What Can Bangladesh Learn from India’s Economic Woes?

Long touted as the upcoming superpower, the Indian economy has come to a sudden halt with many investors fleeing from the country of one billion.  Although many economists are now claiming to have successfully predicted India’s impending fall from grace, the fact remains that almost none had predicted the extent of the mess, including the policymakers in India. From their mistakes, what Bangladesh can learn from India?

The BRIC (Brazil, Russia, India, and China) countries looked strong in the aftermath of the financial crisis, almost to the point of invincibility. China was growing at 10%, while India was surging at a healthy pace of 8-9%.

BRIC countries were considered the engine for the world’s future growth, which eventually was expected to usher in a new economic world order. India’s assertiveness was testament to its renewed confidence, with India foraying in regional diplomatic discourse and its companies making high profile acquisitions globally. There were even talks of including India as a Security Council member. With a well established tertiary industry and a well-trained work force, the Indian economy was poised to move in only one direction; up.

The Fall of Rupee

Then something went wrong and it all came crashing down. The rupee’s value spiraled to its lowest in the last 20 years, and ebbed at 65 Indian rupees per dollar. Many find semblance of the current predicament to the 1991 crisis that India successfully tackled under the tutelage of Manmohan Singh, then Finance Minister, by opening up the economy. The current problems are more complex, as the economy is more intricately connected to the globe.

Although the main symptom happens to be the quick depreciation of the rupee, there are fundamental issues at play deeply entrenched within the economy. The current crisis seems to have stemmed from the populist measure by the government to allocate US$19bn for food subsidies to feed 800 million people.

Hot Money

Given the government borrowing nearing 7% of GDP, the move was perceived to be detrimental to fiscal disciplines and investors failed to overlook it. Some took flight from the country, moving money to other developing countries and the US, where the economic scenario had improved.

This led to a spate of depreciation, which forced the government to place restrictions on the import of gold by Indians, thus further scaring off investors who subsequently moved en masse, causing more “hot money” to flow out. As the currency depreciated further, many speculators set their eyes on the rupee, attempting to take it down further. Reserve Bank of India has been working tirelessly to stabilize the exchange rate market by engaging in open market operations. They have already increased interest rates to woo “hot money” into the country.

These policy initiatives have their shortcomings, as higher interest rates will further stifle the growth rate. The last quarterly GDP growth stood at a paltry 4.8%, and is to slump below 4% in 2014, according to BNP Paribas. The currency depreciation will further deteriorate the inflation rate, which is already touching double digits. India’s import dependence for oil will spell further trouble for the government, as it would contribute to “cost-push inflation” and further stretch government expenditure.

India’s Current Economic Woes

Several other factors have contributed to India’s current economic woes. There is inadequate infrastructure to sustain economic growth. Roads and ports are not up to the mark, while electricity shortage remains a big impediment. Policymakers have belatedly addressed the issue, allocating US$27bn in August 2013, seeking to establish power plants and other physical infrastructure.

India’s treatment of multinational companies remains arbitrary at best. The government has placed undue restrictions from time to time, changing tax regimes contrary to earlier promises. They turned down high profile multinationals such as Wal-Mart. This has negatively impacted international investors’ confidence in India. Some established names, including Nokia, have recently threatened to move their factories elsewhere.

On the flip side the current scenario of currency depreciation is favorable to export oriented firms. However, inflationary trends may erode the competitiveness gained through the depreciation. India’s way forward is unlikely to be steady. The situation may become more complicated as the national election draws near in early 2014. Although the government needs channel its attention towards stabilizing exchange rates, long term policy measures remain of paramount importance.

Implications and Lessons for Bangladesh

The Bangladeshi economy has so far remained immune from any immediate ramifications. This is largely due to its relative isolation from the international economy, save its RMG sector. However, with depreciating rupee and a relatively stable taka against the dollar, international trade may shift in India’s favor. Both India and Bangladesh are competitors in global RMG market competing for the same pie. With artificially cheaper Indian RMG products, price-sensitive international buyers may favour India over Bangladesh. Although RMG export has not dipped yet, the government and BGMEA must tread carefully to manage the US$20bn sector. A depreciating rupee may further increase imports and deteriorate the already widening trade deficit with India.

Bangladesh has successfully maintained a GDP growth rate of 6%, despite political upheaval and a sagging private sector credit growth. This in itself is an achievement when other regional players are suffering from strains on growth. However, the government must not sit idle, and must continue to invest in infrastructure development and capacity building. Although electricity generation has improved markedly, failure to start constructing Padma Bridge remains a major setback. Investment in infrastructure including existing seaports and the proposed deep-sea port in Sonadia remains imperative for long-term strategic reasons.

The government’s tussle with Grameenphone has far-reaching implications on future FDI flows. Such highhanded behavior on the part of the government is unlikely to win them much favor from international investors. Complications related to the 3G auctions are an example of the direct consequences of the tensions with GP.

Upcoming National Elections

Like India, Bangladesh’s national election is in early 2014. To this end, the government must refrain from undertaking costly short-term fiscal expenditure to rev up its support base. This is a mistake India did with food subsidies. The government should seek to finance Padma Bridge project from external sources rather than depending on budgetary allocations. A stable and reasonable budget deficit is an essential indicator of a country’s overall stability. Foreign investors tend to pay special attention to it. Hence, the government should strive to maintain a balanced and stable budget.

Overall, Bangladesh stands at a safer ground compared to India. With US$16bn in foreign currency reserves, the taka is unlikely to be challenged and will hold ground. Growth projections from multilateral agencies point to GDP growth within the range of 5.5-6% for 2014. However, the situation may reverse if the export scenario turns for the worse.

---