Reserve Bank of India Governor Shaktikanta Das in a news interview tried to convey confidence that the central bank is in control of the macroeconomic situation.
But the figures tell a different story. Many red-hot macroeconomic parameters are, in fact, already weaker than the levels seen in 2013, when India was in the ‘fragile five’ phase during the tenure of the UPA government. At that time, rising macroeconomic tensions played a trick on the rupee, but today the rupee is weaker than then.
The rupee continues to deepen to new lifetime lows every few days, even as the central bank is reducing its forex reserves to protect the rupee by selling dollars, a strategy that could soon prove futile and unsustainable. . The rupee hit a record low of $77.76 last week, while the RBI’s forex reserves fell from a record $642 billion to $593 billion in a matter of months. Stocks are bigger now but it is a cold comfort, as the troubles of the global economy have just begun. The unrest can last for months.
The current account deficit is not as bad as it was in 2013, but stood at 2.7% of GDP by 31 December 2021, the highest in nine years. Anything above 2% of GDP is considered unstable for India.
Inflation in April was just under 8%, the highest since May 2014, and nearly double the government’s target of 4% for the RBI. Average inflation for this financial year is estimated to be 6.9%, the highest in 9 years.
The biggest reason for the stress is the fiscal deficit position, which is weaker than in 2013 when it stood at 4.5% (although the UPA government did not include the under-the-line deficit in the reported figure, which this government did). To his credit, that is). The fiscal deficit may be close to 7% or even higher by March 31, 2023, depending on how much the disinvestment proceeds will fall below the budget estimates. Already, the dividend from RBI is much less than the budget of the government. At the same time, the government is sacrificing revenue by reducing taxes to cushion the blow of rising prices at the cost of living and business. More rounds of tax cuts could further widen the deficit. It may take years to bring the fiscal deficit under control. Government borrowing, which is already high, is set to rise to record levels. There is no way that India will be able to reduce public debt to 60% of GDP in the next few years, the FRBM target.
The rising cost of repaying this record level of debt, coupled with interest rates hiked by the RBI, and the government not knowing what new sources of revenue it plans to tap, stress India’s current sovereign rating profile. will come in
In these circumstances, the assurance that Das is trying to give is far less than what is needed. The assurances from central bankers are welcomed in a time of global economic concerns and rising economic hardship for businesses and people in what the British are calling a ‘cost of living crisis’.
Das, however, is trying to calm the growing uncertainty by pointing to other economies, and shifting the blame to dark clouds over the economy for the disruptions caused by Russia’s invasion of Ukraine.
He sought to address India’s extremely high inflation as a result of the war, when official data showed inflation was high until 2019 before the outbreak of the pandemic and was close to the upper tolerance limit of 6%. Average inflation was 6.2% in FY2011 and it was not all smooth in FY2012. All the while, the RBI dismissed experts warning that inflation was set to be stubborn, and Governor Das continued to insist that inflation was “temporary” as if it would subside on its own.
By his own admission, none of the macroeconomic parameters will improve in the next few months. This has an impact on the quality and pace of GDP growth. Apart from blaming global factors, the RBI and the finance ministry have not offered a roadmap for how India’s macroeconomy managers plan to address the dark clouds over the economy and repair red-hot macroeconomic parameters. Will. This is necessary to restore confidence, given that the global economy is going to be in turmoil, possibly a recession, for at least the next year, if not two, with advanced economies cooling their economies with tough policies. Fighting inflation.