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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Problems on Many Fronts
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As a result of India’s slowest economic expansion since 2009, BNP Paribas, France’s biggest listed bank, sharply cut India's GDP forecast to 3.7% for fiscal 2014, from an earlier estimate of 5.2%. Economists pointed out a number of economic challenges facing the Indian economy, the major ones being rupee depreciation; widening current account deficit; falling investment levels; inflation, and fiscal deficit.
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Rupee Depreciation
In the fiscal year 2012-2013, the rupee depreciated by roughly 10% against the dollar. According to the Ministry of Finance, the rupee depreciation was "due to decline in exports on account of euro-zone crisis and widening of trade deficit, as imports remained resilient due to high oil prices and gold imports." A trade deficit of 10.2% of GDP in 2011-2012 created volatility in the supply-demand balance in India’s domestic foreign exchange market, which placed a downward pressure on the rupee.
The average exchange rate of the rupee per US dollar ranged between INR51.81 in April 2012 and INR56.03 in December 2012. On June 27, 2012, the rupee touched an all time low of INR57.22 per US dollar, which was a 10.9% depreciation over INR51.16 on March 30, 2012. On October 05 2012, the rupee appreciated to INR51.62 per US dollar. However, thereafter, the rupee began declining and the monthly average exchange rate of the rupee ranged between INR53.02 and INR54.78 per US dollar between October and December 2012. Such volatility in the rupee increased uncertainty in India's domestic market and impacted business confidence in 2012.
The rupee's volatility continued in 2013 also. The Indian rupee, which was around INR54 against the US dollar at the beginning of the year, fell to a record low level of INR68.80 on August 28, 2013. The slide of the rupee started in May 2013 and by August 2013 it had lost 20% of its value against the dollar. Increasing oil prices as a result of the Syria conflict, widening CAD, and capital outflows intensified the rupee’s fall in August 2013...
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