NEW DELHI The sense of crisis building around the rupee's precipitous fall is likely to deepen on Friday with the release of data expected to show India's economy slowing to dangerously low levels.
A dearth of investment lies at the heart of India's economic malaise. Little improvement is expected any time soon, with investors doubting whether Prime Minister Manmohan Singh's minority government can force through bold reforms with an election due within eight months.
Economic growth virtually halved in two years to 5 percent in the fiscal year that ended in March -- the lowest level in a decade -- and most economists surveyed by Reuters in the past week expect 2013/14 to be worse.
"The economy appears to be entering a tailspin as business confidence collapses under the weight of rapid rupee depreciation, rising energy costs, sharply tightening financial conditions and policy confusion," BNP Paribas said in a note on Wednesday.
The withdrawal of funds from emerging markets as investors re-adjust portfolios in anticipation of higher U.S. interest rates has caused tremors from Brasilia to Jakarta. But the weight of India's current account and fiscal deficits has seen the rupee sink faster than most currencies.
However much Finance Minister P. Chidambaram protests that the market's move is overdone, investing in a currency that has lost around 20 percent since May would be a test of bravery that even India's richer diaspora living abroad could flunk.
In the eight sessions through Tuesday, investors pulled out $1 billion from India stocks. Total net outflows from stocks and bonds have totaled $7.4 billion since May.
Thank heavens for a good monsoon, which should boost rural income and perk up flagging consumer demand, because without it the economy would be looking a lot worse than it already does.
India's statistics office is due to release GDP data for the June quarter at 1730 IST on Friday, bringing down the curtain on what has probably been the worst week for the rupee in nearly 17 years.
The GDP print is likely to be fittingly gloomy.
A Reuters poll of 36 economists showed India's gross domestic product (GDP) expanded 4.7 percent year-on-year in the quarter to June, near decade lows on an annual basis and a tad under the 4.8 percent growth in the previous three months.
Raghuram Rajan, the much-vaunted former chief economist at the International Monetary Fund chief economist, is set to take over as governor of the Reserve Bank of India next Thursday, but so long as the rupee remains under attack he will find it hard to lower interest rates to encourage growth.
With inflation moving back above 5 percent, the upper limit of the central bank's perceived comfort zone, its hands are even more tightly tied.
"With RBI set to sustain, even extend, recent monetary tightening, we now expect the palpable downside risks facing the Indian economy to largely crystallise over the next 6-9 months," said BNP Paribas.
The French bank has cut India's growth forecast to 3.7 percent for this fiscal year, which would be the lowest since 1991/92.
That is nowhere near good enough for a country with India's demographics. It has a population of 1.2 billion and a per capita income of around $1,000.
Chidambaram warned on Tuesday that the economy needs to be averaging 8 percent growth to generate jobs for the increasing numbers of youth joining the workforce, but it is about far more than jobs.
With nearly 270 million people living in poverty, India is a vastly different kind of economy.
On Tuesday, parliament approved a Food Security Bill that critics fear will push up a fiscal deficit that at nearly at 5 percent of GDP is among the highest among major economies.
With enough foreign exchange reserves to cover six months of imports and relatively low levels of sovereign foreign debt, India's situation is less acute than it was in 1991 balance of payments crisis.
But, once lionised as the finance minister whose liberalisation of the economy rescued it from that crisis, Prime Minister Singh is now widely criticised for having feet of clay during his nine years at the helm.
His government has loosened rules for foreign investors, but it has failed to introduce the tax and labour reforms that Singh has long advocated.
Instead, policy flip-flops, high-profile tax disputes and numerous regulatory hurdles have stymied investments to a point where many firms find it easier to invest overseas than at home.
"India's fundamentals have deteriorated steadily under the missteps of Singh, his aides and the central bank," Morgan Stanley said in a research note on Wednesday.
Singh and Chidambaram over the past year cut budget busting fuel subsidies, sped up the clearances for infrastructure projects and relaxed rules for foreign investments into a swathe of industries. But most analysts view their actions so far as too little, too late.
Dismal earnings from India's heavily indebted corporates suggest consumer demand is weak. Manufacturing activity has virtually stagnated, hitting merchandise exports and widening the trade deficit.
At nearly $90 billion India's current account deficit is the third largest in the world. Chidambaram has pledged to narrow it to $70 billion this fiscal year.
Exports might benefit from the rupee's descent, but it will exacerbate the oil import bill, increase fuel subsidy costs and pump up inflation. It appears to be a vicious circle.
The rupee could recover if growth attracted investment, but the trends are going the wrong way, with the June quarter expected to mark a third consecutive quarter below five percent.
"Expectations about economic growth are already rock bottom. But if the GDP data undershoots them, it could prompt more weakness in the rupee," said Mark Williams, chief Asia economist at Capital Economics in London.
(Editing by Frank Jack Daniel and Simon Cameron-Moore)
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