This is the story of a baby elephant, called India, who stayed in British mama elephant’s stomach until 1947. Baby was very independent and decided to start in her life on her own. She was very proud in defining herself as a democracy, but soon enough she struggled with religious dilemmas, chronic lack of resources, widespread poverty and very low economic growth. She had made it as a demographic elephant, though: 350 million inhabitants in 1950.
She realized later that her population size was actually holding her back in being a country-elephant. She tried acting on it by setting up socialist five-year plans for her life, but, as the outcome was disappointing, she was seen as a very bad example for other wannabe elephants out there.
With only three weeks’ worth of reserves to support exports, it appeared that Lord Krishna could no longer protect India’s economy during the Balance-of-Payment crisis of 1991. The saviour came in the form of Dr. Manmohan Singh, the then Finance Minister and the current Prime Minister. He unleashed the most drastic set of liberal reforms in India’s history. The economy revived, experiencing an average growth rate of 7.3% over the 2000-2010 decade. She became the huge, hungry elephant that we have come to know.
I met India this summer during my internship at her Central Bank, the Reserve Bank of India. She had a lot of ugly spots on her trunk, and I had to grow accustomed to it in order to focus on what she was telling me, but I liked her story a lot. Her ugly spots are plenty: 33% of her people live below the poverty line; women are still persecuted; children are among the most malnourished in the planet; corruption and lack of accountability are unfortunately common; income inequality has doubled in the last 20 years...
But one must see past an elephant’s thick skin to understand its challenges, of which we only had time to talk about economic development. India is fond of economic debate, and she has quite a list of issues to debate upon. This summer, that list was topped by her depreciating currency, the Rupee. From 48.6 rupees to the dollar in the first half of 2012 to an all-time low of 68.8 in August 2013, the currency has plunged more than 25% in the past year, and worries India constantly.
A weaker rupee could help India’s exports at a time when her current account deficit (CAD) is worryingly high. The CAD had exploded from $8 billion to $90 billion, an increase of 1125%. This means India imported $90 billion more than she exported in 2013. I worked on this issue as a research intern: a preliminary study to calculate price and income elasticities of imports and exports. India is a colossal beast but lacks resources enough to sustain her march forward. Her dependency on foreign energy - 35% of total imports are oil and petroleum products - is very price inelastic. An interesting point, specific to her: India is the largest importer of gold in the world. Historically and culturally, Indians have used gold as a form of long-term savings and, more recently, to hedge against inflation. The government and the RBI are trying to put restrictions on gold purchases, with some relative success in August.
But the weaker rupee also shows, and will further induce, a declining belief among foreign investors in India’s growth story. Economic growth has been sluggish these last couple of years, at around 5% for the financial year 2013. Investors like Warren Buffet are fleeing her trembling flanks. Manmohan Singh - who recently turned 80 - and his government are constantly trying to reassure the markets that the “fundamentals” of India’s economy remain strong. India, the investors and I are not sure what that means. In the first quarter of 2013, the GDP growth was only 4.4%, and devoid of signs of potential improvement.
India told me it is the Fed’s fault: announcements of possible reductions of the ongoing quantitative easing policy that injects liquidity into financial markets made investors withdraw their investment out of growing elephants like India and Brazil. Dependent on the cheap liquidity offered by the Fed, emerging countries will now have trouble financing their growth. This, combined with steady recovery in Western economies, has led to a withdrawal of capital by the same people who once fueled the steady rise of India and her siblings.
The instatement of Raghuram Rajan as the new governor of the Reserve Bank of India has been seen as the second coming with regards to policy framework. The RBI has a myriad of objectives: act on inflation, economic stability, financial regulation... An elephant within an elephant, Rajan, a former chief economist at the IMF, has a PhD from MIT, and is well known for his 2005 paper, "Has Financial Development Made the World Riskier?" which warned against an impending liquidity bubble. I think India has a crush on her rockstar economist. But he faces her shrinking foreign reserves, a volatile currency, upcoming parliamentary elections, persistent inflation and a growing trust deficit. Following Brazil and Indonesia’s moves, he recently raised the interest rates in order to counter the falling rupee, possibly at the expense of the elephant’s already slow pace.
When I left, I told India and Raghuram Rajan: chalo[*]!
[*] Come on!