On Dec.5, the Times of India carried a Reuters article that stated: “India may face its worst financial crisis in decades if it fails to stem a slide in the rupee, leaving the Reserve Bank of India (RBI) with a difficult choice over how to make best use of its limited reserves to maintain the confidence of foreign investors.” The article centered on the collapsing rupee, but that is only one of the negative outcomes of Manmohan Singh’s economics, which has been pursued mindlessly over the years while doling out phony promises of making India economically strong.

A three-chapter Economics course

The ongoing loss of rupee value is merely a symptom of the wide-ranging economic weaknesses that have developed in India. It also exposes Manmohan Singh’s wrong interpretation of the world financial situation. By itself, the weakening rupee will exacerbate the problems of the Indian economy, such as adding fuel to the existing high level of inflation. India imports about 70 percent of its crude oil requirements from abroad. That means New Delhi will have to pay more in rupee terms to bring ashore the oil. If the government succeeds in passing the higher oil cost to the customers — which could be political suicide for the teetering coalition regime that Manmohan Singh presides over — it will add to the inflation. If not, the ruling United Progressive Alliance (UPA) government will be facing higher fiscal deficits that would, in turn, drive down the value of the rupee further.

Crude oil is just one item, albeit the largest. But a falling rupee value will make all imported items more dear — raw materials, intermediate goods and finished products — adding to inflation. The declining value of the rupee will prompt foreign institutional investors (FIIs), fearing loss of value to their investments, to withdraw money from the Indian equity market.

India’s competitiveness problem is showing up in its widening current account deficit, to more than 4 percent of GDP in the July-September quarter, according to Goldman Sachs. That gap, economists warn, is being filled in by flows of capital from the rest of the world, and not necessarily the good kind. As one analyst pointed out, all of this is financed increasingly with foreign capital inflows, of which a sharply declining portion (as competitiveness drops) is from foreign direct investment (FDI), and remittances — which means that balancing this untenable position is more and more dependent on hot money.

The chimera of oodles of FDI from the dying Eurozone

The rupee has dropped almost 19 percent since last July. Despite short-term fixes proposed by the world’s big six central banks to ease dollar funding strains, analysts expect that the rupee will continue its southward journey and no end is in sight. As Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai, told the Times of India: “The Indian currency will be the first casualty of a deterioration in the euro zone crisis. Risk appetite will obviously collapse, and gradually the currency crisis is likely to take the shape of a balance of payments crisis.”

Foreign portfolio investors have sold a net $50 million worth of equities so far in 2011, in sharp contrast to the $29 billion they invested in 2010, data from the Securities and Exchange Board of India’s website shows. In November alone, foreign funds pulled $661 million out of Indian stocks. “The Indian economy is one of the most vulnerable to liquidity shocks in the region, not helped the least by deficits in its key balances,” said Radhika Rao, an economist with Forecast PTE in Singapore, the Times of India reports.

In a recent detailed and insightful article, “For Whom the Rupee Falls?,” Virendra Parikh, executive editor of Corporate India, pointed out that the rupee’s fortune is now heavily tied with the euro. “Everything that weakens euro strengthens, by default as it were, the dollar. And whatever strengthens the dollar automatically weakens the rupee, as also many other currencies,” Parikh writes.

What is evident, and sad, is that the Manmohan-Montek duo still goes by the briefings sent to them from Washington and Brussels. The duo fails to comprehend that the Eurozone is in its last gasp. Eurozone growth flattened at 0.2 percent in the third quarter — perhaps a rosy picture as the
actual numbers could be negative, according to official EU data. The 17-nation bloc’s economic expansion between July and September was pulled up by growth rates of 0.5 percent in Germany and 0.4 percent in France, according to figures from Eurostat data agency. Four countries experienced contractions in the third quarter, with falls of 0.8 percent in Cyprus, 0.4 percent in Portugal, 0.3 percent in the Netherlands and 0.2 percent in Slovenia. Belgium and Spain saw zero growth.

In other words, the Eurozone is a world of living dead. The Eurozone may not collapse tomorrow; but it cannot be reformed. Banks are kept alive by gigantic quantities of electronically generated cash, but they do not lend; homeowners are sitting in homes worth no more than they paid for them, but are able to stay put because interest rates are so low and lenders have no desire to crystallize losses, and because policy that is neither one thing nor the other, Britain’s The Guardian pointed out on Dec. 6.

What that means is that FDI is not going to flow in like monsoon water, as Manmohan Singh told the Indian audience. His earlier silly statements, like the one about $1000 billion in FDI being used to build up India’s infrastructure, now draw guffaws. As Virendra Parikh observes: “… FDI continued to be a concern with inflows declining to $2.5 billion from $7.5 billion a year ago, owing to lower investment in construction, real estate, business and financial services.”

“India’s external debt profile also has worsened,” Parikh continues. “The overall quantum of the external debt stood at $295.8 billion at the end of September 2010, up from $262.3 billion at the end of March. Short-term debt, at $66 billion, now comprises 22.3 per cent of the total, compared with 20 percent at the end of March. The other important debt sustainability ratio, the ratio of concessional debt to total debt, also deteriorated. It fell to 15.6 percent from 16.7 percent over the review period. And after a gap of seven years, India’s foreign exchange reserves have slipped below total external debt. The country’s forex reserves worked out to be 99 percent of its debt at the end of September 2010, down from 138 per cent in March 2009.”

Intellectually bankrupt Manmohan Singh

But Manmohan Singh, intellectually bankrupt and politically paralyzed, knows nothing better. Recently he tried to push another gimmick, trying to get some FDI by introducing a bill that would provide a wider playing field for foreign retailers. The bill has been blocked in the parliament by the opposition and even by some of the UPA’s key coalition partners. UPA spokesmen tried to cajole the opposition by acknowledging that FDI in multi-brand retail may not be the sole pep pill the economy needs, but that it should be seen as a signal epitomizing a “now or never” moment to snap out of the slowing down growth. This approach, however, has failed to change the mood of parliamentarians.

Out of sheer desperation, Manmohan Singh delivered a blunt warning at the start of the Parliament’s winter session: “As you all know, the global economy is facing serious difficulties, and if we don’t manage our affairs well we can also go down.” Someone should have told him that with him at the helm, the country will be surely going down.

The real problem with Manmohan Singh is that he does not have the capability to do what needs to be done now. He is not a nation-builder. He does not have the wherewithal to realize that the strength of India lies in building up its physical economy that could provide a respectable living condition — not just to a handful of Indians, but to the vast majority of hundreds of millions who live in utter poverty.

Consider two sectors of India’s physical economy, and it will become clear that during his seven years of reign, Manmohan Singh has done very little. These two sectors are power and agriculture. As of now, take or leave a few thousand megawatts, India’s installed capacity of electrical power generation remains abysmally low, at 154,000 MW. This is not the forum to compare India’s power generation capacity with that of China’s; but nonetheless, it must be noted that China’s installed capacity is now well over 950,000 MW, and China is planning to add 500 MW every week. India has also announced that it will be installing 200,000 MW of power over the next 10 years. That works out to adding approximately 400 MW a week. In the case of China, we have seen that it does implement what it proposes, and more; but in the case of India, it never happens. It does not happen because the necessary groundwork to achieve such objectives has not been laid.

Take, for instance, what the Indian think-tank, the Centre for Monitoring the Indian Economy (CMIE), published in its report on India’s power generation capacity in fiscal year 2009. In that year, India’s power generating capacity went up by about 3,500 MW; but the capacity addition was
dismal, as it was barely 32 percent of the target of 11,061 MW that had been set for the period.

Since we are discussing power, it needs to be pointed out that despite projections, and the expenditure of oodles of rupees, over half of rural households (56%) in India are without electricity (source: Indian Ministry of Power’s brochure on Rajiv Gandhi Grameen Vidyutkaran Yojana, or rural electrification). “Over half of rural households” means almost 500 million people. In addition to the health problems that such a condition creates, New Delhi is basically cutting off its own feet by not allowing the next generation of Indians, who will have to become the leaders of the nation, to receive the absolute necessity: an adequate education.

New Delhi says it has targeted an investment of $350 billion to $400 billion in the power sector during the five years ending March 2017. But here is the caveat: Half of this expenditure, between the years 2012 and 2017, is expected to come from the private sector. It is difficult to assume that India’s major business houses and corporations, who will have the capability to assemble the required investment, will spend it providing electricity to the poor and hapless instead of using it to enhance their manufacturing or service capacity.

India’s agricultural sector, where almost 60 percent of Indians are rooted, has been subject to gross neglect for decades. Even if one acknowledges that the terrific food price rises have had more to do with the mismanagement and inadequate distribution system that have become the hallmark
of this administration, the fact remains that India’s agricultural productivity is well below what it should be. The primary responsibility for that lies with one administration after another. It was expected that the UPA, under Manmohan Singh, with the financial solvency it enjoyed (by contrast with previous administrations), would focus on improving India’s agricultural sector. That task involved water storage, water management, power, fertilizer, etc. During these seven years of the Manmohan Singh Raj, however, nothing has been done to alleviate the threat that India’s agricultural sector faces.

Is Manmohan Singh anti-Agriculture?

In his analytical piece, “India’s Farming Failure – Analysis,” Sarosh Bana, a research scholar with the Hawaii-based East-West Center, pointed out last June that India’s failure in agriculture is coming under increased scrutiny as soaring food price inflation ravages the common man and cripples household incomes.

The problem is as much a matter of a shortfall as it is supply and distribution bottlenecks, Bana noted. Simple arithmetic dictates that if two decades ago, an output of 176.39 million tons fed, or nearly did, a population of 849.75 million, the present numbers of 1.2 billion would need yields of at least 250 million tons. In 2010-2011foodgrain production rose to 232.07 million tons — almost 18 tons short of what is needed.

The 1.42 percent compound annual growth rate (CAGR) in foodgrains has trailed behind the 1.66 percent CAGR of the population. Oilseeds have trundled along at 1.14 percent, with pulses, the staple for a large cross-section of the population, actually dipping 0.23 percent.

Indian farmers are vulnerable because of two primary factors. One relates to their small holdings, which tie them into a low-income trap, restraining any credible investment of their income or surplus in land productivity. Secondly, 60 percent of agriculture is still dependent on the rains; if the rains fail or there are unfavorable variations in rain or other climatic factors, then crops suffer.

Bana paints a stark picture. India has no shortage of arable land, or of water. Almost half —159 million hectares (mha), or 397 million acres — of India’s territorial area of 328 mha (820 million acres) is arable, the largest after the United States’ 167 mha (417.5 million acres). But while 48.5 percent of India’s land is cultivable, in the US it is only 18.2 percent; in China, 16.13 per cent; and in Brazil, 7.82 percent.

Yet the yield of paddy in India is just 3,303 kg per hectare (2.5 acres) compared to China’s 6,422 kg, Brazil’s 3,826 kg and the world average of 4,233 kg. India’s wheat yields are better at 2,704 kg compared with Canada’s 2,322 kg, the America’s 2,705 kg and the world’s 2,829 kg. In sugarcane, Indian yields are 72,555 kg per hectare, while those in Egypt are 119,557 kg; Guatemala, 88,630 kg; and globally, 69,998 kg. One does not have to seek far to understand why Indian agriculture is lagging so far behind.

Though India’s economy boasts of a 7.5 to 9.6 percent growth rate over the last few years (though it is now in decline), agricultural growth has foundered at 3 percent, at times a little above that, often below, but largely short of the targeted 4 percent all that while. In 2006, pointing to a “crisis of stagnation in agriculture,” the Planning Commission had postulated putting agriculture on a growth path of 4 percent for the ongoing 11th Five Year Plan (2007-2012). Urging a ‘new deal’ that would kindle ‘hope’ for farming, the Commission prescribed such growth to be attained through spurring demand for farm produce matched with the supply-side response based on productivity improvements. But the directionless Manmohan Singh has no clue what to do to improve this sector of the physical economy.

It is to be noted that those two physical economy sectors are not the only ones that have been neglected by the UPA, keeping the country weak and devoid of a stable future. India’s railways, unlike China’s, have remained archaic. No modernization has been done. According to Manmohan Singh, all this will be accomplished when the foreigners send hundreds of billions of FDI.

When is that going to be, Mr. Prime Minister? If you do not have an answer, it is time to step down and spare Indians further pain.

The author is South Asian Analyst at Executive Intelligence Review; the views expressed are personal