Rupee Down: Is India a sinking BRIC?

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Wen-Yan King

The breaks are screeching on the once throttling Indian economy. The national currency, the rupee, hit a new all-time low against the US dollar today. Five years ago the country was celebrated for its strong currency. Now it is drawing serious concerns.

A consistent slide is cause for concern. Whispers mention the economic collapse of 1991 as a possible course for India.

Investment in the leading emerging markets sharply fell starting between May and June this year. Analysis from early July showed that part of the decline was linked to US bond buying, but the real problem was that investments were not panning out.

An article in the New York Times is the latest to report on India’s woes.

Three events last week crystallized those new worries. On Wednesday, one of India’s most advanced submarines, the Sindhurakshak, exploded and sank at its berth in Mumbai, almost certainly killing 18 of the 21 sailors on its night watch.

On Friday, a top Indian general announced that India had killed 28 people in recent weeks in and around the Line of Control in Kashmir as part of the worst fighting between India and Pakistan since a 2003 cease-fire.

Also Friday, the Sensex, the Indian stock index, plunged nearly 4 percent, while the value of the rupee continued to fall, reaching just under 62 rupees per dollar, a record low. The rupee and stocks fell again on Monday.

The article quotes Rajiv Biswas, Asia-Pacific chief economist at the financial information provider IHS Global Insight, calling India “the sick may of Asia.”

India is scrambling to find ways to stop the decline of the rupee. The Times of India reports today that the Reserve Bank of India is stepping in to sell US dollars in order to slow the downward trend. It already raised interest rates, but that has only harmed businesses.

At the same time India is embarking on a massive cash transfer program to help the millions of poor people in the country. The model, based on the success of Brazil’s and Mexico’s, is piloting the deliver of cash in 51 districts this year. The goal is to continue ensuring people get national ID cards and make it a nationwide program in 2014.

Only a few months in and the program has come under heavy criticism for its design and implementation. Harvard Kennedy School graduate students Kartik Akileswaran and Arvind Nair described some of the flaws in Guardian Professionals.

They say that the scheme is ill-prepared to reach people give the fact that some 800 million people have to be registered in the national ID scheme by next April. 280 million Indians were registered for national IDs in the past three years. The country will need to pick up the pace by a lot.

The current set up provides little feedback data and does not allow the Indian government to learn and adapt, they say. Bolsa Familia, the model program run in Brazil, also shows a blueprint for slowly expanding rather than rushing.

Bolsa Família grew out of a combination of other transfer programmes that had started at the municipal and state levels and had been operating for several years prior to the launch of Bolsa Família. These sub-national cash transfer programmes were then individually scaled up to the national level, and subsequently consolidated into Bolsa Família. Thus, cash transfers in Brazil started from the bottom and diffused upward and outward, which suggests that kinks in programme administration could be smoothed out at smaller scales and then scaled up.

There are some people showing tempered optimism.

“The rupee could overshoot to 64 to 65 (to the dollar) in the next few months. That is realistic,” said Nizim Idris, currency analyst at Macquarie bank, to CNBC. “But after that, it could come back if we do find stability and we do find India hitting the right notes in terms of adjusting the policies and opening up foreign direct investment some more.”

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Tom Murphy

Tom Murphy is a New Hampshire-based reporter for Humanosphere. Before joining Humanosphere, Tom founded and edited the aid blog A View From the Cave. His work has appeared in Foreign Policy, the Huffington Post, the Guardian, GlobalPost and Christian Science Monitor. He tweets at @viewfromthecave. Contact him at tmurphy[at]humanosphere.org.