It was the worst of times, it was the age of foolishness, it was
the epoch of incredulity, it was the season of darkness, it was the
winter of despair, we had nothing before us, we were all going direct
the other way - in short, the period was so far like the present period,
that some of its noisiest authorities insisted on its being received,
for good or for evil, in the superlative degree of comparison only.
Well, all it needed was a few deletions from the Dickensian book opener to describe the state of affairs of the Indian economy and politics in the present period. As I write this, there is a nationwide shutdown (Bharat Bandh): a textbook response to the highest increase in fuel prices in history. Fuel prices had to be increased because crude oil (which is mostly imported) prices have been going up, and the Rupee has been falling. This is a double whammy because the appreciating crude has to be paid for in dollars which have to be purchased using a depreciating Rupee.
Let's start with the question of why the Rupee is falling. The primary enemy of our currency woes is our government (Surprise!) - one that suffers from the worst form of policy paralysis. Decisions that could have helped invigorate the economy and stabilized our currency have been constantly put on hold. Opening up sectors like retail, education, and aviation could have made us the emerging market to go to, not the hot potato that we have become. Simply put, the FDI dollars just won't come the way they could have.
On the other hand, we have the issue of corruption, which the government is not interested in dealing with, except when it is conducive to do so to settle political scores or keep allies in line. The Swiss account details cannot be disclosed (wait a minute, did you say RTI?), but Raja, Jagan Mohan Reddy, and Kanimozhi can go to jail. The 2G spectrum scam is not just a tall tale of corruption, but a tale of how unattractive India has become as an investment destination. Norway would not forget the Telenor fiasco (their sovereign fund is invested heavily), nor would Dubai forgive Etisalat, nor would a lot of funds and governments watching the nasty show unfolding currently. Raja might have been the organizer, but the present dispensation presided over it.
Tax policies that have a retrospective effect (Vodafone) is not something any prospective investor would like. Businesses do factor in uncertainty about the future in their investment decisions, but it would too much to ask them to factor in uncertainty about the past. So shaky is the tax "reform" initiative that fund houses have shunned India and shifted to Singapore stock exchange (SGX) to take a bet on India through Nifty futures traded there. And guess, which side of the trade they would take?
Then, there's this wasteful expenditure under the guise of inclusive growth (NREGA), worth billions of Rupees, that institutionalize corruption and furthers the sole goal of remaining in power. Instead of investing in infrastructure that will result in future growth, we continue to pump more and more of the currency we have no right to print.
Faced with uncertainties and depressed earnings (and quality of earnings, in some cases), foreign institutional investors (FII) have also been on their way out for quite some time. Putting all of this together, Rupee is likely to be under strain for quite some time. Now, that's a problem, because our crude oil import bill is huge, and oil has to be paid for in dollars.
And since we are talking crude, we should not forget a few things:
1. Why should the government benefit every time international crude prices rise? In case you did not know, taxes account for about 50% of your fuel bill. The official reason we get for every fuel price hike is the bleeding oil marketing companies (OMCs) that incur a loss on the sale of every litre of petrol or diesel. If that was the only reason, why did the government not freeze the tax amount (not the %) equal to what it was when fuel prices were allowed to float in 2010, and let the differential accrue to OMCs?
2. Why are we not sourcing cheaper oil? Iran is a case in point, as it offers oil at a much lower rate than the much-hyped $125 per barrel. What's more? Because of its compulsions, Iran is ok if India pays in Rupees, not dollars!!!!! More trade with Iran would not only mean cheaper oil, but also a healthier forex positioning by not spending greenbacks on at least on that portion of the import bill. But NO, our government would rather toe the US line, as is evidenced by the recent reduction in oil imports from Iran. Common man be damned.
3. Is anyone looking into the efficiency of OMCs? Rest assured, there will be a lot of holes in their books and processes, just like any other babu enterprise.
4. Every price rise has a built-in Mamata premium to it. The delta which will account for a possible hike reduction to assuage the shrill noises and uproar that follow a hike.
5. The Congress has been able to manipulate/cajole/threaten its ally base, and consequently the government is at its strongest when everything else is in tatters. This time around Mamata is relatively silent, because Mulayam is cozying up to the Congress, with possible offers for support. Her threats just won't work as it did in the past. The DMK, an ally, threatened to walk out, but then backtracked, apparently because the UPA government's fall would strengthen non-secular forces. Yay! I loved that one.
6. The pseudo-democratic picture is not complete without a few more strokes. In any democracy, the success (or failure) of a government can be judged by its opposition. In this case, the failure of UPA2 can be judged by the even more monumental failure of the opposition. The BJP looks like it still cannot come to terms with "Why-did-we-lose-despite-the-India-Shining-campaign?". The rest of the opposition is just waiting for a chance to sleep with the Congress. What options do we have to vote in 2014?
And then we take a look at the Rupee, and ask why it's falling? God, if I had the pockets of Soros, I would have shorted this damn currency myself. This falling currency incidentally gave the powers that be, the reason to hike petrol prices. In walks inflation and the RBI chief.
The RBI (Reserve Bank of India) chief seems to have taken the hawkish praises a little too much to his heart. Every time the key rates are hiked, we're given the same villain as the reason - inflation. Every inflation-targeted interest rate hike has helped in depressing economic activity by increasing borrowing costs for the average consumer as well as the average business house.
Put all of this together, and your currency will continue to fall. Citing input cost pressure, OMCs will increase fuel prices thereby adding to the inflationary pressure. To target inflation, RBI will continue to be hawkish. The average Joe will be continue to get sodomized from all angles, while the government will sit idle making Nero look like a teenager.
The RBI does make noises when it comes to arresting the fall of the Rupee. But how much can it intervene, given the broad policy and structural concerns, and its small forex kitty that just has enough dollars to pay for 6 months' worth of imports? It actually brings back images of the early 1990s, when our liberalization process was rolled out, more out of necessity than vision. It is indeed ironic that the man heading our current dispensation is the one who helped us claw our way back and into relative prosperity back then.
Well, there is one silver lining in all of this. Thanks to the steep fall of the Rupee, a good chunk of Indian equities (in dollar terms) is at appetizing levels for $FIIs - at levels that were not witnessed even during the great recession. Indian currency market (like the stock market) does not have that much depth, and FII inflows could make a whole lot of difference to the movement of the Rupee as well as stocks. That's a double bonanza for FIIs - they will have an appreciating Rupee as well as booming stock prices contributing to their ROI. Well, it's just a fool's thought, but bulls do have a habit of showing up when everyone turns Cassandra. It's either that or a wad of toilet paper in your wallet.
Or Manmohan Singh lives up to the first three letters in his name. But that would be so unrealistic and chauvinistic, wouldn't it?
Well, all it needed was a few deletions from the Dickensian book opener to describe the state of affairs of the Indian economy and politics in the present period. As I write this, there is a nationwide shutdown (Bharat Bandh): a textbook response to the highest increase in fuel prices in history. Fuel prices had to be increased because crude oil (which is mostly imported) prices have been going up, and the Rupee has been falling. This is a double whammy because the appreciating crude has to be paid for in dollars which have to be purchased using a depreciating Rupee.
Let's start with the question of why the Rupee is falling. The primary enemy of our currency woes is our government (Surprise!) - one that suffers from the worst form of policy paralysis. Decisions that could have helped invigorate the economy and stabilized our currency have been constantly put on hold. Opening up sectors like retail, education, and aviation could have made us the emerging market to go to, not the hot potato that we have become. Simply put, the FDI dollars just won't come the way they could have.
On the other hand, we have the issue of corruption, which the government is not interested in dealing with, except when it is conducive to do so to settle political scores or keep allies in line. The Swiss account details cannot be disclosed (wait a minute, did you say RTI?), but Raja, Jagan Mohan Reddy, and Kanimozhi can go to jail. The 2G spectrum scam is not just a tall tale of corruption, but a tale of how unattractive India has become as an investment destination. Norway would not forget the Telenor fiasco (their sovereign fund is invested heavily), nor would Dubai forgive Etisalat, nor would a lot of funds and governments watching the nasty show unfolding currently. Raja might have been the organizer, but the present dispensation presided over it.
Tax policies that have a retrospective effect (Vodafone) is not something any prospective investor would like. Businesses do factor in uncertainty about the future in their investment decisions, but it would too much to ask them to factor in uncertainty about the past. So shaky is the tax "reform" initiative that fund houses have shunned India and shifted to Singapore stock exchange (SGX) to take a bet on India through Nifty futures traded there. And guess, which side of the trade they would take?
Then, there's this wasteful expenditure under the guise of inclusive growth (NREGA), worth billions of Rupees, that institutionalize corruption and furthers the sole goal of remaining in power. Instead of investing in infrastructure that will result in future growth, we continue to pump more and more of the currency we have no right to print.
Faced with uncertainties and depressed earnings (and quality of earnings, in some cases), foreign institutional investors (FII) have also been on their way out for quite some time. Putting all of this together, Rupee is likely to be under strain for quite some time. Now, that's a problem, because our crude oil import bill is huge, and oil has to be paid for in dollars.
And since we are talking crude, we should not forget a few things:
1. Why should the government benefit every time international crude prices rise? In case you did not know, taxes account for about 50% of your fuel bill. The official reason we get for every fuel price hike is the bleeding oil marketing companies (OMCs) that incur a loss on the sale of every litre of petrol or diesel. If that was the only reason, why did the government not freeze the tax amount (not the %) equal to what it was when fuel prices were allowed to float in 2010, and let the differential accrue to OMCs?
2. Why are we not sourcing cheaper oil? Iran is a case in point, as it offers oil at a much lower rate than the much-hyped $125 per barrel. What's more? Because of its compulsions, Iran is ok if India pays in Rupees, not dollars!!!!! More trade with Iran would not only mean cheaper oil, but also a healthier forex positioning by not spending greenbacks on at least on that portion of the import bill. But NO, our government would rather toe the US line, as is evidenced by the recent reduction in oil imports from Iran. Common man be damned.
3. Is anyone looking into the efficiency of OMCs? Rest assured, there will be a lot of holes in their books and processes, just like any other babu enterprise.
4. Every price rise has a built-in Mamata premium to it. The delta which will account for a possible hike reduction to assuage the shrill noises and uproar that follow a hike.
5. The Congress has been able to manipulate/cajole/threaten its ally base, and consequently the government is at its strongest when everything else is in tatters. This time around Mamata is relatively silent, because Mulayam is cozying up to the Congress, with possible offers for support. Her threats just won't work as it did in the past. The DMK, an ally, threatened to walk out, but then backtracked, apparently because the UPA government's fall would strengthen non-secular forces. Yay! I loved that one.
6. The pseudo-democratic picture is not complete without a few more strokes. In any democracy, the success (or failure) of a government can be judged by its opposition. In this case, the failure of UPA2 can be judged by the even more monumental failure of the opposition. The BJP looks like it still cannot come to terms with "Why-did-we-lose-despite-the-India-Shining-campaign?". The rest of the opposition is just waiting for a chance to sleep with the Congress. What options do we have to vote in 2014?
And then we take a look at the Rupee, and ask why it's falling? God, if I had the pockets of Soros, I would have shorted this damn currency myself. This falling currency incidentally gave the powers that be, the reason to hike petrol prices. In walks inflation and the RBI chief.
The RBI (Reserve Bank of India) chief seems to have taken the hawkish praises a little too much to his heart. Every time the key rates are hiked, we're given the same villain as the reason - inflation. Every inflation-targeted interest rate hike has helped in depressing economic activity by increasing borrowing costs for the average consumer as well as the average business house.
Put all of this together, and your currency will continue to fall. Citing input cost pressure, OMCs will increase fuel prices thereby adding to the inflationary pressure. To target inflation, RBI will continue to be hawkish. The average Joe will be continue to get sodomized from all angles, while the government will sit idle making Nero look like a teenager.
The RBI does make noises when it comes to arresting the fall of the Rupee. But how much can it intervene, given the broad policy and structural concerns, and its small forex kitty that just has enough dollars to pay for 6 months' worth of imports? It actually brings back images of the early 1990s, when our liberalization process was rolled out, more out of necessity than vision. It is indeed ironic that the man heading our current dispensation is the one who helped us claw our way back and into relative prosperity back then.
Well, there is one silver lining in all of this. Thanks to the steep fall of the Rupee, a good chunk of Indian equities (in dollar terms) is at appetizing levels for $FIIs - at levels that were not witnessed even during the great recession. Indian currency market (like the stock market) does not have that much depth, and FII inflows could make a whole lot of difference to the movement of the Rupee as well as stocks. That's a double bonanza for FIIs - they will have an appreciating Rupee as well as booming stock prices contributing to their ROI. Well, it's just a fool's thought, but bulls do have a habit of showing up when everyone turns Cassandra. It's either that or a wad of toilet paper in your wallet.
Or Manmohan Singh lives up to the first three letters in his name. But that would be so unrealistic and chauvinistic, wouldn't it?
