Unless circumstances push the Indian government into red, it has never treaded the path of structural reforms, be it 1991 balance of payments crisis or of late the impending multi pronged crisis looming large in the form of depletion of reserves, mounting fiscal deficit, alarming trade deficit. Foreign exchange reserves fell by $ 12 billion by depreciating rupee in a span of three weeks. Montek singh Ahulwalia, deputy chairman planning commission told that the fiscal deficit could swell to 5.5 percent of GDP, against the government’s target of 4.6 percent of the GDP for the year 2011-12. Finance ministry was of the opinion that it is a challenge to meet the fiscal deficit target. While the finance ministry is striving hard to contain the fiscal deficit another problem brewing in the back ground is the widening current account deficit, which might reach to a figure of 3% of GDP from 2.6% of GDP in 2010-11.
Though Indian government and the central bank have taken measures, by raising the Foreign Direct Investment limit in retailing industry, raising the limit of FII investment in G-Secs, bonds, to bail out the country in the short term if not in long term, much needed structural reforms are the need of the hour. The government has raised the FDI limit to 100% in single brand retail, to 51% in multi brand retail, though with lot of limitations in the form of restricted entry into 53 cities, and 50% of the investment should go into back end infrastructure building in the form of cold chain building and warehouse building and 30% of the sourcing should be done from the local players. While it is a good move, but retail being a state subject and opposition parties playing emotional politics, the impact of this move is a debatable subject, as to how far it will help energize the retail industry in India, and could yield the desired results. Another move aimed at meeting the dollar demand and to contain rupee fall is, Finance ministry increased the investment limit for foreign institutional investors in government securities and bonds by $ 5 billion each. But, how far these short moves will help sustain the long term growth story of India, a country which is looking to grow at double digit are questions which time can only answer.
Rupee fall might help exporters to some extent, especially the major export oriented industries, IT industry and textile industry, but the gains are only for those who receive alms in dollar denomination, and even if the receipts are in dollars many of them must have hedged their positions in the forward market and the gains depends on the position they have taken. At the same time the imports must have cost the importing companies dearer especially oil companies, many of whom are state owned. Capital goods are another component which cost more because of the depreciating rupee. According to the ministry of commerce and industry the trade deficit for April - September, 2011-12 was estimated at US $ 73461.34 million which was higher than the deficit of US $ 71119.23 million during April -September, 2010-11. And rupee expected to fall further to a low of Rs 58 vis-à-vis dollar, as expected by some of the industry analysts, may worsen the current account deficit even further.
