India has to get the pace of its reforms right to grow fast

  • Hindustan Times
  • Updated: Jun 18, 2015 03:27 IST

Yesteryear humorist Mehmood was more than symbolic when he crooned ‘Na biwi na bachcha na baap bada na bhaiyya/ The whole thing is that ki bhaiyya sabse bada rupaiya’ in the 1976 movie Sabse Bada Ruppaiya.

The movie, released a few years after a politically controversial rupee devaluation move in the Sixties, mirrored the inescapable importance of the currency in India’s socio-economic milieu.

Now as the rupee hits a 21-month low, racing past 64 to a dollar, all seemed to have one question in mind: Is the rupee headed towards the lows it recorded in 2013?
Two years ago the rupee went into a tailspin, hitting an all-time low of 68.85 to a dollar in August 2013, driven by fears that the US central bank will start unwinding its stimulus programme. This had prompted foreign portfolio investors to move funds away from emerging markets like India.

The resultant dollar flight had pummelled the rupee’s value. The proximate reasons for the current fall of the rupee are both local and foreign. A spurt of tax notices to foreign portfolio investors (FPIs) had roiled investor sentiment.

This has spooked investors although the government has maintained that FIIs were asking for ‘retrospective exemption’ of minimum alternate tax (MAT). The selling by FPIs has set off a dollar outflow, pushing down the rupee’s value. While the MAT notices are a domestic issue, global markets will closely track the developments in the two-day US Federal Reserve meeting that began on Tuesday. The meeting will likely decide on a schedule to raise interest rates. Higher interest rates in the US could trigger a dollar flight, hurting India’s (and other emerging nations’) equity and currency markets. Besides, crude oil prices have been steadily rising over the last few days.

Herbert Stein, a former economic adviser to US Presidents Richard Nixon and Gerald Ford, had presciently observed: “If something cannot go on forever, it will stop.”

India will only be hoping that Stein’s rule proves true for halting the rupee’s free fall. But, for that, we have to get the pace of reforms right for India to retain its status as an island of global growth and funds to flock back here.

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