Tuesday 5 August 2008

India is now the shakiest of BRIC economies

Last year we were talking about a strengthening rupee. We have now seen the rupee tumbling faster than Jack and Jill. It has fallen by 12% last quarter, and is now at 43 to the US dollar. The 50-rupee mark is not far off.

Fifty is not far-fetched any more. Consider six good reasons. India’s imports are ballooning. In June, our imports jumped by a perturbing 27% year on year. With prices of oil headed northwards — experts believe $200 per barrel is not merely an Arabian Nights fantasy — our import bill will only explode further.

This situation is worsened because the high oil price signal is not reaching Indian consumers. The government is keeping subsidies and price caps in place. In India, fuel price increases this year have been just 15% — far lower than the global oil price increase. Contrast this with Malaysia, where the price of petrol was hiked by a record 41% in June. So we have a piquant situation where demand for the main product on our import bill will remain high, despite high prices.

While ballooning imports put pressure on the rupee, a slowdown in exports looms large. During June, growth in exports halved to 12% (in dollar terms), year on year. The threat to our export earnings is immediate, because India’s IT industry derives two-fifths of its earnings from the financial sector, which is worst hit by the global credit crisis. Similarly, India’s large gems & jewellery exports is also significantly dependent on the United States, where the housing and credit crises have left consumer confidence dipping.

THANKS: ET

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