For the past few weeks, Indian finance minister P. Chidambaram has been promising a fresh set of reforms to kick-start the country’s ailing economy. Some minor changes were implemented which excited nobody. Then, on August 14, the Reserve Bank of India (RBI) turned back the clock. “India goes back two decades as RBI imposes capital curbs to stabilize rupee,” read a headline in the business daily The Economic Times.
The Indian rupee has been falling for several months now. On January 31, 2013, it was 53.19 to the U.S. dollar. On August 14, it closed at 61.30 — a record low.
The latest moves by the RBI impose exchange controls. Investment by Indian companies in foreign assets has been cut from 400% of net worth to 100% of net worth. Many Indian companies and business houses were looking at mergers and acquisitions abroad. They will now have to rework their plans. The government says that it is only investment through the automatic route that has been curtailed. But, in India, getting permissions always runs into a wall of redtape.
The RBI has reduced the limit for remittances made by resident Individuals from US$200,000 to US$75,000 per financial year. Also barred is the “acquisition of immovable property outside India.” So, rich Indians can’t buy the Swiss chalet they had set their sights upon.
These measures are described as temporary; they will continue until the crisis abates. “The present set of measures is aimed at moderating outflows,” says an RBI statement. “I am sure that the RBI will revisit it at an appropriate time,” Chidambaram told a TV channel. “This is not to be understood as capital control.”
Two days earlier, it had been Chidambaram in action. He told Parliament that a whole host of measures were on the anvil, including easier norms for companies to raise overseas loans and focusing on deposits from Indians overseas. Some domestic institutions would be allowed to raise quasi-sovereign loans in the international market. This would collectively fetch an additional US$11 billion this year, taking total capital inflows to US$75 billion. He said that curbs on gold and silver imports would be announced soon. There would be fresh duties on “luxuries” and electronic items. The latter will particularly hit Korean companies.
The next day, the RBI stopped import of gold coins and medallions. The government in tandem raised the import duty on gold to 10% — the third increase this calendar year. The earlier hikes may seem to have worked. “The trade deficit in July remained low at US$12.3 billion primarily on gold imports – which remained contained at US$2.9 billion,” says Kapil Gupta, analyst at brokerage house Edelweiss. “Gold imports will be restricted to 850 tons this fiscal against 950 tons last fiscal,” said Chidambaram.
But will the gold tariff hike really work? The government has been targeting the metal since the beginning of this year. But, according to the World Gold Council (WGC), India’s gold demand could reach a record 1,000 tons this year. “The resilience in Indian demand has offset government efforts to curb imports,” says the WGC.
Analysts believe that if all these moves fail, the government may be pushed further down the road of controls. In September, a new RBI governor – Raghuram Rajan – will be taking over. Rajan has a PhD in management from the Massachusetts Institute of Technology and has served as chief economist to the international Monetary Fund. But for all his free-market thinking, he may be forced to support controls now.
Meanwhile, the weak rupee has sent inflation to a five-month high of 5.79% in July. The widely used HSBC purchasing managers index for the manufacturing industry fell to 50.1 the same month, marginally higher than 50.3 in June. A level of 50 indicates stagnation.
The prognosis is not good. “We expect continued weakness to 65 through 2016,” says Goldman Sachs. “Allow the rupee to fall to 70,” says S.S. Tarapore, the man who headed the 2006 panel on capital account convertibility. The crisis has clearly some time to go.
India Turns Back the Clock on Reforms | Knowledge@Wharton Today
The Indian rupee has been falling for several months now. On January 31, 2013, it was 53.19 to the U.S. dollar. On August 14, it closed at 61.30 — a record low.
The latest moves by the RBI impose exchange controls. Investment by Indian companies in foreign assets has been cut from 400% of net worth to 100% of net worth. Many Indian companies and business houses were looking at mergers and acquisitions abroad. They will now have to rework their plans. The government says that it is only investment through the automatic route that has been curtailed. But, in India, getting permissions always runs into a wall of redtape.
The RBI has reduced the limit for remittances made by resident Individuals from US$200,000 to US$75,000 per financial year. Also barred is the “acquisition of immovable property outside India.” So, rich Indians can’t buy the Swiss chalet they had set their sights upon.
These measures are described as temporary; they will continue until the crisis abates. “The present set of measures is aimed at moderating outflows,” says an RBI statement. “I am sure that the RBI will revisit it at an appropriate time,” Chidambaram told a TV channel. “This is not to be understood as capital control.”
Two days earlier, it had been Chidambaram in action. He told Parliament that a whole host of measures were on the anvil, including easier norms for companies to raise overseas loans and focusing on deposits from Indians overseas. Some domestic institutions would be allowed to raise quasi-sovereign loans in the international market. This would collectively fetch an additional US$11 billion this year, taking total capital inflows to US$75 billion. He said that curbs on gold and silver imports would be announced soon. There would be fresh duties on “luxuries” and electronic items. The latter will particularly hit Korean companies.
The next day, the RBI stopped import of gold coins and medallions. The government in tandem raised the import duty on gold to 10% — the third increase this calendar year. The earlier hikes may seem to have worked. “The trade deficit in July remained low at US$12.3 billion primarily on gold imports – which remained contained at US$2.9 billion,” says Kapil Gupta, analyst at brokerage house Edelweiss. “Gold imports will be restricted to 850 tons this fiscal against 950 tons last fiscal,” said Chidambaram.
But will the gold tariff hike really work? The government has been targeting the metal since the beginning of this year. But, according to the World Gold Council (WGC), India’s gold demand could reach a record 1,000 tons this year. “The resilience in Indian demand has offset government efforts to curb imports,” says the WGC.
Analysts believe that if all these moves fail, the government may be pushed further down the road of controls. In September, a new RBI governor – Raghuram Rajan – will be taking over. Rajan has a PhD in management from the Massachusetts Institute of Technology and has served as chief economist to the international Monetary Fund. But for all his free-market thinking, he may be forced to support controls now.
Meanwhile, the weak rupee has sent inflation to a five-month high of 5.79% in July. The widely used HSBC purchasing managers index for the manufacturing industry fell to 50.1 the same month, marginally higher than 50.3 in June. A level of 50 indicates stagnation.
The prognosis is not good. “We expect continued weakness to 65 through 2016,” says Goldman Sachs. “Allow the rupee to fall to 70,” says S.S. Tarapore, the man who headed the 2006 panel on capital account convertibility. The crisis has clearly some time to go.
India Turns Back the Clock on Reforms | Knowledge@Wharton Today
