How the Modi government is snoring as Indian rupee is plummeting

Sanjay Jha
Sanjay JhaAug 20, 2018 | 13:05

How the Modi government is snoring as Indian rupee is plummeting

As the Turkish lira did a whopping nosedive against the dollar last week, the Indian rupee plummeted reaching a historic low, breaching that psychological hurdle of 70. All hell broke loose, perhaps expectedly. Emerging market economies, many still long on dollar-denominated foreign currency borrowings had substantial reason to press the panic buttons.

The towering ghost of the Asian currency crisis of 1997 was a haunting reminder of the ravages an external uncontrollable can do to domestic economies. The world is now truly globalised, and thus if Turkey is infected with influenza, everyone else needs a vaccine quickly. A neighbour’s pain is no reason to get a sadistic kick or pretend obliviousness. It will hurt you too. In India, the debate turned both puerile and political. Again, expectedly.


On a TV chat with a BJP political heavyweight, the theatre of the absurd assumed a highly entertaining script. Extremely agitated, the angry man blurted; “The Congress party loves the American dollar. We believe in the Indian rupee. We have pride in our local rupaiya, while the Congress has a penchant for foreign things." Thankfully, he did not explicitly call me an anti-national, albeit that is exactly what he insinuated.

The currency has plummeted reaching a historic low, breaching that psychological hurdle of 70. (Photo: Reuters)

It was a bizarre argument to make Uncle Sam’s green-bucks a desh-bhakti issue. But in politics, nothing works better than a totally inane diversion. What was hurting the BJP spokesperson was Congress president Rahul Gandhi’s tweet earlier in the day:

Ouch! I could empathise with the excruciating pain that must have caused the saffron brigade (it was what #ModiToadies on Twitter call as their “Burnol moment” — when a pain reliever is desperately necessitated). In the one-minute video that Mr Gandhi attached with the tweet was the characteristic Narendra Modi hyperbole wherein the former Gujarat chief minister called the depreciating rupee a national humiliation on account of governance failure and economic mismanagement. It is bizarre logic to look at a convertible traded currency from the kaleidoscope of muscularity. But fair enough, in that case, what is sauce for the goose is sauce for the gander, right? No, according to the BJP; double-standards is perfectly fine.


I remember debating with Piyush Goyal, India’s half-finance minister (no one knows when Arun Jaitley will assume charge as he seems quite happy writing sub-standard blogs) during the time of the tapering crisis that simultaneously engulfed several economies. The US Federal Reserve had announced its reversal of the Quantitative Easing programme that was triggered post-the Great Recession of 2007 to increase financial liquidity.

Goyal and Co rubbished global factors (which was the real reason) as a diversionary tactic and hauled the Congress up the coal fires. There was a complete absence of economic rationale and they persisted with their preposterous flimflam but were only intent on scoring cheap political points. They were also fully aware that the price of crude oil was at a stratospheric $150 dollars a barrel, but hey, “global factors” was dismissed as an attempt to bamboozle. Come August 2018, the chickens have come home to roost. In the age of social media and cable television, your past indiscretions and shenanigans are on permanent display. They catch up with you.

What the BJP tried to cleverly camouflage was its dismal showing on key macroeconomic factors; five-year record high current account deficit of $16.6 billion, (annualised forecast of $72 billion at 2.5 per cent for current fiscal year), a 14-year low in exports as a percentage of GDP, under-performance in merchandise exports, and the fact that the rupee had been the worst-performing Asian currency (8.6 per cent fall) since the beginning of the year already.


The incorrigible optimists or government sympathisers are taking the popular maximalist position: a falling rupee is good for exports. (Photo: PTI)

The fact that India had not gone seriously financially bust was on account of low oil prices that had scraped $28 during Modi’s period, giving the government a massive bonanza. Modi ended up imposing staggering taxes on the common man and raking in big moolah (and yet could not meet fiscal deficit targets), but to what avail? No answers yet.

India faces grave uncertainty as the currency volatility continues and the government snores, only waking up to change the headlines with some anaemic defence. We face a double whammy, rising oil prices and a falling rupee which will further accentuate current account deficit. Expect an increase in capital outflows as foreign portfolio investors reduce their currency risk by counterbalancing with more purchases of the attractive dollar.

The global tariff war, principally between US and China could exacerbate matters. Oil prices post the US threat to allies to stop buying oil from Iran could lead to enhanced disruption. And currency trader Peter Brandt has prognosticated that if the rupee were to break the 71 barrier it could hit a disconcerting 80. In fact, the RBI has already spent $23 billion in market interventions to stabilise the rupee. 

What next? The incorrigible optimists or government sympathisers are taking the popular maximalist position: a falling rupee is good for exports. Theoretically yes, but what they unfortunately forget is that several currencies have depreciated, and thus it erodes any relative competitive price advantage. The big headwinds for India now are the prospect of rising inflation and the hardening of repo rates. Please continue to wear your seat belts during the entire duration of your flight to perdition.

There is a bigger underlying message for an authoritarian political leadership whose personal hubris can dismantle stable economies. President Recip Erdogan who qualifies to be a democratically elected dictator cannot save the Turkish lira by imprisoning intellectuals or intimidating media editors critical of him.

And back home in India, we discovered in November 2016 that brazen politicking with economic policy issues for personal image-building has clearly boomeranged.

Voodoo economics does not work, like that disastrous cold Turkey demonetisation.

Last updated: August 20, 2018 | 13:05
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