(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By Jeff Glekin
MUMBAI, May 17 (Reuters Breakingviews) - It’s too easy for India’s leaders to say investors’ uncertainties over the future of the EU are bringing the rupee down. Pranab Mukherjee, the finance minister, did just that in parliament on Wednesday. But such political blame-casting leads directly to the Greek trap: knowing what’s good but failing to do anything. The currency’s decline should be a trigger for action.
India’s problems begin in New Delhi, not in Athens. Inflation has been stubbornly above 7 percent for two years. The GDP growth rate during the most recent quarter was a disappointing 6.1 percent. Capital formation, a measure of investment in future growth, has actually been declining.
If Mukherjee had enough political power and courage, he would use the rupee’s fall, and the threat of a downward spiral, as a wake up-call. The crisis is an opportunity for unpopular -but necessary - economic restructuring. Subsidies are the obvious place to start. Mukherjee promised to restrict subsidies to 2 percent of GDP in his last budget - a sharp decline from the 9 percent the OECD estimates to be the real cost to the economy. But his words have not yet been followed with deeds.
The economic case against fuel subsidies is strong. Higher world oil prices - which Indian consumers don’t pay - have contributed to a 38 percent increase in imports this year. The trade deficit has shot up 78 percent year on-year and at 3.7 percent of GDP, the current account deficit is the highest since 1980, when the International Monetary Fund starting collecting data.
Without the subsidies, India would consume less crude, reducing the import bill. The fiscal deficit, which stands at 5.9 percent of GDP, would shrink. Foreign investors might start to gush again. But as in Greece, politics get in the way of economic sense. Cheap fuel is seen to win votes and politicians across the spectrum fear a public backlash if prices rise. Rather than shaking off his political slumber, Mukherjee looks to be hitting the snooze button.
- India will issue some austerity measures to aid the fiscal consolidation process, Finance Minister Pranab Mukherjee said in parliament on May 16. Although he gave no clear indication of specific cuts he planned to make.
- The rupee breached 54.30 against the dollar on May 16, hitting an all-time low. The rupee has declined 20 percent against the dollar over the past year.
- Reuters: India rupee hits record low; fin min seeks austerity
- For previous columns by the author, Reuters customers can click on
(Editing by Edward Hadas and David Evans)