No Mr Chidambaram, we will not keep calm

The web that UPA government have built around, is neither going to fetch you investments, nor the votes, which the government do hope to garner from it.

The most ambitious of all times scheme by the UPA government, the Food Security Bill, was ratified by the parliament and it was welcomed by a plunge in the sensitive index (Sensex) and fall in the Rupee. The Rupee took a deep plunge and today it stands at 68.75.

With this fall, the Indian market is facing perhaps the toughest time after 1991 and our emerging market economy stands at the mountain of problems that will be triggered by it.

The finance minister, P Chidambaram, has been appealing for patience and his assurance that the ambitious scheme will not affect the deficit has surely fallen on deaf ears. He could not stop the fall of the Rupee further. Not today, not even tomorrow.

Why? It has a very simple answer.

Indian Rupee is market regulated and not government regulated just like any other country’s currency. Its value depends upon market dynamics. Governments all over the world have accumulated a lot of debt. They all are under financial strain. For this, all the governments have been asked to cut down on social benefits. For example unemployment benefits like in Greece.

Our Indian government is not in tandem with this arrangement. We have massively increased social benefit umbrella, which is clearly visible in the form of recent food bill.

The markets read this as an irresponsible behaviour by the government which creates no assets and does no capacity building. There is no open area for rolling back these no asset creating schemes. And so the markets dip further.

Depreciation of rupee is not an end in itself. It is a result of lot of things. It has got two facets.

First, the external facet is not actually a real one but it is potential stimulus to internal mess. For example, the quantitative easing (QE) programme of USA. To sustain the ongoing financial problems, they started printing money. The investors started looking out towards emerging economies. India too benefited from their policy in the forms of funds which also reflected in the growth of 9% during 2009-10.

Now there are signs that the QE programme will be rolled back soon as this was a crisis management action of the USA government and now their market is in the process of recovery and this changes the scenario for emerging markets. They fear that the investors will go back to the USA after the economy there is ready and all healed.

Second, the internal factors are the main reasons behind the fall of the Indian Rupee. And topping the list is infra-structural bottlenecks.

The core sector in India is in shambles because of the regulatory problems prevailing in the country. Files don’t move, land acquisition is a tough job, getting green signal is a headache and corruption is rampant. In short, doing business in India is way more difficult than other economies. This takes away our foreign investment chances and domestic as well.

Next comes the inflation. Our retail inflation is in double digits and RBI has been constantly trying to lower it down but all in vain. Inflation triggers, again, less investment in goods and commodities, reduces our purchasing power and leads to economic slowdown.

The rising current account deficit is another problem that we are having. With the passage of the food bill, which is being speculated in the market as a driver of fiscal deficit, the current account deficit widens.

We have huge trade imbalances with other markets, economies, which further enhances our problem and keeps the Indian market shaky.

And, to add to all this, we have banking sector whose non performing asset (NPA) proportion is rising continuously due to such social schemes of the government. The NPAs have already crossed 3% mark, asset quality is quite bad, and there is lesser money in the banks. This, again, generates a spiralling effect.

The Rupee is falling down and there is no faith in the market. All the internal issues that we saw here lie within the purview of the finance ministry, except for the inflation which is to be regulated by RBI. And our finance minister asks us to keep calm.

Well Mr Chidambaram, the web that now you and your UPA government have built around, is neither going to fetch you investments, nor the votes, which you do hope to garner from it. We are just waiting for the cookie to crumble.

Till then, we are not keeping calm.

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