caste, religion and terrorism and makes every Indian proud of his /her contribution to the country. Jai Hind.

References

Agarwal, J.D. “Volatility of International Financial Markets, Regulation and Financial supervision.” Finance India March 2004: 15-36.

Agarwal, J.D. and Aman Agarwal. “International Money Laundering in the Banking Sector.” Finance India June 2004: 767–778.

Agarwal, Yamini. “Black Money: Its Genesis and Impact on Indian Economy.” National Institute of Financial Management,Public Finance & Policy Program (For Customs and Central Excise Officers). Faridabad, Haryana, 17th July 2014. ppt.1-31.

Bank, Asian Development. Asian Development Outlook 2014: Fiscal Policy for Inclusive Growth. Manila, Philipines: Asian Development Bank, 2014.

Finance, Ministry of. Economic Survey. Delhi: Ministry of Finance, Government of India, 2013-14.

Global Financial Stability Report. Semi-Annual, Washinton, D.C., USA: Monetary and Capital Markets Department on Market Developments and Issues, International Monetary Fund, April 2014.

Reserve Bank of India. Annual Report. Annual, Delhi, INDIA: Reserve Bank of India, 2012-13.

Reserve Bank of India Trend and Progress Report of Banking. Annual, Delhi, INDIA: Reserve Bank of India, 2012-13.

Union Budget 2014-15, Ministry of Finance, Government of India

 

 

 

 

 

Yamini Agarwal
Professor and Vice Chairman (Academics)
Indian Institute of Finance (IIF), Delhi

 

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India, the largest secular democracy in the world, is home to 1.21 billion people (i.e. about 17.4 % of world population). In terms of economics, India accounts for 2.5% of world GDP in US dollar terms and 5.5 % in purchasing power parity (ppp) terms. India’s rich civilisation history dates back to over 10,000 years, going back to the Harrapan and Mohanjadaro periods having high appreciation for architectural layout of townships and structured lifestyles. In the last 5,000 years till the invasion by the Mughal and the British, India was referred as the Golden Bird with the highest possible respect for women and mankind. Texts and temples of these periods clearly reflect the richness in the society and the importance of gold in a common man’s life for the use of cloths, utensils and for consumption as part of food (which is re-emerging in modern India).

The currency regime in India (then Hindutav Raj / Bharat /Hindustan) goes back to about 1,000 BCE with the creation of coins in gold and hence forth in silver for long periods of reins much prior to the Chandragupta Maurya glorious period of 350 BCE. Chanakya’s (Kautilya) work “Arthashastra” is the first ever written text in economics – in 350 BCE (2362 years back), outlining: the way a kingdom is to be run ; the role of a King ; the functions, duties and role of his officials and the way civilian functions should work in the society. Kautilya’s teachings given in the Arthashastra (meaning economics in Sanskrit) holds very well in today’s time, though Adam Smith’s work of “Wealth of Nations” is no longer valid in today’s context. Hence, I always refer to Chanakya (more commonly known as Kautilya), a teacher, as the father of economics.

India has been one of the earliest issuers of coins (around the sixth century BCE). The first “rupee” is believed to have been introduced by Sher Shah Suri (1486–1545), based on a ratio of 40 copper pieces (paisa) per rupee. Among the earliest issues of paper rupees were those by the Bank of Hindustan (1770–1832), the General Bank of Bengal and Bihar (1773–75, established by Warren Hastings) and the Bengal Bank (1784–91), amongst others. Until 1815, the Madras Presidency also issued a currency based on the fanam, with 12 fanams equal to the rupee. Historically, the rupee, derived from the Sanskrit word raupya, which means silver, and it was a silver coin.

Over the years, the Indian Rupee (INR) has emerged as a strong currency having a strong base with good fundamentals. This is in special reference with the economic conditions in the West (U.S., Europe, Russia, Latin America and other regions), where they suffered from high inflation, low GDP, liquidity crunch and banking sluggishness. The following positive developments could be noted: Indian GDP growth has been stable around 6.9% for last three years and over 8.4% in the last eight years preceding these two years ; there has been control on inflation, which before had soared up to double digit and has been brought down to a sustainable level ; foreign exchange reserves hanged around US$ 290 million for the last four years ; FDI flow strengthened over the last year ; fiscal deficit was under control ; international confidence in Indian had been strong and building up; the economy was relatively self-sufficient ; flows of NRI remittances increased; the conservative banking system proved to be stable.

All these noted strengths show the true potential for the Indian currency (INR) to strengthen and attain the well-deserved level of Rs 35 – Rs. 40 against a US$ if it is allowed to float freely in the short run (next 8-10 months). The Reserve Bank of India (RBI) has always tried to keep a managed floating exchange rate since the early 1970s.

Numerous challenges-cum-opportunities lay before the Indian economy given the steep recent fall of the rupee and the trembling global economy. These challenges bring four serious concerns for the dancing baby elephant like

(a) a threat to India’s National Security and Indian’s tomorrow as an outfall of the rupee deprecation ; (b) challenges for the trade participants and the business in India ; (c) the appropriate mix of financial volatility, a relatively stable exchange rate and the conduction of a robust monetary policy ; (d) concerns about fiscal discipline and the role of the government ; (e) rising inflation and the costs for major parts of the population ; (f) the possible impact of the Fed’s and the ECB’s future policies.

National security implies a state or condition where our most cherished values and beliefs, our democratic way of life, our institutions of governance and our unity, welfare and well-being as a nation and people are permanently protected and continuously enhanced. The fundamental elements that lie at the core of national security, and therefore further amplifies our definition of national security, are a strong and stable currency; socio-political stability; territorial integrity; economic solidarity and strength; ecological balance; cultural cohesiveness; moral-spiritual consensus and external peace. The transition between great civilization and an economic power house is a slow process that is centered on the incumbent’s struggle to balance short-term national security demands and long-term economic interests. It is impossible to predict exactly what the future of the currency holds, it is impossible to also predict exactly the second and third order effects of a persistent currency collapse/fall.

However, such a persistent depreciation/fall in the value of the currency would have important consequences on the Nation’s continued reliance on deficit financing. The inflow of foreign financing would be dramatically, if not wholly, reduced as the value of the currency falls. Hence the country would have to pay higher interest rates to fund future debt to offset the increasing uncertainty about its future value which would place a restrictions on future government spending. Any hope of covering this spending shortfall by increasing revenue through taxation is also unlikely to succeed in the short-term because of potential impacts to the domestic economy (Everingham and Anderson, 2011). Such a crisis would force the Government to make immediate budget cuts (especially in defense and social security) due to the loss of international funding. Even modest reductions in government spending would affect funding support for the national security strategy, since the costs for the up-gradation/procurement of the latest technology defense equipment/aircrafts/missiles would impound up the need for foreign currency.

Some of the reasons which seem to have been driving the rupee to its low levels in past months have been (a) elections coming forth (having huge funds moving into the country to fund them) ; (b) the Fed’s guidance being sought which also should enable the U.S. economy to have a smooth comeback ; (c) RBI’s management of their balance sheet ; (d) the Ministry of Finance wanting to manage the fiscal deficit at the same level ; (e) the IPL Scam, where the investors and the Cricket Team Funding Organizations/Groups from overseas would be withdrawing their funds given the uncertainty of the IPP moving forward; (f) the exporters’ lobby who would like to bring their funds kept in US dollar or euros or other currencies back into India for their quarterly results to be shown as good ; (g) the non-implementation of the second phase of economic reforms ; (h) no focus and development of the agro sector, agro banking and the agro-based economic framework, where more than 70 percent of the population of this country is housed; (i) RBIs performance being tamed by the brilliant presence of strong political leaders like Shri P Chidambaram,  Manmohan Singh and Shri Pranab Mukherjee in a UPA Government during times of the world’s worst financial turmoil having its seeds in the West with oil bubble, natural and man-made tsunamis and NPA accumulation by banks between 2004-2007 bringing its heat further to the Asian region after 2008 until today.

In my opinion, there has been no valid reason for the rupee to fall. There are all necessary positive signs in India – given the recession that hit the global village – to enable the economic growth and the rupee to appreciate at new levels which have not been observed since the 1991 fall when the rupee was fluctuating between Rs. 11 – Rs 13 for one US dollar.

India at its independence in 1947 had an exchange rate of Rs. 0.50 for aUS$ (i.e. 2 USD for 1 rupee) when we were by 98 percent an importing country, had almost no industrial or economic growth and no strengths to match any developed nation. Statistically simulated empirical evidence shows that the recent single rupee fall means sending the nation, its people and economic developments clearly backward.

The Indian Rupee (INR) in the last 40 years has been slowly, steadily and strongly emerging as a reserve currency in various countries neighboring to India (in South Asia, in East Asia, in the Arabic region and in Africa). In the Arabic region, the INR was floated with a different colour of currency note in the 1970s. The new governor of the central bank, professor Raghuram Rajan, outlined on September 5, 2013, also highlights that the Indian INR ought to be recognized as an international currency.

The RBI has been able to curtail the Money Supply (M3) growth to 13 percent as against 17-22 percent (between 2005-2008). In the last one year the M3 has again gone up by 17 percent and hopefully given the new policy framework adopted by Governor Prof. Raghuram Rajan of having a multi-facet monetary targeting policy with special focus on an inflation target, would help the RBI bring the M3 back to a 13 percent level. The multi-objective and multi-instruments approach followed by the RBI in formulating the monetary policy has helped in interpreting developments in the financial system and taking prompt corrective action. Also the measures such as putting in place robust systems for reducing counterparty risk in OTC transactions through CCP arrangements and regulation of shadow banking institutions to address the interconnectedness issues have helped in containing the impact of the crisis.

The high savings rate of 33 percent has also been a positive anchor to the economic downturn and the threats of rising unemployment and large number of Indian workforce retrenched and returning back home between 1995 (from the U.S.); 1997-99 (from South East Asia), 2001-03 (from the U.S.), 2008-12 (from Europe and the U.S.). It should be kept in mind that India has a shadow economy as strong as the normal economy, which provides for a buffer for any kind of recession with actual savings rate and GDP growth being substantially higher than the official figures. The FDI flows in 2011-12 and 2012-13 have seen a big jolt due to the bleak economic scenario globally, however, given the trends observed in the increase in FX reserves it is expected to improve in 2013-14.

The Government of India needs to re-consider its FX reserve policy both from the perspective of putting the excessive reserve to productive use and by allowing the exchange rate to float freely and to appreciate – given strong currents of depreciation of the US dollar, the euro and the GBP, which are the major currencies in the basket of currencies in accordance with trade balances.

Governor Rajan having served as Advisor to the Prime Minister and as a Chief Economic Advisor to the government would entail smooth functioning. I strongly feel that the symbiotic relationship which Rajan has with President Shri Pranab Mukherjee, Prime Minister Manmohan Singh and Finance Minister Shri P Chadambaram is unique and would serve to be of advantage for the Indian Economy and international confidence inIndia.

References

1. Agarwal, Aman, (2007), “Global Dis-Equilibrium, Growth and Europe”, Plenary Keynote Address at the Economia Reale Conference at Sala delle Colonne (Italian Parliament),19th September 2007. Audio of the Speech online at Italian Media Channels (Radio RadicaleItaly www.radioradicale.it/scheda/235385 and Sherpa TV Italy) & at IIF (www.iif.edu).
2. Agarwal, Aman; (2003); “US Federal Reserve Policy, RBI Policy and Indian Economy” Lok Sabha TV (Parliament of India TV Channel) in Public Forum Program on Saturday, September 21st, 2013 at 7:00 PM – 8:00 PM.
3. Agarwal, Aman; (2013); “Challenges before RBI Governor Raghuram Rajan” Lok Sabha TV (Parliament of India TV Channel) in Insight Program on Friday, September 6th, 2013 at 1:00 PM – 2:00 PM.
4. Agarwal, J.D. and Aman Agarwal, (2004), “International Money Laundering in the Banking Sector, Finance India, Vol XVIII No 2, June 2004; Reprinted with permission in The ICFAI Journal of Banking Law, Vol. II No. 4, October 2004, the journal of ICFAI University, Hyderabad. Invited to deliver as the Keynote Address at the Asia Pacific Banker’s Congress 2004 inManila,PHILIPPINES on 26th March 2004. (25-26th March 2004)
5. Agarwal, J.D. and Aman Agarwal; (2009);”Building Nations Future in times of Recession and Global Dis-Equilibriums“, Invited to be delivered as Plenary Keynote Address at the Parliament of Finland (EDUSKUNTA) at the Finland Parliament Committee of the Future’s Conference on “Future of Nation Building” at The Parliament, Helsinki, FINLAND (July 6th, 2009)
6. Agarwal, J.D., (2004), “Volatility of International Financial Markets: Regulation and Financial Supervision” delivered as Keynote Address at the 4th International Conference in Finance organized by Faculty of Administration & Economics, University of Santiago de Chile, CHILE on 7^th January 2004; Finance India Vol. XVIII No. 1, March 2004.
7. Agarwal, J.D.; (2013); “The Indian Economy & the Rupee Depreciation”, Lok Sabha TV (Parliament ofIndia TV Channel) in Insight Program on August 2013 at 1:00 PM – 2:00 PM.
8. Agarwal, J.D.; Manju Agarwal and Aman Agarwal; (2013); “Fall of Rupee & its Impact on Indian Economy: The Dancing Baby Elephant“, Invited to be delivered as Guest of Honour Plenary Address at the 2nd VDMA German Mechanical Engineering Summit 2013 at Taj Vivanta, Bangalore, India [30th September 2013]
9. Bernanke, Ben S., (2008), “The Euro at Ten : Lessons and Challenges”, at the 5^th ECB Central Banking Conference, Frankfurt, Germany, November 14^th, 2008
10. Everingham, Neil C.; and David A. Anderson; (2011); “The Dollar’s Vulnerability and the Threat to National Security”, Strategic Insights, Vol. 10, No. 1, Spring 2011
11. Fromlet, Hubert, (2008), “Financial Literacy and its Benefits on a Household, Corporate and Macroeconomic Level“, Working Paper, Baltic Business School, Kalmar/Sweden, & Blekinge Institute of Technology, Ronneby/Sweden, April 2008.
12. Kalam, Abdul A.P.J and A Sivathanu Pillai, (2004), “Envisioning an Empowered Nation : Technology for Societal Transformation”, Tata McGraw-Hill Publishing Company Ltd,Delhi
13. Miller, Merton H., (1990), “Leverage”, Nobel Prize Lecture, December 7, 1990

 

 

 

 

 

 

 

Aman Agarwal
Professor of finance, vice chairman of the Indian Institute of Finance (IIF) and Executive Editor of “Finance India”, Delhi

 

 

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