Why is the rupee falling despite all the positives that are beginning to be discernible? On Friday, the currency dipped below 57 to the dollar, ignoring the Reserve Bank’s strong stand on rate cuts, the impending end of Pranab Mukherjee’s ill-starred stewardship of the finance ministry, and Ikea’s announcement of a €1.5 billion investment in India in two phases.
The answer is actually quite simple. The currency markets are waiting to see what the government will actually do before it acts on good news. Promises alone are not enough. It wants to action, not words this time.
What the market senses is that the government has only a small window of time to get its act together. And this window begins from 26 June, when Mukherjee formally resigns as finance minister to seek the presidency, and the Prime Minister takes temporary charge of the finance ministry.
According to The Economic Times, Mukherjee’s replacement will not happen before September, since July and August will see contests for the presidential and vice-presidential polls. The newspaper, quoting an unnamed senior Congress leader, says that the cabinet reshuffle will happen only in September.
Once a cabinet reshuffle happens, and a new finance minister is installed, the window will close, and the game may change once again. Action will then depend on what Sonia Gandhi wants from the next incumbent – more reforms or someone to steer her next election agenda. The betting is that it will have to be the latter, since 2013 will be the last budget before the 2014 general election. After September, no matter whether we have an earlier mid-term poll or the scheduled one in 2014, everyone will be in election mode. The Gujarat elections are due in December, and elections to Madhya Pradesh and Chhattisgarh in 2013.
This means Manmohan Singh has a clear run to fix things between 26 June and end-August – roughly eight to nine working weeks. If he does not push through all the important decisions that the government has to take to allay investor and business concerns about policy paralysis, market sentiment could worsen.
Among the things global and domestic investors are looking for are the following:
#1: A decision on diesel and cooking gas price increases. In the first fortnight of June, the Indian crude oil basket saw price decreases, which means the daily losses of the oil marketing companies have come down to Rs 10.20 per litre for diesel and Rs 396 for LPG cylinders. But this could change if the rupee keeps falling. The loss figures have been calculated at Rs 55.61 to the dollar; last week the rupee ended well below Rs 57.
#2: A decision on opening up foreign direct investment in multi-brand retail. This will be the biggest welcome mat India can place before foreign investors to turn sentiment around, even though actual investments may flow only much later. At the very least, Sonia Gandhi will have to get Mulayam Singh on her side this time. The last time the issue was raised, he threatened to burn foreign supermarkets in Uttar Pradesh – but that was before the UP elections.
Increasing foreign investment limits in insurance, media, telecom and aviation are other steps that need quick decisions.
#3: Action is also required on food subsidies. The March budget had pencilled in a Rs 75,000 crore food subsidy bill for 2012-13, but this is already going to be busted. Reason: earlier this week, the government decided to sell an additional 5 million tonnes of super-subsidised wheat to below poverty line (BPL) families and 3 million tonnes through open market sales. This will bloat the subsidy bill by Rs 10,000 crore in one shot. Even the so-called open market sale will involve a subsidy.
The reason for this munificence is not concern for the poor, but lack of storage space: the government has food stocks of 82 million tonnes and storage capacity is just 63 million tonnes. Clearly, the government has to invest in additional storage and raise the prices of food issued though the public distribution system. It could also allow more exports as a short-term measure. Things could get worse if election-related food subsidies begin after that.
#4: Similar action may need to be taken on the fertiliser subsidy. This subsidy will soar on the rupee’s weakness in a situation where the country’s import dependency is growing in the absence of a stable subsidy regime. The government’s fertiliser subsidy policy is nutrient-based. But while it has freed the prices of potassic and phosphatic fertiliser, urea prices are regulated. The country does not produce any potassic fertiliser, and imports 90 percent of its phosphatic fertilisers. Thanks to their higher import prices, the subsidy bill is rising. and farmers are shifting to cheaper urea which is heavily subsidised.
The fertiliser subsidy bill of Rs 60,974 crore for 2012-13 is likely to be overshot if urea prices are not raised quickly – and three months of the year are already over. (Read more here on fertiliser folly).
#5: The government clearly has to sort out the telecom mess in the same timespan. Pranab Mukherjee seems to have cried off on the issue of deciding the spectrum reserve price. Kapil Sibal does not appear to have the authority to get things done on his own steam – or the good sense to stick to the Telecom Regulatory Authority of India’s final suggestions on spectrum for fear of angering the belligerent telcos who want lower spectrum prices. The PM will have to sort out this mess on his own. The Supreme Court deadline is 31 August to complete spectrum auctions. The deadline can be met only if the PM takes the call and puts his moral weight behind any decision.
There are, of course, many, many more areas that need reforming (read more about it here), but if Manmohan Singh and Sonia Gandhi (the PM can’t do it without the Congress president’s political support with party and allies) can get the reforms act right on the four F’s – food, fuel, fertiliser, and FDI – and spectrum, the markets and investor sentiment will revive.
Manmohan Singh, as we have mentioned earlier, has just about eight to nine weeks to rescue India, the rupee and the economy from disaster. And even this will work only if the gods of eurozone are on our side and don’t create a bigger external mess for us to wallow in.