CURRENT SITUATION OF INDIAN’S ECONOMY DUE TO INFLATION
India's inflation could accelerate in the current fiscal year due to the rupee's sharp depreciation, said the Reserve Bank of India (RBI).
The Indian rupee touched record low of 65.52/dollar on Thursday and is down 16 percent so far this year despite efforts by policymakers to prop it up. "The pass-through of the depreciation of the rupee exchange rate by about 11 percent in the four months of 2013-14 is incomplete and will put upward pressure as it continues to feed through to domestic prices," the RBI said in its annual report for the 2012-13 fiscal year ending last March. Asia's third-largest economy has been pummelled by a selloff in emerging markets; with the rupee the worst performer in Asia this year after the U.S. Federal Reserve indicated it will begin winding down its economic stimulus. Headline wholesale price index inflation climbed to 5.79 percent in July driven primarily by higher food prices and costlier imports as the rupee's fall continued. Consumer price index inflation was 9.64 percent in July, fuelled by high food prices. "Risks on the inflation front are still significant," the RBI said. The rupee's weakness could also increase subsidy payouts for fuel and fertiliser in 2013/14, the central bank said. However, the report said normal monsoon rains in India have taken a "major risk off the horizon" but said a close vigil was necessary after food prices showed an upsurge during April to July. "If high food inflation persists into the second half of 2013-14, the risks of generalised inflation could become large," it said. India's current account gap, which widened to a record high of 4.8 percent of GDP in the fiscal year to March 2013, is likely to ease in the current fiscal year but may continue to be "much above" the sustainable level, the report said.
"Global risks coupled with domestic structural impediments have dampened prospects of a recovery in 2013-14, and posed immediate challenges for compressing the current account deficit," it said. The central bank's report added that "utmost attention" is needed to contain risks to financial stability arising from deteriorating asset quality of banks.
The India of 2013 is not the India of 1991
There are ways of looking at India’s present economic woes marked by a rapid fall in the value of the rupee caused by persistent inflation of the past few years and the high current account deficit (CAD) of about $85 billion (4.5 per cent of GDP) which needs to be funded through uncertain capital inflows year after year. The description of the present crisis by various economic and political analysts by itself tends to carry shades of ideological bias. Some well known economists on the far right prefer to describe the external sector situation as worse than the 1991 economic crisis India had faced. This narrative suggests the 1991 crisis was marked by a severe, external sector crunch and it acted as a trigger for the big bang reforms of the early 1990s. This section believes that the present crisis may be worse than that of 1991 but the government this time round is much more complacent, and less inclined to implement drastic reforms to revive growth. Then and now
Of course, not everyone agrees with the narrative that the India of 2013 is worse than it was in 1991. Actually it is not. And more of the same kind of reforms is perhaps not the answer either. The world was very different in 1991 when western economies were still strong and looking outward, trying to deepen the process of economic globalisation. Today, major OECD economies are looking much more inward than before, trying to fix their own domestic economy and polity. Emerging economies like India, which managed to avoid until 2011 the negative impact of the global financial crisis, began to dramatically slowdown after 2011. Most of the BRICS economies have lost over four per cent off their peak GDP growth rates experienced until 2010....
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