Falling rupee likely to be election issue in India

The Indian rupee, one of the worst performing Asian currencies, is likely to be a major election issue in a bunch of upcoming state assembly elections in India. These elections in turn lead to the general elections next year.

Since the start of this year, the rupee has lost about 11 per cent of its value in nominal terms vis-a-vis the US dollar. On Monday, the currency depreciated 81 paise to 72.65 against one US dollar in early trade on the Mumbai foreign exchange market. It is currently hovering in the region of 72.43.

The Indian currency's fall, coupled with the rise in international crude oil prices, has resulted in a high degree of disquiet in India with petrol selling at record prices. The fear is that this will stoke inflation. A combination of a falling rupee and higher food prices can be a deadly cocktail for any ruling party during India's election season. Moody's Investors Service has said in a report that there are risks of India breaching the 3.3 per cent fiscal deficit target for the current financial year as higher oil prices add to short-term fiscal pressures.

However, things may not be as bad as they look. According to data released by the International Monetary Fund, since December 2017 the real effective depreciation rate of the Indian rupee has been between 6-7 per cent. That is because the US dollar is appreciating against a number of currencies.

Thanks to the falling rupee, exports grew by a relatively strong 14.3 per cent in July from a year earlier, although slower than the 18 per cent pace that it hit in June. Economists and policy makers are optimistic that the recent weakness in the rupee will help support the recovery in sectors such as textiles which are major employment generators.

Policymakers need to do some tightrope walking to ensure that inflation remains under control in what is the world's sixth largest economy, and India's central bank has already raised policy rates in its last two meetings.

The overall economy is doing very well with the April-June quarter growth coming in at 8.2 per cent, higher than earlier estimates of 7.6 per cent after a poll of economists. In the previous January-March quarter India clocked growth of 7.6 per cent. In the year ago April-June quarter, growth had slipped to 5.6 per cent, the lowest since the current government came to power in May 2014.

Manufacturing grew 13.5 per cent during the April-June quarter, compared to 1.8 per cent contraction during the same quarter one year ago. Construction was up 8.7 per cent from 1.8 per cent in the year-ago period. In the absence of reliable data, it is assumed that since these two sectors are major employers, job growth has been good during the quarter. India needs around eight million jobs per year in order to absorb new entrants into the labour market.

With the escalating trade war between the United States and China, growth may have peaked for the Indian economy for the rest of the year thanks to uncertain conditions in global trade. On top of that there is unlikely to be any further decontrol of the economy, such as the urgently needed land and labour reforms which can have a dramatic impact on growth. It is likely that the government will put a hold on big bang reforms till the election season is over which, in a way, is unfortunate for the India growth story. It was only early this year that the country regained its title as the world's fastest growing major economy.

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