INDIA’s ECONOMIC PROBLEMS DIFFICULT ROAD AHEAD.

ABSTRACT

The case discusses the major economic problems faced by India in 2012-2013 and how these
problems were caused. The major economic problems included: rupee depreciation; widening current
account deficit; falling investment levels; fiscal deficit; and inflation. In the first quarter (April-June) of
the fiscal year 2013-14, India's economy grew at its slowest in the previous four years and recorded a
growth rate of 4.4%. As a result of India's slowest economic expansion since 2009, BNP Paribas,
France's biggest listed bank, sharply cut India's GDP forecast to 3.7% for fiscal 2014, from an earlier
estimate of 5.2%.

In the fiscal year 2012-2013, the rupee depreciated by roughly 10% against the dollar. By August
2013 the slide of rupee intensified with it loosing 20% of its value against the dollar. Increasing oil
prices as a result of the Syria conflict, widening current account deficit, and capital outflows intensified
the rupee's fall in August 2013. Apart from it, India's current account deficit, swelled to 4.8% of GDP
during 2012-2013, from 4.2% of GDP in 2011-2012. The reason behind India's swelling current
account deficit in 2012 was lower exports and higher imports of oil, coal, and gold.

In 2012, on the investment front, several projects were reportedly stalled due to policy bottlenecks.
The investment climate in India was not seen as encouraging by corporates. The FDI inflows to India
decreased by 29% y-o-y to USD26 billion in 2012. The reason for this significant decline was India's
slowest growth in a decade and high inflation which increased the risks for foreign investors. Along
with declining investments, another major economic problem which India faced was its increasing
fiscal deficit. India's fiscal deficit widened to 5.7% of GDP in 2011-12. Analysts were skeptical that
government would be able to contain its fiscal deficit, as it continued to rollout populist policies giving
out huge subsidies, like the Food Security Bill (FSB) in September 2013.

High inflation since 2009 had been the most challenging issue for policymakers in India. In the fiscal
year 2012, food inflation remained an area of concern as it was contributing to an average of one third
of total inflation. The case study goes into details of as to why India was facing such wide-spread
economic problems and what steps the Indian government had initiated to combat these problems.

Issues:

The case has the following objectives

» Understand the major economic problems which an economy faces.

» Study the concept of currency (rupee) depreciation and also the pros and cons of currency
depreciation.
» Understand the reasons behind India’s falling investment levels and its correlation with economic
growth. 
» Discuss why India’s current account is widening. 
» Understand the reason’s behind India’s ballooning fiscal deficit. 
» Examine the concept of inflation and discuss how harmful it is for the Indian economy. 
» Study the steps taken by the Indian government to overcome its economic problems and analyze
whether they were appropriate. 
» Discuss ways in which India could combat its major macroeconomic problems. 

On August 28, 2013, the value of the Indian rupee vis-à-vis the US dollar plummeted to a record low
of INR68.80. The stock market took a plunge and BSE SENSEX on August 28, 2013, touched an
intra-day low of 17,720, down a whopping 13.6 % from January 2013's high of 20,500. Experts
pointed out that the Indian economic condition in 2013 was the worst since 1991.
The Indian economy had posted good growth during 2003-2007 with growth rates averaging 9%. In
2008, growth moderated due to the global financial crisis. Starting 2012, India was showing signs of
deceleration. According to a report by The Central Statistics Office (CSO), in the first quarter (April-
June) of the fiscal year 2013-14, India's economy grew at its slowest in the previous four years and
recorded a growth rate of 4.4%. Inflation was running high at above 7% since December 2009;
Current Account Deficit (CAD) was expanding to record levels; several projects were reportedly
stalled due to policy bottlenecks. The investment climate was not seen as encouraging by corporates.

Parallels were drawn with the situation India faced in 1991. But observes felt that Manmohan Singh
(Singh), Prime Minister of India (2004-2014), who as the Finance Minister in 1991, had initiated bold
reforms that helped a turnaround of the economy, was not able to placate the criticism that the
government was lacking concrete action. Though Singh said there was no need for panic, analysts
were skeptical, since the government continued to roll out populist policies giving out huge subsidies,
like the Food Security Bill (FSB) in September 2013. With elections for the parliament due in 2014, the
atmosphere was highly charged with opposition parties' waiting for every opportunity to criticize the
government. In the absence of an absolute majority in the parliament, the ruling UPA government was
in a tight position.

Problems on Many Fronts

As a result of India’s slowest economic expansion since 2009,

BNP Paribas, France’s biggest listed bank, sharply cut India's
GDP forecast to 3.7% for fiscal 2014, from an earlier estimate of
5.2%. Economists pointed out a number of economic challenges
facing the Indian economy, the major ones being rupee
depreciation; widening current account deficit; falling investment
levels; inflation, and fiscal deficit.

Rupee Depreciation

In the fiscal year 2012-2013, the rupee depreciated by roughly 10% against the dollar. According to
the Ministry of Finance, the rupee depreciation was "due to decline in exports on account of euro-
zone crisis and widening of trade deficit, as imports remained resilient due to high oil prices and gold
imports." A trade deficit of 10.2% of GDP in 2011-2012 created volatility in the supply-demand
balance in India’s domestic foreign exchange market, which placed a downward pressure on the
rupee.

The average exchange rate of the rupee per US dollar ranged between INR51.81 in April 2012 and
INR56.03 in December 2012. On June 27, 2012, the rupee touched an all time low of INR57.22 per
US dollar, which was a 10.9% depreciation over INR51.16 on March 30, 2012. On October 05 2012,
the rupee appreciated to INR51.62 per US dollar. However, thereafter, the rupee began declining and
the monthly average exchange rate of the rupee ranged between INR53.02 and INR54.78 per US
dollar between October and December 2012. Such volatility in the rupee increased uncertainty in
India's domestic market and impacted business confidence in 2012.

The rupee's volatility continued in 2013 also. The Indian rupee, which was around INR54 against the
US dollar at the beginning of the year, fell to a record low level of INR68.80 on August 28, 2013. The
slide of the rupee started in May 2013 and by August 2013 it had lost 20% of its value against the
dollar. Increasing oil prices as a result of the Syria conflict, widening CAD, and capital outflows
intensified the rupee’s fall in August 2013... .

Excerpts - Next Page>>

Current Account Deficit

According to the Reserve Bank of India (RBI), India's current

account deficit , swelled to US$87.8 billion (4.8% of GDP) during
2012-2013, from US$78.2 billion (4.2% of GDP) in 2011-2012.
The reason behind India's swelling current account deficit in
2012 was lower exports and higher imports of oil, coal, and
gold. Morgan Stanley, a global financial services firm, estimated
that India's current account deficit stood at US$93.9 billion
(5.1% of GDP) in 2012, just behind that of the US in absolute
terms. Such a high current account deficit was expected to
weaken India's economic growth, as it created a situation
wherein investors dumped the country's assets...

Falling Investment

The growth rate of the Indian economy since 2003-04 showed a correlation with the investment rate.
For instance, the GDP growth was lower in the years 2008-2009 and 2011-2012, when the growth
rate of investment was low. One of the major economic problems which India faced in 2012-2013,
was lack of investments happening in the country. According to Harish Damodaran, Reporter and
Editorial Analyst of The Hindu Business Line, "The economy's main problem today is investment, not
fiscal and current account deficits that will take care of themselves."...

Fiscal Deficit

India's fiscal deficit widened to 5.7% of GDP in 2011-12, according to the “Economic Survey 2012–13”
report. A high fiscal deficit was a cause of concern for the Indian economy as due to it, inflation
increased; monetary policy expansion became constrained; external sector imbalances widened; and
investment growth and employment took a hit. This resulted overall in weak economic growth in 2011-
2012...

Inflation

High inflation since 2009 had been the most challenging issue for policymakers in India. The inflation
rate in India was based on the Wholesale Price Index (WPI). Inflation, as measured by the WPI
remained above 7% since December 2009. During 2010-2011, it was as high as 11.1% and in 2011-
2012 it was around 7.2%. Since the WPI included a higher number of products, it was given more
importance than the Consumer Price Index (CPI) in India. The weight of manufactured products was
65% in the WPI basket...

Outlook

India's economic situation in 2013, according to some, was a repeat of 1991, which was the worst
economic crisis of India. However, analysts opined that the situation was not as bad as in 1991, as
India had reserves to pay seven months of imports in 2013, compared to just 15 days in 1991.

India's growing economic problems in 2013 were a matter of great concern, especially its large
current account deficit and rupee depreciation. Apart from this, the Indian Prime Minister's economic
advisory council (council) opined that containing fiscal deficit at 4.8% of GDP could be a challenge for
the Indian government...

Exhibits

Exhibit I: Outstanding Investments: Stalled Projects (2006-2012)

Exhibit II: Quarterly Investments: New Projects (2006-2012)
Exhibit III: FDI Inflows Top South Asian Countries (in USD billion)
Keywords:

Indian economy, India’s economic growth/GDP, India's economic problems, Mergers and acquisitions,
Central Statistics Office (CSO), Food Security Bill (FSB), Rupee Depreciation, Current Account
Deficit, Falling Investment, Foreign Direct Investment (FDI), Fiscal Deficit Inflation, WPI inflation, CPI
inflation, Fiscal policy, Monetary policy, Reserve bank of India, Cabinet Committee on Investment
(CCI), Fiscal Deficit, Revenue Deficit, Macro Economic Policy

On August 28, 2013, the value of the Indian rupee vis-à-vis the US dollar plummeted to a record low
of INR68.80. The stock market took a plunge and BSE SENSEX on August 28, 2013, touched an
intra-day low of 17,720, down a whopping 13.6 % from January 2013's high of 20,500. Experts
pointed out that the Indian economic condition in 2013 was the worst since 1991.