India's Economic Problems: Difficult Road Ahead?

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Case Details:

Case Code : ECON041
Case Length : 15 Pages
Period : 2012-2013
Pub. Date : 2013
Teaching Note :Not Available
Organization : --
Industry : -
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"Yet history suggests economic development is like a game of snakes & ladders. There is no straight path to the top, and there are fewer ladders than snakes which mean that it’s much easier to fall than to climb."

-Ruchir Sharma, Chief Financial Analyst at Morgan Stanley Investment Management Inc, in 2012.

"While global factors such as tensions over Syria and the prospect of U.S. Federal Reserve tapering its policy of quantitative easing have caused general weakness in emerging market currencies, the rupee has been especially hit because of our large current account deficit and some other domestic factors."

-Manmohan Singh, India's Prime Minister, August 30 2013.

"In India, the combination of large fiscal and CAD, high and persistent inflation, sizable unhedged corporate foreign borrowing and reliance on portfolio inflows are longstanding vulnerabilities that have now been elevated as global liquidity conditions tighten, and this clearly has affected market confidence."

-Gerry Rice, Spokesman International Monetary Fund (IMF), August 30 2012.

On August 28, 2013, the value of the Indian rupee vis--vis the US dollar plummeted to a record low of INR68.80. The stock market took a plunge and BSE SENSEX on August 28, 2013, touched an intra-day low of 17,720, down a whopping 13.6 % from January 2013's high of 20,500. Experts pointed out that the Indian economic condition in 2013 was the worst since 1991.

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The Indian economy had posted good growth during 2003-2007 with growth rates averaging 9%. In 2008, growth moderated due to the global financial crisis. Starting 2012, India was showing signs of deceleration. According to a report by The Central Statistics Office (CSO), in the first quarter (April-June) of the fiscal year 2013-14, India's economy grew at its slowest in the previous four years and recorded a growth rate of 4.4%. Inflation was running high at above 7% since December 2009; Current Account Deficit (CAD) was expanding to record levels; several projects were reportedly stalled due to policy bottlenecks. The investment climate was not seen as encouraging by corporates.

Parallels were drawn with the situation India faced in 1991. But observes felt that Manmohan Singh (Singh), Prime Minister of India (2004-2014), who as the Finance Minister in 1991, had initiated bold reforms that helped a turnaround of the economy, was not able to placate the criticism that the government was lacking concrete action. Though Singh said there was no need for panic, analysts were skeptical, since the government continued to roll out populist policies giving out huge subsidies, like the Food Security Bill (FSB) in September 2013. With elections for the parliament due in 2014, the atmosphere was highly charged with opposition parties' waiting for every opportunity to criticize the government. In the absence of an absolute majority in the parliament, the ruling UPA government was in a tight position.

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