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India’s New Central Banker Steps Into A Perfect Storm

Filed by KOSU News in World News.
September 6, 2013

Raghuram Rajan, the new governor of India’s central bank, swept into office this week infusing a sense of optimism.

He announced hard-headed measures Wednesday that remove uncertainty which has characterized the Reserve Bank of India’s moves.

By Friday Indian equities and the rupee were clawing back.

But analysts say the exuberance — and honeymoon with the suave MIT-trained economist — is unlikely to last.

After decade-long high growth rates India is now the sick man of the Asia.

Growth has crashed to a four-year low. The rupee has plunged 16 percent since June, driving up the cost of imports and threatening to widen India’s massive current account deficit.

Rahul Kacker is alarmed over the slide in the fortunes of Asia’s third-largest economy. Sales at his auto parts manufacturing business are down 30 percent since July. That translates into lost sales of $200,000 a month.

“Smaller companies like mine get into a cash flow crisis,” Kacker says, and adds: “If the scenario goes on like this, soon we will” have a cash flow crisis.

The downturn is especially startling because his company has seen 15 percent annual growth for the past decade.

“It’s a rude shock,” Kacker says as he strolls through his factory located in Gurgaon, the satellite city of Delhi.

The factory pumps out components for automobiles — mostly molded plastics fashioned into glove compartments, grills and lighting fixtures.

Kacker, a mechanical engineer who once worked for Maruti-Suzuki, now sells parts to India’s biggest carmaker. His customers also include Tata Motors and Honda Japan.

Car Sales

Kacker is worried that passenger car sales in India have sputtered, declining by more than 20 percent since the start of the year, according to the Society of Indian Automobile Manufacturers.

Deepak Kapoor, the managing director of the Marketing Times Maruti-Suzuki dealership in Delhi, says high interest rates, rising fuels prices — diesel’s gone up eight times this year — and uncertainty in the broader economy, has knocked a third of his customers out of the showroom.

“Now that the number game has dried,” he says “that is really hitting our bottom line.”

So much so, Kapoor says, that if previously he converted 20 out of a 100 customers into buyers, he now must convert 50 out of the 70 who walk in.

“If we cannot covert that 50, we will not make up for the 30 percent dip” in customers, he says.

India’s falling rupee is also driving up business costs. Take petroleum, the basis for Kacker’s plastic car parts. With the rupee losing purchasing power, the cost of importing oil, priced in dollars, has become much more expensive.

One reason for the rupee sell-off is the U.S. Federal Reserve’s anticipated tighter monetary policy. It has investors pulling money out of emerging markets such as India while a resurgent American economy draws capital back to the U.S.

Economist Arvind Subramanian says with a declining rupee all foreign goods are now going to be more expensive, driving up inflation in India. He says if the rupee depreciates by 10 percent, the rule of thumb is that Indian prices will be more expensive by about 1 percent.

“So if the inflation rate is now 10 percent in India,” Subramanian says, “a 10 percent depreciation [in the rupee] would make Indian inflation 11 percent, and that’s a cost to consumers.”

A Problem To Tear Up About

Nothing sums up food inflation like the humble onion, and consumers are tearing over the price. Onions recently skyrocketed to as high as 80 rupees – or $1.25 per kilo, exorbitant in a country where 1 in 3 people lives on less than $1 a day.

Onions are now selling in central Delhi’s Kotla market for 60 rupees a kilo where Mohammad Saleem captured the public mood as he muttered about pitching a few at politicians.

“I’m angry but what [can] I do?” he says. “Without onion, I’m not cooking my Indian food.”

Saleem, a wedding videographer, says that with his disposable income declining, his savings are drying up. It’s a lot different, he says, from 10 years ago.

“My bank account is zero and income source is not very sufficient, so I’m not saving single penny — daily earning, daily burning,” he says with a laugh.

From the man on the street to the owners of business, everyone agrees corruption is burning the Indian economy. Kacker, the car parts maker, says corrupt officials from local agencies routinely hit him up for what he wryly calls their “consultancy fee.”

And what does he get for that “consultancy?”

“It’s for the peace of my company to keep running,” he says. “Nobody’s exempt but nobody specifies it in public. It’s a plague. It’s all over the country, so people are really fed up.”

Subramanian, the economist, says corruption, poor infrastructure and burdensome regulation have all depressed private investment. He says it’s only appropriate that Indian assets as well as the rupee be re-priced.

But Rajan, the new of head of the Reserve Bank of India, told his first news conference this week that the “doom and gloom” was overdone and that he would “not use the word crisis and India in the same breath.”

“Yes, we are going through challenging times, what country isn’t?” he said. “But we will overcome these challenges.”

The challenge for the government will be remaining in power after next year’s election. There is deep frustration over the growing economic hardships that are not likely to end soon. Vegetable vendor Gulal Yadav wants Sonia Gahdhi’s Congress Party, which heads the ruling coalition, out.

“I think it’s possible,” Yadav says, “that this entire economic situation can cause a change in government and it’s time for a change.” [Copyright 2013 NPR]

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