Undercurrents of optimism about reform, and some fighting talk, in India
AFTER a storm-tossed six months for the economy, India’s authorities are trying to get things back on an even keel. On June 25th the Reserve Bank of India (RBI) announced measures to try to stabilise the rupee. It has lost a fifth of its value against the dollar in the past year (see chart), reflecting global woes but also a slowdown in India and a drying up of capital inflows. Its decline is widely seen in India as a bad thing, stoking inflation and hurting firms with foreign-currency debt.
India has long shied away from letting fickle foreigners buy government bonds, but the RBI this week loosened the rules to tempt in sovereign-wealth funds and other long-term investors. It also slightly eased restrictions on Indian manufacturing and infrastructure firms seeking funds abroad.
IKEA, a Swedish furniture chain, boosted morale by saying it would invest up to €1.5 billion ($1.9 billion) in India—although on closer inspection that sum was spread over many years. Coca-Cola followed suit with the announcement of an additional $3 billion in investment, taking the total earmarked for India by 2020 to $5 billion. A ratings agency proved oddly helpful, too: on June 25th Moody’s signalled it would not follow Standard & Poor’s and Fitch, which have both warned of a possible downgrade of India to junk status. Its rating, which hovers just within investment grade, remains stable, the agency said.
The impact of all this? Not much. The rupee is still near record lows. Yet there is a feeling that a bleak picture may be improving slightly, mainly thanks to a government reshuffle. Pranab Mukherjee, the finance minister, left his position on June 26th to contest the largely ceremonial post of the presidency. Mr Mukherjee, who presented his first budget in 1982, has had a disastrous stint as finance minister this time round, pursuing controversial tax claims against foreigners, including Vodafone; failing to tame the budget deficit; and chairing troubleshooting committees that often fired ordnance at India’s own feet.
Responsibility for the finance ministry, for a time at least, has passed to Manmohan Singh, the prime minister. Although even less of a spring chicken—at 79, compared with Mr Mukherjee’s 76—he has credentials as a reformer, having served as finance minister when India unveiled its liberalisation in 1991.
At the end of his career, the hope is that Mr Singh makes a stand and rams through budget cuts and vital changes on tax and foreign investment. “It could make a difference,” says an official. “He has a lot of credibility. It is an area that is close to his heart and his reputation will be much more on the line…The situation is tough so there is a limit to what can be done, but it is a mood-lifter.” His party, Congress, which leads the ruling coalition and is run by Sonia Gandhi, its hereditary chief, is lukewarm about making tough decisions. But there are signs that it may have successfully wooed one or two smaller parties outside its present coalition, which may help it push tricky changes through parliament.
The promise of a push on reforms has been made—and broken—consistently by the government for years. With a busy electoral timetable up to general elections in 2014, it may be harder to fulfil than ever. Still, others, stepping back from the hurly-burly, can see a silver lining in India’s great wobble, particularly the fall in the currency. T.C.A. Ranganathan, the chairman of Exim Bank of India, which finances trade, says: “The exchange rate has moved in our favour. I’m fairly happy.” He reckons a weaker rupee will help spur a long-awaited boom in manufacturing. Kaushik Basu, the government’s chief economic adviser, no slouch on the need for reform, agrees. A cheaper currency means India is “getting an advantage for our export sector”. Perhaps, in time, that may prove more important than today’s firefighting.
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