Madam
Speaker, the movement of the exchange rate of Indian Rupee
recently has been a matter of concern. The Rupee has depreciated sharply
against the dollar since the last week of May. There are concerns of the impact
this would have on our economy. Madam, what triggered the sharp and
sudden depreciation was the markets' reaction to certain external developments.
On May, 22, 2013, the United States' Federal Reserve indicated that
it would soon taper its Quantitative Easing as the US economy was
recovering. This led to a reversal of capital flows to Emerging Economies,
which are100 now sharply
pulling down not just the Rupee but also the Brazilian Real, the
Turkish Lira, the Indonesian Rupiah, the120
South African Rand and many other currencies. While global factors such as
tensions over Syria and the prospect of the US Federal Reserve tapering its
policy of Quantitative Easing have caused general weaknesses in the Emerging
Market currencies, the Rupee has been especially hit because of our large current
account deficit and some other domestic factors. We intend to
act to reduce the current account deficit and bring about an
improvement in the functioning of our economy. In200 2010-11
and the years prior to it, our current account deficit was more modest
and financing it was not difficult, even in the crisis year of 2008-09. Since
then, there has been a deterioration,240 mainly on account of huge imports
of gold, higher costs of crude oil imports and recently, of coal. On the export
side, weak demand in major markets has kept our exports from growing. Exports
have been further hit by a collapse in iron ore exports. Taken together, these
factors have made our current account deficit unsustainably
large. Clearly, Madam, we300
need to reduce our appetite for gold, economise in the use of petroleum
products and take steps to increase our exports. We have taken measures
to reduce the current account deficit. The Finance Minister has
indicated that it will be below USD 70 billion this year, and we will
take all possible steps to ensure that outcome. These are360 already showing results with a declining
trade deficit in both June and July. The Government is confident that
we will be able to lower our current account deficit to USD 70
billion. Our medium-term objective is to reduce the400 current account deficit to 2.5
per cent of our GDP. Our short-term objective is to finance the current
account deficit in an orderly fashion. We will make every effort to maintain a macro-economic
framework friendly to foreign capital inflows to enable orderly
financing of the current account deficit.
Madam
Speaker, coming back to the effects of the Rupee depreciation, we must
realise that part of this depreciation was merely a necessary adjustment.
Inflation in India has been480
much higher than in the advanced countries. Therefore, it is
natural that there has to be a correction in the500 exchange rate to account for this
difference. To some extent, depreciation can be good for the economy as
this will help to increase our exports and discourage imports. There are
many sectors which are regaining competitiveness in export markets as
a result of the fall in the exchange rate. Over the next few months,
I expect the effects of this to be felt more strongly, both in exports and in
the financial position of exporting sectors. This in itself would
correct the Current Account Deficit to some extent. However, foreign
exchange markets have a notorious history of overshooting.
Unfortunately, this600 is what
is happening not only in relation to the Rupee but also other
currencies. The Reserve Bank and the Government have taken a number of
steps to stabilize the Rupee. Some measures have given rise to doubts in
some640 quarters
that capital controls are on the horizon. I would like to assure the House
and the world at large that the Government is not contemplating any
such measures. The last two decades have seen India grow as an open economy
and we have benefited from it. There is no question of reversing
these policies just because there is some700 turbulence in capital and currency markets.
The sudden decline in the exchange rate is certainly a shock, but we will720 address this through other measures,
not through capital controls or by reversing the process of reforms. The Finance
Minister has clarified this matter at length, and I take this
opportunity to reaffirm our position.
Madam
Speaker, Ultimately, the value of the Rupee is determined by the
fundamentals of our economy. While we have taken a number of actions to
strengthen those fundamentals, we intend to do more. Growth has slowed in
recent months. I expect growth in the first quarter800 of 2013-14 to be relatively flat, but as
the effects of the good monsoon kick in, I expect it to pick up. There are many
reasons for this optimism. The decisions of the Cabinet Committee on
Investment840 in reviving
stalled projects will start bearing fruit in the second half of the year.
The full effects of the growth-friendly measures that have been
taken over the last six months, such as liberalizing norms for Foreign
Direct Investment, resolution of some tax issues of concern to industry and
fuel subsidy reform will come into play over the year,900 resulting in higher growth particularly
in manufacturing. Exports are also starting to look up as the growth
performance of the rest of the world is showing signs of improving. So,
I believe growth will pick up in the second half of the fiscal year
barring extreme unforeseen eventualities. Madam, there are questions
about the size of the fiscal deficit. The960
Government will do whatever is necessary to contain the fiscal deficit
to 4.8 per cent of GDP this year. The most growth-friendly way to
contain the deficit is to spend carefully, especially on subsidies that do not1000 reach the poor, and we will take
effective steps to that end. Madam, inflation measured by the Wholesale
Price Index has been coming down, even though inflation measured by the Consumer
Price Index is still too high. Depreciation of the Rupee and rise in Dollar
prices of petroleum products will no doubt lead to some further upward
pressure on prices. The Reserve Bank will therefore continue to focus on
bringing down inflation. The favourable monsoon and the anticipated
good harvest1080 will help
bring down food prices and ease the task of controlling inflation.
