Reports indicate that the US is on a molasses-slow road to recovery, although the success of that recovery largely hinges the European Debt Crisis and whether the plan set forth by Chancellor Merkel and President Sarkozy is effective. However, as the world trains their eyes on the west, India’s currency has quietly slipped into the worst performing currency in Asia.
The rupee has slowly dropped since August and this past week took a nosedive, falling to the already weak dollar. The Reserve Bank will make an announcement this Friday to address concerns of investors.
The DNA of global finance is so Gordian, you’d need a masters in finance to parse the details. Even lifelong economists are having trouble piecing this moment in history together. What we do know is that India is Asia’s third largest economy and an important trading partner with both Europe and the United States.
With ongoing financial tumult, particularly in the 17-nation Eurozone, with which India does most of its trading, investors have begun to flee the market, leaving India vulnerable to flux in the unstable Eurozone. India’s current account deficit is in the red and puts India in a position of over dependency on short-term capital flow to cover it.
As the rupee falls in value due to inflation, exports are seeing a small boost, but if the inflation continues economic growth could be jeopardized; the country’s workforce would be stagnant and count almost exclusively on the unreliable Euro markets.
The challenge that emeging markets are facing–and that especially includes markets in Asia–is, ironically, too much growth.
David Carbon, a researcher at one of Southeast Asia’s most prestigious banks (DBS), explains the problem as such: “[When] growth is too fast and inflation is too high [and continues to accelerate]” then that increases the number of people who are in poverty, by weakening Purchasing Power Parity. In layman’s terms, if you are making 150% of the salary that you made last month, but food and basic items take up most of your budget, and the price of these items has increased by 200%, then you have actually become more poor, even if your paycheck looks bigger. This problem is particularly prevalent in China, India, and Vietnam. India’s inflation rate is almost 10% and Vietnam’s is more than twice as bad. The increasing price of good’s creates a lifestyle that is unsustainable for the working poor in these countries. Here are some grim statistics quoted from the business section of Dawn:
-The Asian Development Bank estimates that a 10 per cent increase in food prices drags another 64 million people below the $1.25 a day poverty line.
-A 20 per cent increase in prices pushes up the number in poverty by 129 million.
The question of whether all these financial problems are related is a tricky one. It’s certainly too obtuse to say that Western economies have a causal effect on Asian economies, though the two are tied through trade. These countries’ problems are generally of their own making and a lot of bad factors are coincidentally happening at the same time.
The key for emerging markets like India and China is to get inflation under control. If they stay the course, their currencies will become valueless in the global market and stall domestic growth considerably, leaving India unable to pay for anything.
Terming it a shocker, Sterlite Finance Director Tarun Jain said the average tenure of foreign currency loans was typically five years. “Even if you amortise this 20 per cent fall in the rupee over the life of the loan, it’s four per cent per annum. On top of that, if you cover in forwards by paying six-seven per cent premium per year and then have the average borrowing cost of five-six per cent, then the borrowing cost is in the range of 15-16 per cent. How can big infrastructure projects come up?”
Experts say the worst is yet to come; let’s hope they are wrong.
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