New Delhi, May 16
The political drama in faraway Greece is casting its shadow on the Indian economy. The worsening economic situation in Europe today led to the rupee sinking to a new low of Rs 54.51 to the dollar causing a deep gash in the stock markets even as the Finance Minister Pranab Mukherjee indicated that austerity measures were on the way.

The rupee has now depreciated 22 per cent since January 2011 moving from Rs 44.67 to Rs 54.51 to a dollar. A weak rupee has the effect of making foreign travel, overseas education and imports like oil and consumer goods more expensive. However, it is beneficial for exporters like software, textiles and gems and jewellery.

Finance Minister Pranab Mukherjee alluded to the shadow being cast by global events on the Indian economy. “International situation is difficult. Country after country is witnessing economic crisis. I shall have to keep in mind it’s a difficult world. I cannot live in a world which is not real”, he said while replying to the debate on the Finance Bill in Rajya Sabha.

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 including some austerity measures. “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.” Though he did not spell out the austerity measures, he did mention once again the need to reach a consensus on the problem of oil subsidies.

The main reason for the depreciation of the rupee is the current account deficit or the difference between imports and exports. India’s current account deficit last financial year ending March was $180 billion primarily because of slowing exports due to anaemic growth in the developed markets like US and Europe and rising imports of items like crude oil and gold.

While some measures have been taken in the Budget to cut down on gold imports, crude oil demand in a growing economy is only expected to go up. Europe has been a big spoiler for the global economy in the last 3 years and the problems there are leading to a risk aversion leading to capital moving out of riskier assets like equities to gold and dollar which are considered safer.

The perceived policy paralysis in the government is also not inspiring foreign investors leading to reduced FII and FDI inflows causing a shortage of dollars. Keeping in mind the need for getting more dollars, Finance Minister had deferred the implementation of GAAR to next year as it was spooking FIIs.

Sanjeev Zarbade, Vice-President (Private Client Group Research), Kotak Securities, said “Eurozone worries continued to impact global equities. A possible exit of Greece is resulting in rise in risk aversion. Capital is moving from risk assets to safe assets like the USD, thereby resulting in the USD rallying against global currencies. India has its own set of issues including a decelerating economic growth and stubbornly high inflation”.

The weak rupee will also hit companies which have borrowed overseas loans. Jagannadham Thunuguntla, Strategist & Head of Research, SMC Global Securities the weak rupee translates into an increased burden on the Indian companies in repaying the external commercial borrowings (ECBs). Such additional burden works out to $6.6 billion. That is, an additional burden of about Rs 35,640 crore. During the calendar year 2011, Indian corporates have raised about $30 billion of ECBs or about Rs 1.5 lakh crore.

While the RBI has been on and off trying to support the rupee, it is clearly not succeeding.