Assistant Professor of Marketing at Warwick Business School, Sourindra Banerjee, has researched Indian business and economics, he gives the following synopsis of what is happening in the market there.
India has been ravaged by crony capitalism and corruption in the last five years. The country has always suffered from this, but with so much foreign investment now tied up in Indian financial markets it can’t get away with it any more.
In the last five years a series of corruption cases involving billions of dollars benefiting the cronies of the political class have been reported. This has battered the image of India as a reliable investment destination and has hit investor confidence, both domestic and foreign, adversely. The low investor confidence has resulted in India losing out on investment from both domestic and foreign players, which has led to less capital formation, less employment, less tax collection and less consumption. All of these have a combined effect on driving the decline of the rupee.
Also, the lack of reforms has made the Indian manufacturing sector less competitive than its counterparts in other developing countries. This lower competitiveness has hit Indian manufacturing exports and has seen a surge in the import of manufactured items, in turn increasing the current account deficit for the country. An increased current account deficit depletes India’s foreign exchange reserves and pushes the decline of the rupee further.
The turnaround of the recession-hit developed markets means investors have greater investment opportunities in Western Europe and North America. This has led to the withdrawal of investment from Indian markets and this situation has been aggravated by the tapering of quantitative easing which results in less liquidity for foreign investors and is forcing them to withdraw money from Indian markets. This too is driving the decline of the rupee.