The Indian rupee has weakened rapidly in recent months, with the exchange rate against the US dollar dropping by around 20% since early May. There is indeed reason to be worried, but not because the rupee's value has declined. In fact, the slide has been long in coming, and recent market uncertainty has merely been a wake-up call.
The real reason to worry is that India has lost international competitiveness. Growth momentum has fizzled and with inflation persistently high, Indian producers are struggling to compete in world markets. The current-account deficit is increasing relentlessly, owing to a widening trade deficit, raising the danger of a balance-of-payments crisis. The consumption theme on back of which India has grown is slowing down.
Households putting off spending are warning signals of an economy-wide squeeze. Consumers, hit by flat income growth and rising prices, have also put off discretionary spending. Private final consumption expenditure - a proxy for household spending, grew just 1.62% during the April-May quarter against 3.8% in the previous quarter and 4.3% in the same period of the previous year. Consumer durables output fell 12.6% during April to June, mirroring what most shop-end evidence was throwing up. Spends on television, refrigerators and cars continue to remain muted.
A survey by the Associated Chambers of Commerce and Industry in June found monthly bills for the middle class jumped by 15 to 20% in a month across major cities as the falling rupee drove up prices of petroleum products and edible oil. A paper in August by the same group found that even deep-pocketed consumers were cutting back, with five-star hotels and fine dining restaurants registering a decline of 20% in sales in the past three months after prices of imported food ingredients and spirits rose.
A large part of the current slowdown can be attributed to the execution bottlenecks and falling investor sentiment in the country. Supply constraints such as land acquisition, coal linkages, environmental and policy clearances and raw material availability have all contributed to the investment slowdown that has dragged down growth over the past few years. Slowdown in domestic consumption is bad news for India Inc. With revenues falling and high borrowing and input costs, it is increasingly clear that India Inc is facing a long and dark winter.