Prime Minister Manmohan Singh sought to soothe worries about the Indian economy on Friday, telling Parliament that the crashing value of the rupee was part of a needed adjustment that would make Asia's third-largest economy more competitive.
Though rupee’s sudden decline is a shock, he said the government will not address it by imposing capital controls or by reversing reforms.
The speech was the veteran economist's first substantial comment to parliament since the rupee suffered its steepest ever monthly fall in recent weeks, bringing back memories of a 1991 balance of payments crisis that made Singh famous.
Reading from a written statement, the Prime Minister promised his government would reduce the "unsustainably large" current account deficit undermining the currency.
"Clearly we need to reduce our appetite for gold, economise the use of petroleum products and take steps to increase our imports," he said.
But he said that a weaker currency was the natural outcome of several years of high inflation, and although the rupee had overshot in the foreign exchange market its decline would bring some economic benefits.
"To some extent, depreciation can be good for the economy as this will help to increase our export competitiveness and discourage imports," he said.
India's stock market has dropped more than 10% in the past three months and the rupee has lost a sixth of its value against the dollar this year. Much of that fall has been in the past month.
The government has raised gold taxes and hiked deposit rates to combat the outflow of money.
"Clearly, we need to reduce our appetite for gold, economise the use of petroleum products and take steps to increase our exports," he said. At the same time, the fall in rupee's value is good to some extent as it makes exports competitive,” he added.
The Prime Minister also assured that the country's growth which has slipped will pick up soon, and everything would be done to contain the fiscal deficit at 4.8 percent of the gross domestic product (GDP).
He said the economic growth in the April-June quarter of the current fiscal will be relatively flat.
"Growth has slowed in recent quarters. I expect growth in the first quarter of 2013-14 to be relatively flat, but as the effects of good monsoon kicks in, I expect it to pick up," he said while making a statement on the state of the economy in Parliament.
The economic growth slowed to a decade low of 5 per cent in the 2012-13 fiscal. The government expects the economy to growth at around 6 per cent in the current fiscal.
The Indian rupee has lost almost 20 percent against the US dollar this fiscal, largely due to pull-out by foreign funds from the Indian markets after the US central bank hinted that it would lower fiscal stimulus as the economy shows sign of recovery.
The prime minister, who had made a brief statement on the economic situation Thursday as well, also sought to lift market sentiments on Friday with assurances on reforms.
"Last two decades have seen India grow as an open economy and benefited from it. There is no question of reversing these policies," he said. "I would like to assure the house and the world the government is not contemplating any measures on capital controls."
The prime minister said the fundamentals of the Indian economy had continued to remain strong and that both the central bank and the government were taking steps to contain inflation. He said efforts were also underway to contain the current account deficit. "Growth-friendly way to contain the deficit is to spend carefully, especially on subsidies that do not reach the poor. We will take steps," the prime minister said, while also seeking the support of political parties to pursue good policies.
"The easy reforms of the past have been done. For more difficult reforms, we need political consensus. I urge across political parties to work towards and join in the government's efforts to put the economy back on the path of stable growth," he said.