Rupee falling is disastrous

The recent sharp depreciation of rupee is a cause for concern. The depreciation was largely against the dollar, by more than 7.5% in this year 2018. The rupee’s decline is likely to continue due to rise in the current account deficit on India’s balance of payments, intensified by the recent sharp rise in the price of crude oil. The current account deficit rose from $41.6 billion in 2016 to $73.3 billion in 2017. A depreciating rupee affects the local economy in several ways.

• Periodical rupee depreciation is a symptom that India is a bubble economy. 
• The success of India's liberalizing reforms is not because it has transformed into a manufacture & export driven economy, but indicates its emergence as a favored destination for international financial investors resulting in large capital inflows. The large capital inflows resulted in stock market values, but the valuations are not warranted by its potential earnings.
• Large inflows of foreign capital, enhances the liquidity in the system, triggers a credit boom that spurs demand and drives domestic market growth. 
• The debt-financed consumption and investment results in excess liquidity that drives banks to increase lending. This increases the defaults which can lead to systemic fragility that can intensify the capital flight and exchange rate volatility.
• The import liberalization fuels the demand funded by debt and in the absence of matching enhance in exports, the import-intensive consumption and investment results in widening current account deficit.
• The net foreign exchange outflow is due to mismatch between imports and exports and remittances and the deficit gets financed by capital inflows. A country that cannot earn the foreign exchange to finance its current needs is vulnerable to balance of payments difficulties and cannot sustain the value of its currency. 
• The low oil prices, between 2014-17, had depressed the outflows on account of excess import of goods. Now as oil prices have risen to $80 a barrel, the reality is that India is a country that is vulnerable on the balance of payments front.
• Liberalized trade and liberalized capital flows have enhanced India’s vulnerability, of which periodical currency depreciation is a symptom which got concealed so far by the large capital inflows and by the benefits of low oil prices. Both those advantages are now under threat.
• Trade liberalization has increased dependence on imports for consumption and investment and now the depreciating rupee increases cost of imports that aggravates inflation. Increase in the price of crude oil has the potential for much higher inflation. Inflation forces RBI to raise interest rates. 
• Many companies have outstanding foreign currency loans, either as working capital or acquisition-related debt, will be seriously affected.
• The liberalizations results in surge in capital flows that in turn increases private foreign debt. Since large capital inflows make the domestic currency appear strong, much of this borrowing in foreign currency is not hedged for possible losses stemming from any currency depreciation.
• Any plunge in the rupee effectively accentuates foreign institutional investors' losses on their equity portfolios and triggers stop-losses, which forces further sales, dragging markets even further down. 
• A falling rupee, in theory, should help exporters. But due to other factors export gains due to a depreciating currency may be limited.
• A falling rupee impacts tourist & business foreign travelers and students joining foreign universities. 
• FIIs have been supporting the rupee in the last three years, their inflows have dried up. So far in 2018, FIIs have pulled out Rs 46,197 crore from the Indian markets. 
• The Indian currency's vulnerability is particularly heightened by the fact that among its emerging market peers, India runs a high current account deficit.
• Large number of expatriates returning from Saudi Arabia and modified H1B visa rules by USA will hit remittances in coming years and impact current account deficit.

When depreciation actually occurs, the rupee costs of servicing foreign debt rise sharply. When the stagflation afflicts the economy hurts corporate profits and makes the burden of servicing foreign debt too much to bear. The distress sale of assets that follows bankruptcies results in asset price deflation, which worsens the problem. Depending on the intensity of these effects, the bubble can burst and the game of speculation can unravel. It is for this reason the bubble economy becomes unsustainable.

India escaped the last two global financial crises, but it may not be as lucky this time. Rising oil prices & increasing inflation and combined with the bad loans & capital flights already occurring, there is trouble looming. Turkey and Argentina, two of the world's biggest emerging markets, have been plunged into economic turmoil. Both the Turkey's lira and the Argentina's pesos have gone into free fall in recent months due to panic-selling by investors. Emerging markets were under performing by 2.5% so far this year. The strong US dollar is putting pressure on other currencies. Turkey's inflation rate exceeded 10%. The Argentine peso has plummeted by more than 10% against the US dollar. In May 2018, Argentina's central bank hiked interest rates from 27.5%  to 40% to avoid further capital outflows. While Argentina had already requested IMF help to rescue its economy, it is only a matter of time for Turkey to request IMF to help rescue its economy. Other emerging markets may be able to adapt to rising US interest rates without facing such turbulence. The strong $ 400+ billion reserves are sufficient for meeting contingencies but uncontrolled current account deficit will compel FII's to withdraw their exposures in India that will spell doom for our economy. Hence reducing current account deficit and inflation control are paramount.

Modi's failures

Modi ascended to power in 2014 riding on the tsunami of anti-incumbency of scam ridden Congress led UPA. While Modi is still drawing huge crowds abroad with his charisma and is darling of upper middle classes which are in complete disconnect with lower classes, peasants & rural population is a colossal failure in India during the past two and half years, despite favorable crude oil prices at less than one third of its peak prices. Their argument that "those who governed us for 60 years should not ask for an appraisal in merely 24 months" is untenable.


Here is the list of failures:

1. Industry stagnating and exports are falling consistently.
2. Inflation especially food inflation is rising.
3. Job creation dismal. Textiles, leather, metals, automobiles, gems and jewellery, transport, information technology and the handloom sectors together created just 135,000 jobs during 2015, 67 per cent lower than 421,000 jobs that were added in 2014, the last year of the Manmohan Singh government.
4. Make in India remains a slogan only.
5. Bringing back black money in Swiss banks etc in 100 days remains a shallow promise.
6. PSU Bank's NPA doubled from Rs.2.86 to Rs.5.71 lakh crores in the past one year, due to default by corporate's close to ruling BJP. Improving liquidity or recapitalization needed urgently for banks remain operational.
7. Despite crude oil prices falling by 70% from its peak prices, consumer sale prices were reduced by just 15%. GOI retained 85% advantage to itself by increasing excise duty etc.
8. Riding on the wave of low oil prices, Modi government hasn't made any meaningful impact on Indian economy so far.
9. The BJP had promised to increase the Minimum Support Price (MSP) at the rate of cost of production along with 50 per cent profit. Agricultural sector is in distress with  no hike in Minimum Support Price (MSP) for farmers.
10. The biggest failure, however, is the mishandling of the agriculture and drought situation across the country and the continuing neglect of agriculture. While Modi promises to double agricultural incomes, it is yet to be seen how he will achieve that target. Agricultural growth rate has fallen from about an average of 3.7 per cent per year under UPA to just about one per cent in Modi's tenure.
11. The drought situation was totally neglected. The drought manuals and rules by the government itself said that water trains and tankers are to be pressed into service as last resort and number of steps ought to have been taken before reaching that step which the government at the centre and state missed. Lack of seriousness by the government of India in assessing and mitigating the drought situation and crisis worsened afflicting nearly 33 crore Indians across several states. Drought is, perhaps, the only natural calamity one can plan against in advance, unlike floods and earthquakes. National Disaster Management Authority manual on management of drought speaks of "drought mitigation" as part of public policy and not just drought relief but this was clearly lost on the Modi government.
12. All schemes are being renamed and repacked with reduced central contributions passing on the burden on states. They are unable to conceive any new sensible scheme so far on their own.
13. Cross border firings and ceasefire violations in Jammu & Kashmir are at a high.
14. Modi's Pakistan policy and his foreign policy is defective. It has been driven by style over substance, adventurism over analysis; by self projection, vanity and petty domestic political calculations over larger interests. The ministry of external affairs has been more like a tour operator or logistics handler, and not a source of policy and executive inputs. Modi's relentless foreign travel remained pleasure trips burdening exchequer.
15. Income Declaration Scheme (IDS) remained a big failure, despite tough talk.
16. Demonetization of big notes of Nov 8, 2016, except for its secrecy in unveiling failed to achieve any of its stated objectives viz. black money, fake money, terrorist financing & corruption except causing disruption to civic life in all segments especially informal economy, agriculture and rural economy apart from causing innumerable difficulties for common man for exchanging old notes or withdrawing their own cash from banks. About 70 people died standing in bank/ATM queues and 15 bank employees died due stress and long work hours continuously. Manmohan Singh had rightly remarked that "I do not disagree with the objectives but the process of demonetization is monumental mismanagement and is a case of organised loot and legalized plunder of the common people".
17. Failed to recover Rs.8,000 crores lent to King Fischer Vijay Mallya who has absconded and banks have just written off as bad loans.
18. GST bill still incomplete.
19. Swachh Bharat, Yoga, LPG subsidy give up & Cashless transaction campaigns, even though good, doesn't deserve that much high decibel campaigns.
20. Smart Cities & Digital India projects are yet to take off from the ground despite announcements a year ago.
21. Has not fulfilled many of the AP Reorganization Act 2014 commitments or BJP promises of 2014 election campaigns to Andhra Pradesh. Whatever little has been done was with delay of two years reducing its impact and results.
22. Diverting lot of money for his pet project Ahmedabad - Mumbai bullet train which serves only rich & upper middle classes with ticket price of Rs.3,000.
23. Many agreements and concessions for enriching richer people but nothing for poor or rural population.
24. Modi and his Cabinet colleagues foreign trips cost the exchequer Rs.567 crore during 2015-16, an increase of more than 80% from the previous year Rs 269 crore. This is besides the over Rs.500 crore spent by his bureaucrats on their foreign travel.
25. Reliance has resorted to stealing gas from ONGC gas fields during 2009-11 to the tune of Rs.12,000 crores. Against the consultant recommended claim of ONGC for Rs.30,000 crores Modi passed orders on Reliance to pay up Rs.10,000 crores recently. This was contested in courts by Reliance.
26. Recollect BJP's political failed adventures in Uttarakhand and Arunchal Pradesh to usurp power leading to a suicide by an innocent Ex-CM in Arunachal Pradesh. It was rumored that BJP spent Rs.15 crore per MLA crossing in intense horse-trading.
27. NDA and all state governments are spending lots of money on advertisement campaigns while doing very little on the ground.
28. While Assam's BJP win can't be termed as endorsement of Modi's government, Delhi & Bihar's defeat is a clear rejection for Modi. In all the five states that went to the polls recently, BJP dropped its vote share since 2014, and minus Assam. Even the Congress party scored nearly twice as many Assembly segments compared to the BJP. The Modi tsunami is now withdrawing back to the sea and those who revelled when it hit the coast are now in a real danger of being drowned by it.
29. Artificial JNU controversy on nationalism is another black spot on Modi.
30. Modi government seemed more keen on confrontation than conciliation in order to get tricky legislation's passed. Consequently, very little has actually got done on the development and economic front.

The reason for the victory of Narendra Modi was the tremendous support he got from first-time young voters and floating voters who saw him as the best alternative then may very well change their opinion come 2019 and that is the nature of a fence sitter who isn't ideologically wedded to what the BJP represents.

Patriotism is the last refuge of the scoundrel but in the case of Modi's government, pseudo-patriotism is the last resort of the incompetent.

My View:

The last two years, if seen in totality, offer very little for the Modi government to gloat about. Modi government harping on the past that Congress hasn't done anything is futile. While Congress was certainly bad, they never meddled with the lives & livelihood of poor & peasants. In the absence of strengthening Lok Pal & RTI bringing Politicians, Bureaucrats, Judiciary & Businessmen under its purview, granting autonomy and teeth to CBI, CVC  & ACB etc and no steps to enforce transparency & accountability, Modi's talk about elimination of corruption & black money etc is shallow and is a mere lip service. Modi should do something for the nation with sincerity of purpose evident rather than blaming Congress for all the ills of nation even after two and half years of ascending to power. It sounds nice only during first quarter and second quarter but sounds awkward in the 10th quarter. Above all, Modi government in collision course with Supreme Court regarding judges appointment matters for prolonged periods of over an year doesn't august well irrespective of merits.

Modi grants nothing to Telangana state as well.

• For Godavari pushkaralu during 2015, centre has granted Rs.100 crores for AP and Rs.50 crores where as expenditure was several hundreds of crores. This discrimination was objected to by KCR.
• For Krishna pushkaralu this year 2016, the expenditure is huge at Rs.1,080 crores by AP Govt and Rs.800 crores by TS Govt. TS demanded 75% i.e. Rs.600 crores grant from Centre. Centre has rejected its assistance for both the states.
• Modi inaugurated Telangana's Mission Bhagiratha Phase I costing Rs.858 crores on August 7, 2016. KCR requested Modi for Central assistance of 80% for Rs.42,000 crore Mission Bhagiratha and Modi gave nothing.
• Even though KCR spent more than Rs.50 crores for the Modi's inauguration and praised him a lot, Modi also praised KCR but didn't announce any specific support to any project much to disappointment of KCR & Co. 
• KCR's non-stop praising of Modi is due to a CBI case pending and recent questioning of him by CBI for allegaed corruption in ESI Hospital construction case.
  None of the KCR's projects like Kakatiya Mission, Kaleswaram project, Hyderabad's ITIR project, Palamuru-Dindi LI scheme etc are awaiting Modi's mercy for funds. Of course TS hasn't followed any procedures for obtaining any clearances for these projects, is another matter.
• Earlier in 2015 while laying foundation stone for AP capital Amaravati, contrary to expectations of people of AP, Modi announced nothing and gave only a pot of Yamuna water and Parliament house's pouch of earth and tried to arouse sentiment. While Naidu spent about Rs.200 crores for the function and got nothing in return from Modi.

So it is clear that Modi is only a taker and gives nothing to anybody.

• During his two year regime crude oil prices fell by more than 80%. Modi passed on only 20% to people and retained 80% with centre by increasing excise duty.
• He has minimized LPG subsidy and also removed subsidy for higher income people.
• While 14th Finance Commission increased state's share of central taxes from 32% to 42% and centre accepted  the report in toto but centre has withdrawn from several jointly funded welfare schemes by much more amount. These schemes will have to continue at state's expense thus in totality centre is benefited financially by implementing the report.
• Modi announced Rs.1000 crores help to Visakhapatanam destroyed by 'Hudud' but state received only Rs.400 crores whereas damages are in excess of Rs.8,000 crores.

Modi sanctions 'Bullet Train' to Ahmedabad-Mumbai route at Rs.100,000 expenditure while Rs.80,000 external soft loans and centre's contribution is in excess of Rs.25,000 crores. He has kept aside 6 priority routes identified by experts during UPA regime and sanctions Ahmedabad-Mumbai route.

Modi appears like 'PM of Gujarat' rather than 'PM of India' 

like Deve Gowda PM of Karanataka in the past.

Low Oil Prices Scenario

Historically, the OPEC, cartel of oil-producing nations, has been able to manage oil prices because of the lack of flexibility in global supply. And a small cut in OPEC supply can have a significant impact on the global oil price. 

This price surge started in around 2003 and reflects the persistent long-term growth of the key oil import markets of China and India. OPEC members produce 40% global proportion of oil with very low production costs. The key “swing producer” Saudi Arabia, has used its surplus capacity to influence price. The OPEC cartel is clumsy, given that some member states have an incentive to “cheat” by exceeding their authorized production quotas.

United States supplies of “shale oil” are said to be at risk once global oil prices fall below US$60 a barrel in terms of the current costs of existing operations or even US$90 a barrel in terms of investment in new projects.

US Shale Oil:

The advent of the US shale oil boom changed this dynamic. The industry has lower fixed costs but higher variable costs and is more like an industrial process than a major one-off investment. That makes it more responsive to price movements and more flexible in adjusting short-term output.

Overall though, shale is a relatively high cost source of oil, especially compared to Middle East production. As a result, when US shale threatened OPEC’s market share, the cartel allowed a position of global oversupply to develop to make oil prices fall to make shale unprofitable. Middle East production costs at as little as US$10 a barrel, while US shale can come in at more than US$70. The plan to cripple shale oil production has certainly had a significant effect. The price has fallen from a high of US$115 a barrel in mid-2014 to a low of US$27 in January 2016.

Why haven’t US producers been laid low given that the oil price has already fallen below the cost of shale oil production? The answers are:The first is that many companies managed to hedge their production when prices were higher, selling future supplies of oil at a high enough price keep profits coming in. A second is that many got bank loans to pay for investment. Loans need to be repaid, and so lower oil prices led to a need for higher output at almost any price. A third, and important reason, is that the cost of US shale production has decreased due to efficiency gains and production costs got reduced costs to as low as US$30 a barrel.

Russia Pressure:

Oil exports account for over 60% of export revenues, on average, for OPEC countries and account for as much as 90% of Saudi budget revenues. In Russia they account for around half of total federal budget revenues and a similar amount of total exports. Any fall in prices can lead to both fiscal and budget deficits. Russia looses about $2 bn in revenues for every dollar fall in the oil price, and its economy would shrink by at least 0.7%.

Despite pressure, the gap between breakeven and actual price can be sustained for a while. Both Saudi Arabia and Russia have built up significant currency reserves during the period of high prices which are now being used to finance a budget deficit and sustain spending. Russia is reaching the limits of its reserves getting exhausted by early 2017. Currency devaluation is a blunt tool for Russia and others to consider to reduce costs in dollar terms.

The bankruptcy of US oil producers has begun as banks begin to call in loans, new financing gets harder to find and hedging programmes expire, leaving producers fully exposed to a lower oil price. Many OPEC countries have begun to despair that no end of the current oil price slump is in sight. It appears that Russia is becoming increasingly desperate to coordinate a production cut with OPEC, in stark contrast to its previous reluctance to engage with the cartel. 

A US$30 oil price has brought many producers to their knees, with the resulting possibility that the majority of OPEC countries, plus Russia and the US, may all be set to reduce output in 2016 and bring the oil market back into some form of balance. Only Saudi Arabia, with the largest financial reserves (about US$600 billion) and an avowed strategy to maintain market share, appears firm in its resolve to maintain production and brutally test the economic robustness of its major competitors.

Low oil prices impacts Gulf states:

• Analysts expect oil prices to remain depressed for the remainder of 2016.
• In 2014, after almost a decade of record highs, the price of a barrel of Brent crude began to collapse from a peak of US$140 to less than US$30.
• Saudi Arabia is lining up a US$2 trillion sovereign wealth fund to see it through the twilight years of the oil era. But not all the countries of the Gulf Co-operation Council, or GCC, have this kind of cash. 
• Even for Saudi Arabia, the new era of low oil prices spells increasing budget deficits, reductions in state subsidies and a slowdown of the energy and construction sectors.
• Bahrain is still coming to terms as subsidies fall and inflation rises, people living and working in the region are starting to experience a reduction in the purchasing power of their incomes and increase in the cost of living.
• If the price remains low, reserves also will start to run out in two or three years.

Low oil prices impact on India:

• Current account balance:
  India imports nearly 80% of its total oil needs which is one third of its total imports. A fall in oil prices by $10 per barrel helps reduce the current account deficit by $9.2 billion or 0.43% of the GDP.
• Inflation:
  Because of use of oil in transportation of goods and services and fall in global crude prices decrease in prices of all goods and services thus helps reduction of inflation. Every $10 per barrel fall in crude oil price helps reduce retail inflation by 0.2% and wholesale price inflation by 0.5%.
• Oil subsidy and fiscal deficit:
  The government compensates oil companies for any losses or under-recoveries from selling fuel products at reduced rates resulting in higher fiscal deficit. A fall in oil prices reduces companies' losses, oil subsidies and thus helps narrow fiscal deficit.
• Rupee exchange rate:
  A fall in oil prices is good for the rupee. But the dollar also strengthens every time the value of oil falls. This negates any benefits from a fall in current account deficit.
• Petroleum producers:
  The fall in global oil prices affects the exporters of petroleum producers in the country. India is the sixth largest exporter of petroleum products in the world earning $60 billion annually. India's buyers of its exports are net oil exporters and fall in oil price impacts their economy, and hamper demand for Indian exports.
• Remittances from abroad:
  Indians remittances from abroad, mainly Gulf, were $70 billion in 2013 thus reducing current account deficit.  Fall in oil prices affects oil-exporting Gulf countries and in turn affects inward remittances into India.

My View:
Oil prices at moderate levels of $50-70 is good for economic stability of the world. Either high or low oil prices hurts some nations while doling out windfalls to others.

India is immensely benefited in the last two years by saving at least Rs.500,000 crores worth in foreign exchange outflow reducing the impact on fiscal deficit, trade deficit and inflation under control, even though inward remittances from Gulf had reduced to some extent. Ruthless Modi govt retained all the benefits of low oil prices by increasing duties on petrol & diesel to alarmingly high levels making them most expensive in the world. While UPA Govt made consumers pay international market prices during high oil price regime for nearly 10 years, Modi & Jaitley though fit not to pass on benefits of reduced oil prices to consumers. This is nothing but taxing public without legislature approval and is unethical as well as immoral.

However negative effects of prolonged low oil prices will be felt here after, mainly Indians in Gulf region losing jobs and returning to India. Already diminishing exports are hurting trade deficit even though imports have also reduced to some extent.