India’s rupee value keeps falling at alarming rates and the deficit in trade keeps widening. A standard rule in macroeconomics is that when the currency of a country in on the decline, the exporters should be given some form of a boost, so that their goods can be more competitive when the currency is lowered.
In this regard, India should be enjoying a boom in exports, but instead India’s currency has dropped by 23% and while exports did go up to a meager 11.6%, it was only achieved after twelve months. To make matters worse, the rupee has been on a steady decline over the last two years leaving India with a very narrow current account deficit while the trade gap keeps getting bigger.
This very high level of deficit has become a concern as it does not allow banks to lower interest rates to their borrowers. Fiscal deficit magnifies inflation and also impedes the transmission of monetary policy.
Many lenders have asked the central bank to reduce the cash reserve ratio for banking institutions a certain percentage of the deposits have to be in cash with the RBI hopefully freeing up liquidity and reducing the lending rates.
India has been affected by slow reforms taking place in policies- the root cause for the stalling of various industrial projects and disappointing many foreign investors. This in turn has also created a number of issues such as high inflation, wide deficits in the current account and fiscal accounts.
To add to these issues, the central bank also stated that warned that it has very limited room for reducing rates as they are capable of aggressively stoking inflation, encouraging imports and will further widen the existing gap in current deficit accounts.
Structural issues were also inherent in India’s model of economic development that chose to rely on the limited number of skilled labor rather then an abundant pool of unskilled and semi skilled labor already present. The field of manufacturing requires transparent rules and a reliable infrastructure- these are two things that India lack.
The number of regulations, such as the inflexible labor laws actually discourages companies from growing, and even if these companies do grow, they choose to use machines over unskilled labor.