WHAT IS HAPPENING - NEARING 4700 - IS IT A PANIC BUTTON?

Austerity measures on the way, says Pranab Mukherjee

 Citing the difficult economic situation, Finance Minister Pranab Mukherjee on Wednesday said the government would be resorting to a fresh spell of austerity measures to deal with the problems, but made it clear that he was not pressing "panic button".

Winding up a debate on Finance Bill, 2012 in the Rajya Sabha, he said, India's growth was still intact despite moderation in the Gross Domestic Product (GDP) which dropped to disappointing level of 6.9 per cent in 2011-12, down from 8.4 per cent in the previous two years.

"International situation is difficult. Country after country is witnessing economic crisis... I shall have to keep in mind its a difficult world...I cannot live in a world which is not real", he said. The House later returned the bill marking completion of the three-stage budgetary exercise for 2012-13 by Parliament.

Referring to crisis in eurozone and its impact on India, Mukherjee said, the government would resort to some "unpopular" steps to deal with the fiscal problems.

"I am going to issue some sort of austerity measures... whether people like it or not ... to convey a signal that we are responding to the situation", he said, adding, "We are not pressing panic button."

Mukherjee, however, did not spell out the austerity measures.

His statement came on a day when the BSE sensex slipped below the psychological mark of 16,000, mainly impacted by problems in the eurozone countries and other rich nations.

Referring to members mentioning about the Finance Minister biting the bullet, Mukherjee said, "I am not hesitating to bite the bullet if it achieves the goal, not if it is ending in a fiasco."

"Without doubt, the investors are looking for steps from the government in terms of structural reforms, be it in the form of news on goods and services tax or the direct tax code or some measures that might encourage infrastructure investments."

 

RBI's battle to save the rupee

The RBI is trying its best to support the rupee, which is steadily depreciating against the dollar. Since September last year, the central bank has tried a mix of dollar selling and regulations to check the slide, without much success. Given the widening current account deficit and anemic foreign capital flows, RBI would be reluctant to use its shrinking dollar reserves to prop up the rupee. 

The only support RBI has got from the government so far is the decision to hike import duty on gold and thereby discourage gold imports. But the government needs to do much more. Its top priority should be fuel subsidy reforms as higher fuel prices could discourage consumption and reduce crude import bill. 

A- December 15, 2011: Bans rebooking of forward dollar contracts, reduces net overnight open position limit (NOOPL) for forex trades.

B- December 17, 2011: Frees rates on non-resident Indian deposit schemes by banks.

C- January 6, 2012: Lowers minimum maturity period for ECBs up USD 20 million to three years against five years earlier.

D- May 4, 2012: Eases interest rate ceiling on FCNR deposits, allows banks to freely determine the interest rates on export credit in foreign currency.

E- May 9, 2012: Allows banks to use funds from foreign currency non-resident deposits as collateral against lending to related local residents.

F- May 10, 2012: Asks exporters to convert 50% of dollar holdings in exchange earners' foreign currency account into rupees. Bars exporters from buying dollars unless existing balance is exhausted.