dpm on indian economy falling rupee and common man (26.8.13)
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Indian Economy Fiscal year 2013-‐14
Falling Rupee, rising $ and
Common Man in India
August 2013
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Indian Rupee and US $
PresentaDon on Ø Why Value of Rupee has gone
down? Ø Factors responsible for slide of
rupee. Ø What is the possible soluDon by
poliDcal leadership, common man and businessman?
2
What is Current Account Deficit (CAD )
In simple terms
Ø Difference between value of goods and
services Exported ( Sent out of India) and
Imported ( Brought in India) is CAD.
3
What is Current Account Deficit (CAD )
In simple terms,
Ø When Country is spending more than it is
taking from abroad, CAD is created.
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What is Current Account Deficit (CAD )
In simple terms,
Ø CAD means Country is net debtor to the
World.
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CAD and US$ vs. Rupee
Ø Higher the debt, lesser the confidence. Ø Risk taking ability is reduced. Ø Capacity to negoDate is reduced. Ø Higher lending rates. Ø Margins / surplus (income over the
expenditure) come under greater pressure.
Ø But, CAD is not the only factor to prompt this cyclic effect.
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India Current Account Deficit & Historical Exchange Rate
Year Quarter
Current Account Balance
(Current USD Bn)
USD/INR Closing Exchange
Rate 2008 Q2 -‐1.53 46.26
Q3 -‐3.27 48.43 Q4 -‐12.58 50.53
2009 Q1 -‐11.67 47.89 Q2 4.75 48.15 Q3 -‐4.45 46.50 Q4 -‐9.20 44.83
2010 Q1 -‐12.19 46.20 Q2 -‐12.80 44.57 Q3 -‐12.10 44.95 Q4 -‐16.90 44.68
2011 Q1 -‐9.98 45.03 Q2 -‐6.30 49.09 Q3 -‐14.10 53.07 Q4 -‐18.90 50.78
2012 Q1 -‐19.60 56.81 Q2 -‐21.70 52.86 Q3 -‐16.40 54.78 Q4 -‐22.30 54.29
2013 Q1 -‐32.63 59.49 Q2 -‐18.10 63.36
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-‐1.53 -‐3.27
-‐12.58 -‐11.67
4.75
-‐4.45
-‐9.20
-‐12.19 -‐12.80 -‐12.10
-‐16.90
-‐9.98
-‐6.30
-‐14.10
-‐18.90 -‐19.60 -‐21.70
-‐16.40
-‐22.30
-‐32.63
-‐18.10
-‐40
-‐30
-‐20
-‐10
0
10
2008 2009 2010 2011 2012 2013
India Current Account Deficit Current USD Bn
Source :hbp://www.tradingeconomics.com
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Co-‐efficient of DeterminaDon (R2) is 38% Which means: only 38% of the changes in Exchange Rate can be related to the current account deficit and balance 62% to other factors (Such as Purchasing Power, Investment
Paberns, Etc.)
1.53 3.27
12.58 11.67
-‐4.75
4.45
9.20
12.19 12.80 12.10
16.90
9.98
6.30
14.10
18.90 19.60 21.70
16.40
22.30
32.63
18.10
46.26 48.43
50.53 47.89 48.15 46.50 44.83 46.20 44.57 44.95 44.68 45.03
49.09 53.07
50.78
56.81 52.86 54.78 54.29
59.49 63.36
-‐20
-‐10
0
10
20
30
40
50
60
70
-‐10
-‐5
0
5
10
15
20
25
30
35
2008 2009 2010 2011 2012 2013
India Current Account Deficit vs USD/INR Exchange Rate Current USD Bn USD/INR
Deficit
Surplus
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India Imports Breakup USD Bn
Imports USD Bn Imports %
Year Oil Gold Others Total Oil Gold Others Total
2002 15.31 4.56 36.41 56.28 27.20% 8.10% 64.70% 100.00%
2003 18.50 4.06 41.90 64.46 28.70% 6.30% 65.00% 100.00%
2004 21.04 6.64 52.32 80.00 26.30% 8.30% 65.40% 100.00%
2005 31.87 11.18 75.86 118.91 26.80% 9.40% 63.80% 100.00%
2006 46.33 11.47 99.26 157.06 29.50% 7.30% 63.20% 100.00%
2007 58.54 14.87 117.26 190.67 30.70% 7.80% 61.50% 100.00%
2008 81.67 17.26 158.70 257.63 31.70% 6.70% 61.60% 100.00%
2009 96.57 21.29 190.67 308.52 31.30% 6.90% 61.80% 100.00%
2010 90.79 29.76 180.09 300.64 30.20% 9.90% 59.90% 100.00%
2011 109.36 41.92 229.78 381.06 28.70% 11.00% 60.30% 100.00%
2012 158.35 57.45 283.73 499.53 31.70% 11.50% 56.80% 100.00%
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Indian Lust for gold
Import of Gold in India Year Rs. in crores Growth Rate 1999-‐00 17991 2000-‐01 18829 4.7% 2001-‐02 19889 5.6% 2002-‐03 18608 -‐6.4% 2003-‐04 29946 60.9% 2004-‐05 47348 58.1% 2005-‐06 47951 1.3% 2006-‐07 65440 36.5% 2007-‐08 67330 2.9% 2008-‐09 95324 41.6% 2009-‐10 135878 42.5% 2010-‐11 184742 36.0% 2011-‐12 269563 45.9%
Cumula)ve total of imports made in last 13 years makes it to the tune of Rs. 1018839 crores. If converted in USD at current price of USD (65), it becomes 156 billion USD
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Import content of Oil and Gold are rising on year to year basis where as other things remained stagnant and then declined. Alarming trend for growth of economy. The signals on India’s growth story (8% to 9%) being wrong were evident.
15 19 21 32 46 59 82 97 91 109 158
5 4 7 11
11 15
17 21 30
42
57
36 42 52 76
99 117
159
191 180
230
284
56 64 80
119
157
191
258
309 301
381
500
0
50
100
150
200
250
300
350
400
450
500
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
India’s Total Imports USD Bn
Oil Gold Others
Indian Economy Contributories to rise in CAD
Three Factors influenced increase in CAD 1. Rising Oil import bill In 10 years (2002 to 2012) rise is 10 Dmes
From 15.31 billion $ to 158.35 billion $
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Indian Economy Contributories to CAD
Three things have affected the CAD 2. Indian Lust for gold Ø In 10 years (2002 to 2012) rise is 12.5 Dmes
From 4.56 billion $ to 57.45 billion $
Ø CumulaDve import bill for 10 years is 220.46 billion $ ( Non producDve asset)
Ø Had this not been imported (possibly hoarded), India’s Foreign Exchange reserve would have been about 433 billion $ against 278.81 billion as at 16.8.13 (RBI Data)
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Indian Economy Contributories to CAD
Three things have affected the CAD 3. Decrease in import of goods and services
other than oil and gold.
This has negaDve effect on economy. Capital goods, payments for technology imports etc. are parts of this import bill. These are the drivers of growth.
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Falling Rupee and rising US $ Other factors which has promoted this slide
External Factors:
Ø Assump)on that growth in India was
spontaneous and self propelling proved wrong.
Ø It was not that Indian economy which was
growing fast or beber than others but US economy was not doing well was the reason that money came to India for beber returns from the year 2007-‐08 onwards.
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Falling Rupee and rising US $ Other factors which has promoted this slide
External Factors:
Ø Money which came to India were mostly
short term investments in FII’s – Debt and
Equity.
Ø Long term Investment in India – Foreign
Direct Investment (FDI) has remained
lower than FII’s invesDng in India.
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Falling Rupee and rising US $ Other factors which has promoted this slide
External Factors:
Ø Once the US Economy is giving signals of
improvement, flight of money has started.
Ø Rate of interest in US has improved, so
bonds of Indian market are redeemed and
money is going back to other countries.
Ø Greater peril may come, if European
economy improves sooner.
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Falling Rupee and rising US $ Other factors which has promoted this slide
Internal Factors
Ø Reforms have been ignored.
Ø Populist measures like subsidies, grants
took prime posiDon Viz. Diesel, FerDlizer,
Food etc. – Burden to naDonal income as
against the investment in Infrastructure
and core Industries.
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Falling Rupee and rising US $ Other factors which has promoted this slide
Internal Factors
Ø Investor’s confidence has been affected by retrospecDve amendments in law, endless
liDgaDons, corrupDon stories ( 2G, Coalgate
etc.) coupled with indecisions.
Ø State Vs. Center Leadership and governance issues.
Ø Bable between Judiciary and polity.
Ø Trust in the leadership is at low level.
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Falling Rupee and rising US $ Other factors which has promoted this slide
Business and Polity (State) -‐ (A)
In the maze of judicial acDvism, government inacDon ( or corrupDon) industry and businesses in India are suffering enormously.
1. Coal-‐ Inspite of having 300 billion ton of coal
reserves, India to pay about 8 billion US $ for import of appx. 82 million tons of coal. ( Coal Gate LiDgaDon)
2. Natural Gas: Court to intervene in pricing of gas. KG basin producing minimum gas.
21 (Curtsey: ArDcle by Mr. Mukul Rohatgi TOI 26/8/13)
Falling Rupee and rising US $ Other factors which has promoted this slide
Business and Polity (State) (B)
In the maze of judicial acDvism, government inacDon ( or corrupDon) industry and businesses in India are suffering enormously.
3. NaDonal Highway: NHAI suffers. Kishangadh-‐ Udaipur-‐
Ahmedabad 555 km highway held up in liDgaDon. Environment clearances held up.
4. TelecommunicaDon: FDI for 2012-‐13 Rs. 1654 crores but in previous 3 years totaled Rs. 58782 crores ( Down by 82%) [ 2G LiDgaDon)
5. Iron Ore: India is having one of the largest resources of Iron Ore. But now is the net importer.
22 (Curtsey: ArDcle by Mr. Mukul Rohatgi TOI 26/8/13)
Falling Rupee and rising US $ Other factors which has promoted this slide
Business and Polity (State)
Ø In such state of uncertainty, which businessman would have confidence to invest in new business or to expand the exisDng one. Its in fact difficult to protect the exisDng one.
Ø While the businesses are facing the down cycle, high inflaDon and pressure from foreign markets, the State has generated problems.
Ø Repeated / retrospecDve amendments in law. Frequent changes in monetary policies have shaken the confidence.
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Falling Rupee and rising US $
Indian economy can be further affected by: Ø Business failures and insolvency (expected that 25% of corporates would
be unable to service the debts in next one / two years)
Ø Low industrial producDon Ø Rising prices Ø Higher InflaDon
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Falling Rupee and rising US $
Way Out ?
No short term soluDon is
visible as the flood gates are
already open.
Slow and steady recovery is
possible.
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Falling Rupee and rising US $
Way Out ?
For External factors:
Ø Confidence bu i ld ing i s
necessary.
Ø Change in polity – State must
act posiDvely and decisively.
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Falling Rupee and rising US $
Way Out ?
For External factors:
Ø Promises given by the
Government (whichever
Party) must be fulfilled.
Ø LiDgaDons must end.
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Falling Rupee and rising US $
Way Out ? For Common man / Middle class / rich Indians : Ø Don’t buy gold for at least 5 years. Ø Reduce your petrol consumpDon ( at least
25%). Travel in common pool or public vehicle and avoid unnecessary use of petrol.
Ø Use Indian goods as far as possible.
Ø Work honestly, improve your moral standards.
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Falling Rupee and rising US $
Way Out ?
For Business / Industry :
Ø Don’t borrow, if you can’t pay back. (you decide and not the
lender)
Ø Try to produce more with Indian inputs.
Ø Export the goods / services as much as possible.
Ø Import capital goods, technology and adopt it as fast as possible.
Ø Don’t liDgate, if you can avoid it.
Ø Avoid corrupDon, moral and real; both.
Ø Start new businesses (in India) in rural / semi urban areas.
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PresentaDon on
Falling Rupee, rising $ and
Common Man in India
Thanks
By Divyang Majmudar Spectra Management Consultancy Chartered Accountant Pune Ahmedabad
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