Troubles a brewing

DEC 28 –

All is not well with the Indian economy. The essential parameters for a healthy economy

have shattered over the past few months; and if the situation keeps deteriorating, the shock waves are destined to result in severe cracks in Kathmandu’s nascent and fragile economy which is India-dependent.

At the helm of feverish economic indicators, New Delhi has already lowered its projection of growth to less than 7 percent from more than 8 percent. The Indian currency seems to be unstoppably sliding vis-à-vis the US dollar. Earlier this week, the Indian rupee slid down to an all-time low of 53.23 to the dollar, a 20 percent fall in five months. Apprehensions are rife that it could fall as low as 55 against the greenback. Likewise, manufacturing output has plummeted to negative figures, as has mining output.

Amid these negative indicators, fears of a global recession gradually gripping the Indian subcontinent have emerged. Seemingly cautious Indian mandarins have, however, dismissed such apprehensions. They have argued that even the lowered growth projection of 7 percent is good enough against a backdrop of a recession having hit other major economies, mainly the US and the Euro zone. But a larger section thinks that an economic recession is inevitable in India despite the growth claims if serious steps for fiscal reforms are not taken. The political blame game has already begun on the issue, and on the contrary, efforts to dig out the reasons behind the economic slowdown and finding possible treatments for this illness have equally thickened.

As of now, the Euro zone crisis and India’s own domestic mess are observed to be the decisive factors for the economic slowdown. Foreign investors are pulling out along with domestic investors. Foreign investors pulled out IRs 3,200 crores in November alone. The indecisiveness of the political class on crucial issues, lack of a strong investment-friendly policy and ultra politicisation of major issues have contributed to degrading the confidence of foreign and domestic investors.

The Indian business community, complaining of lapses in policy, has come up with strong remarks targeting the political class — a scene which used to be rare in the Indian state. “There is a need for a shift in governance from 20th century to 21st century decision-making,” leading Indian industrialist Mukesh Ambani recently thundered.

Seconding the aforementioned remarks, the leading daily of India, The Times of India, has underscored the urgency of a “second wave of reforms” to reassure foreign investors and discourage the flight of domestic capital overseas. The daily, in its editorial, recently urged the Indian government to expedite reforms in critical areas such as mining and power, junk antiquated land acquisition and labour laws and overhaul red tape-ridden and discretion-based clearance processes which are stymieing infrastructure creation, rapid industrialisation, and, by extension, employment generation.

Policies are seen more to be guided by scruples of wooing poor voters, sometimes, at the cost of creating an investment-friendly environment. To borrow an Indian expert’s words, “India has now slipped back to electrocracy, rather than democracy.”

The Indian economy, which bravely fought the rough weather of the post-Lehman global meltdown, seems to have been weakened by the latest Euro zone crisis — a fact which Indian Finance Minister Pranab Mukherjee himself has accepted. Mukherjee has called for collective efforts above partisanship to save the economy, warning that if the Euro zone crisis extends to a large economy, “any amount of bailout package will not be sufficient and worldwide depression will take place”.

A serious economic crisis in Europe has resulted in a global shift from the euro to the dollar, which has also had an effect on the rupee’s slide against the dollar. The Euro zone is significant for India as it has substantial trade with India and India’s vast infrastructure financing needs are, to a great extent, financed by European banks, which are, at this stage, unwilling to lend in an uncertain environment.

The uncertainties in the Indian economy will have a serious impact on the Nepali economy. As the Nepali currency is pegged with the Indian currency, the sliding down of the IC compared to the US dollar has started showing its repercussions in Nepal too. The Nepali currency has slid down to an unprecedented 85 against the greenback.

Though the situation will not be affected much while buying Indian goods, products from third countries would be more costly for Nepal. Petrol, diesel and cars, among others, are set to turn dearer with the weakening of the Indian currency, which would have a direct impact on the Nepali economy. Trade with India accounts almost 66 percent of Nepal’s total foreign trade. Our trade deficit with India is also worryingly huge, which amounts to more than Rs 174 billion, and it has increased alarmingly over the past few years.

If India’s economy plunges into recession, it can even hit Nepal’s exports to India, resulting in a setback for the Nepali economy. Nepal’s current exports to India stand at the mark of US$ 396 million. Thousands of Nepali migrant workers, though low paid, will be among the first ones to be hit by job cuts, which will be inevitable in a recession-stricken India.

The weakening of the rupee will, however, have some positive impacts. Though, the quantum of Nepal’s exports is very low vis-à-vis its imports, Nepali exporters, however, could benefit from the surge in the value of the dollar. Overseas workers can benefit by increasing the volume of money they repatriate back home to cash in a weak domestic currency.

Against a backdrop of a weakening of the Indian currency and major parameters of the Indian economy slowing down, theories of the Indian economy moving in the direction of depression are doing their rounds. Nepali stakeholders, however, don’t seem to be even a bit concerned about the serious economic downfall in its neighbourhood. Nepal should quickly buckle down to identify possible repercussions and find ways to address the problems before it becomes too late. Needless to mention, there are many domestic political issues to focus on, but the mandarins in Kathmandu should make no delay in working towards saving the nation’s economy from threats looming large, before they become Herculean tasks and impossible to handle.

Note:Also find the link to this piece which was originally published in 28th Dec 2011 edition of The Kathmandu Post

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