1.
Weekly Commentary
QNB Economics
economics@qnb.com.qa
25 August 2013
Disclaimer and Copyright Notice: QNB Group accepts no liability whatsoever for any direct or indirect losses arising from use of this report.
Where an opinion is expressed, unless otherwise provided, it is that of the analyst or author only. Any investment decision should depend on the individual
circumstances of the investor and be based on specifically engaged investment advice. The report is distributed on a complimentary basis. It may not be
reproduced in whole or in part without permission from QNB Group.
How to Get the Indian Tiger to Roar Again, According
to QNB Group
The rapid decline in India’s Rupee requires
structural reforms to sustain economic growth,
according to the QNB Group. India’s role as one of
the world’s growth engines is waning as the Rupee
declines rapidly and its economy shows increasing
signs of slowing down. The Indian Rupee has been
the worst-‐performing emerging market currency
since May 2013 against the backdrop of deepening
concerns over the authorities’ policies. Higher
interest rates and a liquidity squeeze, together
with the tightening of gold imports and capital
restrictions to reduce foreign exchange outflows,
have not stemmed the Rupee decline. According to
the QNB Group, such a policy response is merely
undermining the growth momentum in the
economy. A more appropriate response would be
to expedite the process of structural reforms that
could sustain economic growth over the medium
term. This would be similar to the first wave of
liberalization in the early 1990s engineered by
then Finance Minister Singh that led to two
decades of higher growth and lower poverty for
the Indian economy.
The current situation draws similar parallels to
the Indian balance of payments crisis in the early
1990s. In 1991, investors deserted India in the
aftermath of the first Gulf War. This resulted in
rapid capital outflows, a depletion of international
reserves, and an IMF program to restore financial
stability. At that time, the newly-‐appointed
Finance Minister Singh took the opportunity of the
financial crisis to end the decades-‐long “licensing
raj”—a system of elaborate licenses, regulations,
and red tape that had stopped the Indian economy
from achieving its growth potential. The results
were impressive. Since the mid-‐1990s, the Indian
economy managed to grow at an average annual
rate of 6.5% and poverty was significantly
reduced.
The state of affairs today is similar to 1991. India
suffers from the largest current account deficit in
Asia bar Myanmar, foreign direct investment has
stalled, and its international reserves are falling
rapidly. Notwithstanding strong real GDP growth
of 5% in 2012, there are increasing signs that the
economy is slowing rapidly this year, with exports
falling by 4.6% in Q2 and the Purchasing
Managers’ Services Index (PMI) signaling a
contraction in manufacturing. It is therefore likely
that real GDP growth will be less than 3% this
year.
India’s International Reserves
(Months of Import Cover)
Source: IMF, Bloomberg
The authorities’ policy response to the decline of
the Rupee has been to reduce foreign exchange
outflows. The Reserve Bank of India has
repeatedly raised policy rates in the last few
weeks to defend the Rupee. At the same time,
restrictions on gold imports and capital outflows
have been tightened to reduce foreign exchange
outflows. This policy response has backfired, with
the Rupee continuing to decline rapidly against
1.0
3.0
5.0
7.0
9.0
11.0
13.0
15.0
17.0
1980 1984 1988 1992 1996 2000 2004 2008 2012
Balance of
Payments
Crisis
2.
Weekly Commentary
QNB Economics
economics@qnb.com.qa
25 August 2013
Disclaimer and Copyright Notice: QNB Group accepts no liability whatsoever for any direct or indirect losses arising from use of this report.
Where an opinion is expressed, unless otherwise provided, it is that of the analyst or author only. Any investment decision should depend on the individual
circumstances of the investor and be based on specifically engaged investment advice. The report is distributed on a complimentary basis. It may not be
reproduced in whole or in part without permission from QNB Group.
the US dollar notwithstanding the highest yield on
Indian 10-‐yr bonds since 2008. Clearly, short-‐term
measures of this kind are not going to be enough
to restore confidence.
According to QNB Group, the origin of the rapid
decline in the Rupee is the ever-‐growing Indian
current account deficit over the last 10 years. The
widening deficit reflects a structural weakness in
Indian exports, which have stagnated since 2011,
while imports continue to grow at a rapid pace on
the back of higher domestic demand. This ever-‐
growing current account deficit was financed up
to April 2013 through higher capital inflows to
emerging markets (EM), which kept the Indian
Rupee relatively stable. Since then, however, there
has been a significant withdrawal of EM capital
flows reflecting concerns about the impact of a
possible tapering of Quantitative Easing in the US.
For India, this has exposed the underlying
unsustainable weakness of its current account
deficit, which can only be addressed through a
significant decline in the value of the Rupee. Such
a decline has already resulted in a jump in exports
in July. However, further declines will be
necessary in order to bring the current account
back to a sustainable level.
The underlying problem of the Indian economy is
therefore rooted in an uncompetitive export
sector, according to QNB Group. Only structural
reforms aimed at liberalizing the domestic
economy and reducing India’s still relatively high
cost of doing business can therefore restore
competitiveness and bring about higher economic
growth. This requires another wave of economic
liberalization as in 1991. Without such reforms,
the Indian tiger is unlikely to roar again.
