Economic misdirection, deflection, and misinformation: these staples of faltering governments have set up fortifications in today’s India. In the increasingly hectic run-up to the general election due in May 2019, economic analysis in and by the media has become as dangerous as it is absurd, and as confusing as it is invaluable to the beleaguered Bharatiya Janata Party-led (BJP) national government.
In an article on September 15, Madhav Das ‘Monu’ Nalapat, the editorial director of The Sunday Guardian (whose thoughts have for years been in alignment with the BJP’s), blames none other than George Soros for “the ongoing effort to slaughter the value of the rupee in the currency markets.” The Indian rupee has crashed to an unprecedented 72.22 against the dollar. According to this article, although “tangible evidence is difficult to come by” about Soros’s involvement in tanking the rupee, he “was responsible for singlehandedly bringing down the value of the British pound through a sophisticated and comprehensive operation involving short selling on the same lines as has been happening to the rupee.”
The article goes on to conflate Soros with what it calls “the Insider Vulture Cabal,” which has apparently been “headed by a prominent member of the [previous UPA] government” since at least 2013, and which was “deliberately ‘shorting’ (i.e. bringing down the value of) the rupee.”
With nothing by way of evidence, Nalapat rolls out “the ongoing operation to ‘short’ the rupee, especially through Singapore, Dubai, London and New York.” But here’s the thing: this piece echoes another that Nalapat had written five years ago in the same journal, in which he had ventured that the “speculative collapse” of the Indian rupee was “an inside job,” and that “even a cursory check of the phone records of six currency speculators in Dubai, Mumbai, and Singapore [show them] busily ‘short selling’ the rupee (i.e., betting on its further fall).”
Look a bit deeper and it becomes clear that the report is setting up targets to knock down.
The one thing the article does get right—everyone across the media did, seemingly serendipitously—is that Modi, having seemingly decided to override the cataclysmic fallout of his two megapolicies, demonetization and the Goods and Services Tax (GST), has decided to once again grab hold of the reins of the country’s fiscal planning.
This much became more or less evident after a three-hour meeting Narendra Modi chaired on Saturday, September 18, to take stock of an economy that is swiftly abandoning the BJP government’s grasp. Finance Minister Arun Jaitley, who was out of the loop for three months as he convalesced from a kidney transplant operation and reassumed office only three weeks ago, himself has been unable to come to terms with the steadily tanking rupee and rocketing fuel prices. It is anybody’s guess now as to whether or not he was able to bring (or even if he is capable of bringing) the prime minister up to speed. So far, there has been no indication that the change of jockeys has in any way positively impacted a guttering Indian economy.
The rupee has depreciated 14 percent relative to the U.S. dollar in 2018. This is the second time during the Modi government’s tenure that the rupee has sunk to become the worst-performing major Asian currency in a fiscal year, the first instance being 2014, when it shed a fifth of its value. Although the International Monetary Fund (IMF) calculated the real effective depreciation rate at half that (6-7 per cent), the investment sentiment toward India remains at best tentative.
There is blood in the bourses, too, if one looks beyond the cascade of desperate gung-ho in the pink papers and finmin pronunciations. Global funds pulled $830 million out of the market in August 2018. In the first half of September alone, they withdrew $733 million from local bonds, and $133 million from shares in the week up to September 12. As of September 21, the net selling of Foreign Institutional Investors was $302.55 million—in the cash market alone. The net buying of Domestic Institutional Investors (mostly the government itself, seeking to bolster the rupee) was $166.30 million, also in the cash market.
The start-up ecosystem—a matter of policy-level pride for the Modi government, which invested it with equal parts funding free-hand and flexibility, and unrolled the red carpet for foreign investors—has been imploding too, both year by year, and month by month. August 2018 ended with $631 million being invested in Indian startups across 72 deals, compared to $3.1 billion across 56 deals in August 2017. This represents a year-on-year decrease of 76.65 percent in funding for 22.2 percent more deals.
Petroleum prices have also hit an unprecedented 90 rupees per liter and high-octane petrol 100 rupees per liter in some parts of India, riding the back of an average of 120 percent tax on petrol and 100 percent tax on diesel. India’s fuel tax is currently the highest in the world. The U.S. averages 17 percent; the UK 20 percent; and the rest of Europe 21 percent. Even Pakistan has a fuel tax of 23.5 percent.
Given this, there is a countrywide slow-burn protest in favor of whittling down petrol and diesel taxes. The central government is fighting it, as are the states. Most economists are in favor of some manner of fuel-tax reduction. A few, however, have taken recourse to rather dissociated theorizing.
In his blog in The Times of India on September 16, 2018, the well-regarded economist Swaminathan Anklesaria Aiyar suggested that taxes not be rationalized because “cutting fuel taxes will encourage the consumption of petroleum products, increasing carbon emissions that warm the globe. Instead, the logical way forward is a high tax on all forms of carbon, making this revenue-neutral by cutting taxes on other items. That will discourage carbon emissions without affecting tax revenue…”
Under the present circumstances, with a fuel cost-based crisis looming, Aiyar’s concerns, while valid in themselves, belong to a less fraught socioeconomic realm and sound high-flying. Yes, India’s polluter status is significant; yes, a carbon tax is an excellent idea—but all this perhaps apt for times when the economy is good and not at its decadal worst.
Unfortunately, the Indian government remains outward-gazing at the cost of a certain imperative inwardness: foreign investment firms have its unfailing attention. This August, Moody’s Investors Service flashed the stick at India, warning against any elevation of the fiscal deficit from 3.3 percent. The international credit rating agency Fitch, however, kept it pegged at a wise 3.5 percent, even suggesting that India cut capital expenditure to balance out any slippage from the budget. Similarly, Moody’s also cautioned the government against reducing the excise duty on petroleum and diesel products on the grounds that doing so might negatively affect India’s sovereign credit rating.
This is scary stuff for this government. Although, after the recent sit-down with the prime minister, Jaitley was quick to assure that the “government is confident that it will strictly maintain a 3.3 percent fiscal deficit,” it is unlikely that it can. The price of crude, for one, is out of his control. Flirting at $80 per barrel today, with higher prices probable when U.S. sanctions on Iran return in early November, there is little hope he can have of steadying the deficit, even were the reports true that he plans to tell India’s state-owned oil companies to lock down the price of their crude oil purchases. These companies are likely to be hit hardest by the depreciation of the rupee, too.
As for reducing capital expenditure, it is nigh impossible. Roughly 45 percent of the budgeted capital expenditure has already been accounted for four months into a fairly rough and consuming fiscal year. Being attentive to Moody’s prescriptions would entail unconscionable austerity, with 55 percent of the budgeted capital expenditure meant for the remaining two-thirds of the fiscal year—all in a general election year, when the bulk of capital expenditure is pushed as close to election day as possible in order to influence voters.
So, although the finance minister confidently said that the government would spend 100 percent of the budgeted capital expenditure by March 2019, the BJP government is reportedly torn between the truculent prescriptions of the big financial firms and tried-and-tested pre-election profligacy.
Hoping to employ a managed float regime, the central bank, the Reserve Bank of India, has reportedly sold about $500-600 million to settle the restive markets, but it seems not to have worked. Although there are prima facie plenty more dollars where those came from, the country’s forex reserves have been steadily falling.
One thing is clear for now: ‘Managing’ the media is one thing; managing the economy quite another.