Just do it

Begin by admitting that the problem lies not in Greece but at home

It is hard to be dispassionate about the rupee. Even Miss Prism warned Cecily not to read the chapter on the "Fall of the Rupee", as it was "too sensational" (Oscar Wilde's The Importance of Being Earnest). But here goes my attempt.

India's woes over the last two years, for the most part, may be traced back to one thing: weak policy. The slowing growth, declining corporate investment, high and rising inflation, and now the sliding rupee, stem from the erosion of investor confidence in India's policies. History is replete with countries that have grown at a frenetic pace for a few years, promising to reach escape velocity, only to stutter thereafter. What began as a cyclical slowdown in mid-2008 is now threatening to become a structural malaise.

A lot has been said and written about policy paralysis. A lot has been blamed on the political quagmire the ruling coalition is in and its travails with recalcitrant partners. But one has a sneaking suspicion that, at least on macroeconomic policies, the problem is not political constraints. Rather, it is the insistence of the authorities on blaming global conditions for the mess at home rather than acknowledging that running loose monetary and fiscal policies for three straight years almost always turns inflation rabid and pushes the exchange rate into a free fall.

The authorities have already got the inflation dynamics terribly wrong for the last two years by insisting that it is all because of supply side problems that will go away soon enough. It hasn't and it won't.

The RBI's experimental medicine of cutting rates in April rested on a big gamble. India's growth rate in the December quarter was 6.1 per cent. The RBI expects growth to rise to average 7.3 per cent this fiscal year, but expects inflation to remain in the 6-7 per cent range. And this is based on a belief that, although India's "potential" growth has declined as the global environment has turned hostile, it is still above 7.3 per cent such that capacity constraints in India will slacken and manufacturers will find it difficult to raise prices.

... contd.

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