The headlines of global economic forums confirmed in 2018 that India is the official “World Fastest Growing Economy” after surpassing China with an impressive 8.2% GDP growth in the first quarter of the fiscal year 2018. The same global economic forums confirmed China gaining back the tag of “World Fastest Growing Economy” after the first quarter of 2019 for the reason that the Indian economy grew only 5.8%, which is slower than the 6.4% growth registered by China irrespective of trade wars with the United States.
India needs a differentiated currency strategy to become a $5 Trillion economy!
by Nitya Singh
India is aspiring to become the world’s fourth-largest economy with 5 trillion GDP by 2024-2025 surpassing Germany and trailing Japan. Although the economist has argued that this aspiration is achievable with the assumption that Indian records 8% GDP growth each following years keeping the inflation rate below 4% each year. The question is: Does India need a differentiated currency strategy to become a $5 Trillion economy since rupee being the worst-performing currency in Asia, losing more than 12% against the US dollar in 2018.
Depreciation of Indian currency is mainly driven by alterations in the fundamental factors affecting the currency and current weakness driven by the market. Impact of oil price shock fed tightening and Indian policies including demonetization and more supply creation have pushed the INR to 72 USD in recent times.
Oil Price Shock
Oil Price Shock plays a crucial role in the instability of INR, Saudi Arabia’s vulnerability to get attacked by rebels which increased the geopolitical risk premium on oil prices and the expiration of the end of the US-Iran waiver granted has reduced the global oil supply by 1%. Oil Price shock has affected the IndianOil, BPCL, and HPCL which affected the INR by pushing it down by 2%-3%.
Trump’s new policies, tax cuts which overheat the US economy and price pressure from import tariffs gradual lead to pick up in US inflation over the next few years. Fed is enforced to tighten monetary policy more quickly and significantly to stable the market in such scenarios. Given the economist predictions, RBI won’t cut rates in 2019 and 2020, but will not follow the Fed in their hiking spree as well. Eventually, in the following years, a faster than expected Fed tightening would result in additional structural weakness of the INR of almost 3%.
More supply-driven than the demand-driven economy
The current Indian government is more focused on creating supply in the economy by increasing the production of various goods in the country ignoring the factor regarding creating demand for the same. A recent employee cut off by many major companies has increased the unemployment rate, thus reducing the purchasing power and demand from the consumer. INR was pushed down significantly due to the less demand, goods and service tax (GST) and the demonetization policy of the Indian government resulting in INR being the worst-performing currency in Asia.
Apart from structural change in all sectors, India needs to follow a differentiated currency strategy to become a $5 trillion economy by 2024-2025. India needs to strengthen INR by implicating fiscal discipline – fiscal discipline should help government in analyzing the expenditure and contributing the revenue deficit in improving the service sector of the country which will help in strengthen INR; many countries such as Singapore and Europe follow fiscal disciple to maintain strong GDP value in world economy, healthy FII and FDI inflow – inflow should help curb any volatility in Indian currency market and bring stability to INR.
In addition to fundamentals and technical factors, market psychology and geographical risk also influence the value of the currency on the world market. Creating demand for INR is a key differentiated strategy to increase the value of the currency, which can be done by manufacturing and exporting the goods in Indian currency instead of US dollars. Furthermore, the government or large corporation should issue bonds to raise capital in INR that is then purchased by foreign investors, those payments will have to be made in Indian currency increasing its demand. India has a higher possibility to reach $5 trillion economy if the predications and different strategy to increase the value on INR is followed over the following year.
Nitya Singh is an International Business Graduate from James Cook University and an International Student Advisor.