It’s a small vote of confidence in the government’s recent measures to kick-start the economy. Global ratings agency Fitch has revised India’s sovereign ratings outlook from “negative” to “stable”. It’s a piece of news that has almost got lost amidst all the gloom over sluggish growth figures, obstinately high inflation and the Reserve Bank of India’s (RBI) reluctance to cut rates. But it is the first independent confirmation that the finance ministry’s measures to stem the economic rot is working. Despite this, there are many causes for concern. The crashing value of the rupee is the most immediate. Over the past month alone, the value of the Indian currency against the dollar has fallen about 8%, making imports costlier. Therefore, it is inevitable that domestic prices of a range of products will rise. India imports 70% of its oil requirements, huge amounts of commodities like iron ore, gold and coal as well as large quantities of finished products such as capital goods, electronic items, auto parts, etc. All these will become dearer. Result: the recent downward trend in the inflation rate may not be sustainable.
This is presenting RBI governor D Subbarao with a difficult choice. Industry is groaning under the burden of the economic slowdown. Then, high interest rates are making it prohibitively expensive for individuals to buy houses, cars and other durables. For companies, this is leading to lower sales, lower profits, shelved expansion plans and the creation of fewer new jobs. But the possibility of a depreciating rupee pushing up prices and, therefore, inflation rates, is tying up the RBI chief’s hands. If he cuts rates to push growth, he risks stoking inflation. If he keeps rates intact, he risks perpetuating the slowdown. It is in this backdrop that finance minister P Chidambaram announced on Thursday that the government would come out with a slew of reforms measures over the next couple of months. Hopefully, his steps to get stalled projects off the ground will also begin to show results soon. Then, he has urged all departments of the government to start spending their budgetary allocations.
A renewed burst of reforms, expedited government spending, coupled with renewed corporate expenditure on stalled projects — worth Rs 7 lakh crore at last count — can provide the stimulus to get the wheels of the economy moving faster. More importantly, it will improve investor sentiment, which is such an important precondition for a quick economic turnaround. At the same time, the finance minister has urged Indians not to buy gold. That is a sound advice and Indians will do well to heed it and invest, instead, in financial instruments. This will ease the pressure on the rupee and make it easier for the central bank to cut rates. If these measures do begin to show results over the next few months, other ratings agencies, like S&P and Moody’s may also feel compelled to upgrade India’s outlook and then, hopefully, its sovereign rating as well. Then, we’ll know that the sentiment has turned positive at last.