It may not be 1991, but it looks just as bad.
The outlook for the Indian economy is getting darker by the day. At a time when the world economy is showing signs of improvement, India appears to be headed for a decade-low growth in the gross domestic product (GDP), at under 5%.
The last few years have seen a marked slowdown in investments on account of structural issues related to delays in clearance, high interest rates, regulatory hurdles and high commodity prices, thereby impacting GDP growth. The weakness in industrial production data across the sectors has been a testimony to this falling growth.
Things were beginning to look up at the start of calendar year following a series of reform measures announced by the government, falling input prices and rate cuts by the Reserve Bank of India (RBI). But over the past couple of months, the rupee depreciation has emerged as the biggest macro headwind.
The rupee on Monday breached 63 against the US dollar and has now depreciated nearly 15% since the start of calendar year. The weakening rupee has meant that rate cuts are unlikely to happen anytime soon and with consumption too showing signs of slowdown, the economists are busy revising their growth forecasts downwards.
To be sure, the currency weakness is not specific to India. All the emerging markets are witnessing pressure on their currencies due to debt outflows, with global investors rotating money back to developed markets where the growth is improving and yields rising. But India has been badly hurt because of its high current account deficit as it heavily imports oil and gold, whereas exports have fallen quite short of imports.
The current weakness is likely to keep current account deficit and fiscal deficit at high levels. With foreign portfolio investments through the foreign direct investment route not picking pace and even foreign institutional investor (FII) flows turning negative, the current account deficit will be difficult to fund through capital account.
Though the government and the RBI have taken efforts to check the rupee fall, these are long-term in nature and may not result in any immediate respite for the rupee. If economists are to be believed, the currency could well touch 65 by the year end.
And if the rupee does remain at these levels, the RBI may not withdraw its recent liquidity tightening measures, which will, in turn, impact growth.
Inflation, which had moderated a bit over the last few months, is again showing signs of upsurge with imported inflation and high food prices likely to push the wholesale price index above 6% again.
With most economic indicators turning negative, it seems a reversal in the economic downcycle will take longer than expected unless the government can take drastic measures – and soon.
We looked around for a fix, asking both economists, industry captains and common people for solutions to the all-too-visible maladies. Here’s what we got.