India's New Central Banker Steps Into A Perfect Storm
Raghuram Rajan, the new governor of India's central bank, swept into office this week infusing a sense of optimism.
He announced hard-headed measures Wednesday that remove uncertainty that has characterized the Reserve Bank of India's moves.
By Friday, Indian equities and the rupee were clawing back.
But analysts say the exuberance — and honeymoon with the suave MIT-trained economist — is unlikely to last.
After decadelong high growth rates, India is now the sick man of Asia.
Growth has crashed to a four-year low. The rupee has plunged 16 percent since June, driving up the cost of imports and threatening to widen India's massive current account deficit.
Rahul Kacker owns a factory that makes car components. His business has been hit by the economic slowdown.
Rahul Kacker is alarmed over the slide in the fortunes of Asia's third-largest economy. Sales at his auto parts manufacturing business are down 30 percent since July. That translates into lost sales of $200,000 a month.
"Smaller companies like mine get into a cash flow crisis," Kacker says, adding: "If the scenario goes on like this, soon we will" have a cash-flow crisis.
The downturn is especially startling because his company has seen 15 percent annual growth for the past decade.
"It's a rude shock," Kacker says as he strolls through his factory in Gurgaon, the satellite city of Delhi.
The factory pumps out components for automobiles — mostly molded plastics fashioned into glove compartments, grills and lighting fixtures.
Kacker, a mechanical engineer who once worked for Maruti-Suzuki, now sells parts to India's biggest carmaker. His customers also include Tata Motors and Honda Japan.
Car Sales
Kacker is worried that passenger car sales in India have sputtered, declining by more than 20 percent since the start of the year, according to the Society of Indian Automobile Manufacturers.
Deepak Kapoor, the managing director of the Marketing Times Maruti-Suzuki dealership in Delhi, says high interest rates, rising fuels prices — diesel's gone up eight times this year — and uncertainty in the broader economy has knocked a third of his customers out of the showroom.
"Now that the number game has dried," he says, "that is really hitting our bottom line."
So much so, Kapoor says, that if he previously converted 20 out of 100 customers into buyers, he now must convert 50 out of the 70 who walk in.
"If we cannot covert that 50, we will not make up for the 30 percent dip" in customers, he says.
India's falling rupee is also driving up business costs. Take petroleum, the basis for Kacker's plastic car parts. With the rupee losing purchasing power, the cost of importing oil, priced in dollars, has become much more expensive.
One reason for the rupee sell-off is the U.S. Federal Reserve's anticipated tighter monetary policy. It has investors pulling money out of emerging markets such as India while a resurgent American economy draws capital back to the U.S.
Economist Arvind Subramanian says with a declining rupee all foreign goods are now going to be more expensive, driving up inflation in India. He says if the rupee depreciates by 10 percent, the rule of thumb is that Indian prices will be more expensive by about 1 percent.
"So if the inflation rate is now 10 percent in India," Subramanian says, "a 10 percent depreciation [in the rupee] would make Indian inflation 11 percent, and that's a cost to consumers."
A Problem To Tear Up About
Nothing sums up food inflation like the humble onion, and consumers are tearing up over the price. Onions recently skyrocketed to as high as 80 rupees a kilo (or 57 cents a pound), exorbitant in a country where 1 in 3 people lives on less than $1 a day.
While shopping at a vegetable stand, wedding videographer Mohammad Saleem said his financial condition now is "earning and burning."
Onions are now selling for 60 rupees a kilo (40 cents a pound) in central Delhi's Kotla market, where Mohammad Saleem captured the public mood as he muttered about pitching a few at politicians.
"I'm angry but what [can] I do?" he says. "Without onion, I'm not cooking my Indian food."
Saleem, a wedding videographer, says that with his disposable income declining, his savings are drying up. It's a lot different, he says, from 10 years ago.
"My bank account is zero and income source is not very sufficient, so I'm not saving a single penny — daily earning, daily burning," he says with a laugh.
From the man on the street to the owners of business, everyone agrees corruption is burning the Indian economy. Kacker, the car parts maker, says corrupt officials from local agencies routinely hit him up for what he wryly calls their "consultancy fee."
And what does he get for that "consultancy"?
"It's for the peace of my company to keep running," he says. "Nobody's exempt but nobody specifies it in public. It's a plague. It's all over the country, so people are really fed up."
Gulal Yadav, a vendor, said, "There ought to be a change in government because everything's too expensive."
Subramanian, the economist, says corruption, poor infrastructure and burdensome regulation have all depressed private investment. He says it's only appropriate that Indian assets as well as the rupee be re-priced.
But Rajan, the new of head of the Reserve Bank of India, said at his first news conference this week that the "doom and gloom" was overdone and that he would "not use the word crisis and India in the same breath."
"Yes, we are going through challenging times, what country isn't?" he said. "But we will overcome these challenges."
The challenge for the government will be remaining in power after next year's election. There is deep frustration over the growing economic hardships that are not likely to end soon. Vegetable vendor Gulal Yadav wants Sonia Gandhi's Congress Party, which heads the ruling coalition, out.
"I think it's possible," Yadav says, "that this entire economic situation can cause a change in government, and it's time for a change."
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Transcript
STEVE INSKEEP, HOST:
India's economy is a mess. For years, the world's largest democracy enjoyed incredible growth. It was a star of the developing world. Not this year. Growth has slowed down, and India's currency, the rupee, has fallen sharply since June. That means India's imports have become far more expensive. Yesterday, a celebrated economist took over the Reserve Bank of India, and he has a lot of work to do, as you can learn from Indian businesspeople who spoke to NPR's Julie McCarthy.
JULIE MCCARTHY, BYLINE: Rahul Kacker is alarmed over the slide in India's fortunes. Sales at his auto parts manufacturing business are down 30 percent since July. That translates into lost sales of $200,000 a month.
RAHUL KACKER: Smaller companies like mine get into a cash-flow crisis.
MCCARTHY: Are you in a cash flow crisis?
KACKER: Not at present, but if the scenario goes on like this, soon we will be.
MCCARTHY: The downturn is especially startling, because his company has seen 15 percent annual growth for the past 10 years.
KACKER: It's a rude shock. Yeah.
(SOUNDBITE OF MACHINERY RUNNING)
MCCARTHY: Kacker's factory, just outside Delhi, pumps our components for automobiles, mostly molded plastics fashioned into glove compartments, grills and car door pockets. The injection molding machines on this factory floor form liquid polymers into more elaborate components.
KACKER: This injection molding is a process by which we mold the polymers into a particular shape. This is a back lamp cover.
MCCARTHY: And where are these going?
KACKER: They're going to Maruti Suzuki.
MCCARTHY: Kacker's customers are some of India's biggest carmakers. Besides Maruti Suzuki, there's Tata Motors and Honda Japan. But automobile sales in India are in a retreat, down by some 24 percent since January, says the Society of Indian Automobile Manufacturers.
(SOUNDBITE OF DOOR CLOSING)
UNIDENTIFIED WOMAN #1: (Foreign language spoken)
MCCARTHY: At a Maruti Suzuki dealership back in Delhi, a spokeswoman makes a hard pitch to a prospective buyer. But manager Deepak Kapoor says high interest rates, rising fuel prices - diesel's gone up eight times this year - and uncertainty in the broader economy has knocked a third of his customers out of the showroom.
DEEPAK KAPOOR: So, now the numbers game has dried, and that is really hitting our bottom line.
MCCARTHY: He says if he converted 20 of 100 customers into buyers before, he now must convert 50 out of the 70 who walk in.
KAPOOR: If you will not convert that 50, then we will not make up for this 30 percent dip.
MCCARTHY: India's falling rupee is also driving up business costs. In Rahul Kacker's case, the plastics used to mold his car parts are made from petroleum. With the rupee losing purchasing power, the cost of importing petroleum - priced in dollars - has just become a lot more expensive. One reason for the rupee sell-off is the U.S. Federal Reserves anticipated tighter monetary policy. It has investors pulling money out of emergency markets, such as India, while a resurgent American economy draws capital back to the U.S. With the rupee down, economist Arvind Subramanian says all foreign goods are going to be more expensive, and that is going to drive up inflation in India.
ARVIND SUBRAMANIAN: And the kind of rule of thumb is that if the rupee depreciates by 10 percent, you know, Indian prices will be more expensive by about 1 more percent. You know, if the inflation rate is now 10 percent in India, a 10 percent depreciation will make Indian inflation 11 percent. And that's a cost to consumers.
MCCARTHY: Nothing sums up food inflation like the humble onion, and consumers are tearing over the price.
(SOUNDBITE OF CLANGING)
MCCARTHY: Onions recently skyrocketed to 80 rupees, or $1.25, per kilo, exorbitant in a country where one in three people lives on less than a dollar a day. Onions were selling in central Delhi's Kotla Market for 60 rupees a kilo, where Mohammad Saleem muttered about pitching a few at politicians. People are angry about the price of onions. Are you angry?
MOHAMMAD SALEEM: I'm angry, but what I do?
MCCARTHY: You have to cook with them.
(LAUGHTER)
SALEEM: Without the onion, I am not cooking my Indian food.
MCCARTHY: Saleem, a wedding videographer, says with his disposable income declining, his savings have dried up.
SALEEM: My bank account is zero, and income is sort of not very sufficient, so I'm not saving a single penny.
MCCARTHY: That's a big change for India, isn't it?
SALEEM: In India, yes. In 10 years, very critical condition. But like me, daily earning, daily burning. You know?
MCCARTHY: Daily earning, daily burning.
(LAUGHTER)
SALEEM: Yes. Simple language.
MCCARTHY: From the man on the street to business owners, everyone agrees that corruption is burning the Indian economy. Car parts maker Rahul Kacker says corrupt officials from local agencies hit him up for what he wryly calls their fee.
KACKER: Consultancy.
MCCARTHY: And what does he get for that consultancy?
KACKER: It's for the peace of my company to keep running, you know.
MCCARTHY: Are all of your colleagues having to do this? Is anybody exempt?
KACKER: No. Nobody's exempt, but nobody specifies it, you know, in public. It's a plague. It's all over the country. So, people are very fed up.
MCCARTHY: Economist Subramanian says corruption, poor infrastructure and burdensome regulation have all depressed private investment. He says it's only appropriate that Indian assets, as well as the rupee, be re-priced. The markets surged yesterday after Raghuram Rajan, the suave new governor of India's Central Bank, took charge outlining reforms. The MIT-trained economist, who famously predicted the 2008 financial crisis, aims to stabilize the rupee and restore investor confidence. But Rajan says he would not use the words crisis and India in the same breath.
RAGHURAM RAJAN: They're a very stable, very solid economy. There's no reason to be down. Yes, we're going through challenging times. Which country is not? But we will overcome these challenges.
MCCARTHY: The challenge for the government will be remaining in power after next year's election. There is deep frustration over the growing economic hardships that are not likely to end soon. Vegetable vendor Gulal Yadaz wants the Congress part of Sonia Gandhi out.
GULAL YADAZ: (Foreign language spoken)
MCCARTHY: I think it's possible, he says, that this entire economic situation can cause a change in government. And it's time for a change, he says. Julie McCarthy, NPR News, New Delhi. Transcript provided by NPR, Copyright NPR.
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