India has tightened restrictions on the amount of money companies and individuals can send out of the country, trying to curb a sharp decline in the rupee.
Since May, the Indian currency has declined about 16 per cent against the U.S. dollar, and the slide continued Wednesday, with the rupee at a record low of 64.54 rupees to the dollar. The rupee is testing new lows against the dollar on an almost daily basis.
On Wednesday, the Reserve Bank of India said that it will inject 80 billion rupees ($1.26 billion US) into the country's banking system by buying long-term government bonds.
The move is geared to make credit more readily available after the cost of borrowing on India's 10-year bonds rose to 9.48 per cent on Tuesday, the highest level since 2001.
Tightening money supply
The intervention comes just days after the central bank tightened the money supply, increasing the rate at which it lends to other banks.
The limit for overseas investments by Indian companies has been reduced to 100 per cent of a company's net worth from 400 per cent. State oil companies were exempted.
And the amount of money individuals can remit overseas has been limited to $75,000 US each financial year from $200,000. Higher import taxes were also slapped on gold silver and televisions.
Indian stocks have plunged along with the currency, with both the Sensex index and the Nifty down more than 10 per cent since July.
The falling rupee is pushing up the cost of oil and other commodities and raising costs for India's vibrant private sector.
Government debt high
But of greater concern is the government’s record high current account deficit at 4.8 per cent of GDP. India is especially vulnerable to funds moving away from emerging markets in anticipation of a winding back of the U.S. Federal Reserve's stimulus program.
Bhaskar Chakravorti, senior associate dean at the Fletcher School for international affairs in Medford, Mass., said India’s high level of debt is in part due to energy subsidies put in place to keep consumers happy.
"In the energy sector over the past few years and this is part of the problem that the economy is facing, this was a heavily subsidized sector for the Indian consumer. And now a lot of those government subsidies are coming home to roost," he told CBC’s Lang O’Leary Exchange.
"There is an election coming up next year and there is a lot of populist rhetoric in the air. Essentially until the elections are over, no one has a clear sense as to whether the tax regime and regulation regime will be lifted."
The economy also has structural problems that may push its near-term growth below five per cent growth annually, Chakravorti said.
"The structural problem in India is that it doesn’t have a robust alternative to the technology sector, it doesn’t have a strong manufacturing sector It has a giant current account deficit currently and it needs to import and that is not a sustainable situation," he said.
Longer term he is bullish on the Indian economy, because of its entrepreneurial spirit and growing middle class.
Finance Minister P. Chidambaram defended the government's efforts in parliament on Tuesday. To halt the rupee's decline, he said the government is trying to stem demand for nonessential imports while also encouraging inflows of money.
"These are really piecemeal efforts," said Anjalika Bardalai, a senior Asia analyst at the London-based consulting firm Eurasia Group. "They haven't engaged in a big-bang reform to deal with structural problems still affecting the economy."
Pessimists fear India could suffer a funding crisis like the one it experienced in 1990-91 when international investors took fright at its shaky finances. But with the central bank now stocked with $280 billion of foreign currency reserves, most experts think that scenario is unlikely.
What's more probable is an extended period of India failing to generate fast-enough growth to either alleviate the poverty that still afflicts many of its 1.2 billion people or create enough new jobs for a population where a majority is under 30 years old and some 13 million Indians reach working age each year.
Growth at 5% lowest in years
The Indian economy, Asia's third largest, grew five per cent in the financial year ended March, its slowest in a decade and well off the eight per cent pace it had averaged over those 10 years.
Growth suffered under the weight of high inflation, weak investment, corruption scandals and low business confidence. Efforts to open the country wider to foreign investment have been applauded but have yet to take deeper root.
"Five per cent growth is not adequate for India, that's for sure," said Samiran Chakraborty, head of research at Standard Chartered Bank, South Asia. "With the kind of demographic profile we have, it's quite likely we will not be able to satisfy the population with only five per cent."