India’s economy is in dire straits, and no one seems to know how to get out of this mess. The Indian rupee became Asia’s worst performing currency last Wednesday, the automobile industry continued to be in trouble, and even fast moving consumer goods (FMCG) reported lower sales across the nation. Rural India, especially the Northern states, seems to be the worst hit.
Tell me more.
The rupee is in trouble.
“The Indian rupee has now become Asia’s worst performing currency this month, as it battles pressures from China’s yuan, an unresolved global trade war and fleeing foreign funds. The local unit has slumped 3.49 percent against the U.S. dollar so far in August, setting it up for its second-worst monthly loss in four years.”
Rupee’s worsening performance has also given rise to the fear of losses for offshore investors.
“A sharp drop in the rupee may wipe out most of the profits for offshore investors … Even amid all the risks “there are very few countries like India with such high-interest rates that make them attractive carry trade destinations. If the panic spreads, foreigners have to pull funds out of India or will have to hedge their exposures which will eat into returns …”
The automobile industry also reported its worst performance in 19 years as high ownership costs, a worsening economy, and floods in some states led to a 31% drop in sales last month. This has also had a domino effect in the employment sector as automobile giants have been forced to close plants. Last month, Tata Motors Ltd shut down its Jamshedpur and Pune plants for more than 12 days. Maruti halted productions as well.
“The automobile industry supports the steel, chemicals, textiles and other sectors as well, and any slowdown will impact the broader economy. Demand in the rural market has also declined significantly and the double-digit drop in motorcycle sales is an indication of the demand situation in rural areas.”
Even FMCG companies have reported a dip in sales. This has mostly been attributed to declining wage growth across rural and urban areas – especially in the North.
“This demand-led slowdown has been attributed to a possible reduction in household savings – a result of declining urban and rural wage growth. “We find that for the Indian economy there are clearly a host of structural factors that are holding back current consumption. A substantial decline in wage growth (both rural and urban wages) in recent times resulting in lower household savings (a result of conscious policy decisions to correct macro imbalances) has possibly slowed down the growth in real per capita income that is holding back demand,” a study by SBI noted.”
So, what now?
All eyes are on the Government and the Reserve Bank of India. According to most experts, a Government handout is must at this stage to jumpstart the stalling economy. We’ll keep you posted.