Page 11 - DECO303_INDIAN_ECONOMY_ENGLISH

Indian Economy

Notes “While global factors... have caused general weaknesses in emerging market currencies, the
rupee has been especially hit because of our large current account deficit and some other domestic
factors. We intend to act to reduce the current account deficit and bring about an improvement
in the functioning of our economy.”
The signs are indeed grim, despite those intentions. Later Friday, India’s July deficit numbers
revealed the government has already fallen two-thirds of the way toward its deficit target for
2013-14 in the first four months of the fiscal year, according to Reuters.

India’s growth has slowed to 4-5 per cent, while inflation remains in double digits. The rupee
has plummeted nearly 20 per cent since the beginning of the year. The stock market has dropped
10 per cent over the past three months, with foreign institutional investors dumping nearly $1
billion worth of Indian stocks over the past eight trading sessions, according to India’s Mail
Today.
But there’s a ways to go before it hits crisis levels, experts say.
India and Indonesia will face a rocky road in the coming months because their current account
deficits — meaning the balance of funds flowing out versus in — are high. But “we don’t think
this is the Asian crisis all over again,” Standard & Poor’s chief economist for Asia Pacific said in
a recent report.
After rebounding 3.5 per cent to 66.6 against the dollar Thursday – its largest gain since January
1998 – on Friday the rupee was down slightly before Singh’s speech, but was trading at 66.3
shortly before closing. The Bombay Stock Exchange’s benchmark Sensex gained another 1.19 per
cent on Friday after closing up 2.25 per cent the day before, while the National Stock Exchange’s
Nifty added 1.16 per cent after closing up 2.35 per cent Thursday.
Does that mean the worst is over? Maybe, and maybe not.
With short-term debt of around $172 billion and forex reserves of around $280 billion, India is
in much better shape than the victims of the Asian financial crisis. Moreover, the rupee’s free fall
indicates that India’s central bank is not making the same mistakes made by the Asian tigers in
the 1990s, when Thailand, Indonesia and South Korea burned up their foreign exchange reserves
in a doomed effort to defend their currencies.

“The external positions for the emerging Asian economies are much stronger [than in 1997]. The
central banks are also not defending their exchange rates,” S&P’s Paul Gruenwald said in a
report titled “South and Southeast Asian Economies Grapple with Growth and External Financing
Risks.”
The rocks in the road could be pretty big for some of India’s most respected companies, however.
“The fact of the matter is that 25 per cent of corporate India today technically does not have
adequate money to make its interest payments, and 15 per cent of corporate India has negative
cash flows,” Morgan Stanley’s Ruchir Sharma told GlobalPost.
“When you look at that kind of territory you know that the corporate system is under a lot of
stress.”
The numbers may be even worse than that.
A third of India’s big corporations are already busted or on the brink of insolvency, according to
India’s Business Standard newspaper. And every point the rupee plunges makes their dollar
debts that much more difficult to repay.
Citing data from the Capitaline database of Indian corporations, the paper reports that companies
like Tata Steel, Hindalco Industries, Tata Power, Larsen & Toubro, Jaypee Associates, Adani
Power, GMR Infra, GVK Power, JSW Steel, Reliance Infra, Indian Oil, HPCL, Shri Renuka Sugars,

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