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August 16, 2013 4:00 pm
India’s surprise decision to reimpose capital controls on local companies and individuals this week to protect the ailing rupee was prompted by warnings of an imminent surge in capital flight, according to senior policy makers in the capital.
The move on Wednesday night appears to have failed, at least in the short term. The rupee fell to a record low of Rs62.03 to the dollar on Friday once markets reopened after a holiday.
But the curbs on outward direct investment – which reversed a liberalisation of six years ago – reflected the desperate search by Indian authorities for a way to deal with the toxic combination of a falling rupee, a sharp slowdown in growth, swollen current account and budget deficits and persistently high inflation.
“We have to stop the haemorrhaging. We need to stabilise the patient,” one senior official said Friday.
Another complained that Indians had set up “shell companies” to take advantage of corporate allowances for outward investment, while financial advisers in the Middle East had told individuals to use their maximum annual personal allowances immediately.
“People were getting calls to take out $200,000 right now and bring it back when the rupee reaches 70 [to the dollar],” the official said.
The controls were the latest of a series of hastily devised measures to bolster the rupee – others include three rounds of duty increases on gold imports – but they have only deepened the sense of crisis afflicting the Indian economy.
“It seems that the government is groping in the dark, and coming up with measures without any serious consideration from industry, or people who can tell them the consequences of their actions,” said DG Shah, secretary-general of the Indian Pharmaceutical Alliance. “The capital controls are a classic example.”
Indian drugmakers have been aggressively acquiring small drug companies abroad to use their foreign distribution networks. Such plans could be impeded by the new restrictions, although officials insist they are not targeting bona fide corporate investors.
Commentators ranging from foreign economists to Indian chief executives accuse the government and the central bank of devising “Band-Aid” solutions and stopgap measures that promote a sense of panic, when what the country needs is an economic strategy that promotes long-term investment.
Palaniappan Chidambaram, finance minister, has been trying to do just that. But he has been unable to make much progress on the ground in the face of India’s agonisingly slow bureaucracy and hostility to reform from politicians, including some in the governing Congress party.
The US Federal Reserve’s advertised plans to begin bringing an end to its programme of bond-buying thanks to an improving economy there have only added to India’s problems, prompting an outflow of money from emerging markets.
“India is now getting hit on two sides, one being domestic problems of political uncertainty and indecision over the last two or three years . . . the other being the improvement in the US economy, which is taking capital out when we need it, “says billionaire industrialist Sajjan Jindal, who runs JSW Steel, the country’s second-largest private steelmaker by sales. “India is in a difficult place.”
It seems that the government is groping in the dark, and coming up with measures without any serious consideration from industry, or people who can tell them the consequences of their actions
- DG Shah, Indian Pharmaceutical Alliance secretary-general
The result is anxiety for policy makers, gloomy forecasts by Indian business leaders and concerns among regulators about the banking system.
“All the businesses we run that deal with other companies, rather than consumers, are under great stress,” says Jamshyd Godrej, who runs manufacturing businesses within the $3bn Mumbai-based Godrej conglomerate. “We’ve seen people have ordered equipment and now can’t pay for it, while worries about future growth rates are really putting capital expenditure on the back burner.”
Alan Rosling, co-founder of solar power company Kiran Energy, says the view from the countryside and from the consumer goods groups that serve India’s 1.3bn consumers is not as downbeat as it is in the big cities.
“I’ve been here 15 years and through booms and busts and I don’t remember such a negative sentiment in the business community,” he says. “That’s the typical view in [Mumbai] – that India’s lost its way . . . [But] the pessimism is overdone because the economy is not that bad.”
However, even Manmohan Singh, the prime minister, cannot hide his disappointment that annual economic growth has fallen to 5 per cent – half its level of three years ago – in the run-up to the next general election due by May 2014.
Economists and analysts, most of whom question the sense of the recent hodgepodge of measures to try to save the rupee, have in recent weeks begun warning of the risk of “stagflation”, an impoverishing mixture of low growth and inflation.
“We are on a glide path to 4 per cent GDP growth, perhaps lower, this quarter or next,” says Tarun Kataria, chief executive of investment bank Religare Capital India. “Reversing this requires a raft of reforms which unfortunately have not come through yet. Without this the pressure on the twin deficits and the currency will remain elevated.”
Additional reporting by Amy Kazmin in New Delhi
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