Corruption at the root of India's currency slide

20 August 2013

Sourindra Banerjee

Assistant Professor Sourindra Banerjee believes cronyism and corruption are playing a big part in the panic surrounding the Indian economy with the rupee tumbling to an all-time low.

The rupee has slumped 12 per cent against the US dollar this year, hitting 63.2 on August 19 as investors pull out of India causing more turmoil in other emerging markets.

Dr Banerjee, who is Assistant Professor of Marketing at Warwick Business School, believes the  downward spiral of the rupee is a symptom of a much deeper malaise in the Indian economy, which the Government has failed to stamp out.

“India has been ravaged by crony capitalism and corruption in the last five years,” said Dr Banerjee, who grew up in Kolkata. “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 anymore.

“In the last five years a series of corruption cases involving of 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.”

With the US and other developed economies coming out of recession Dr Banerjee feels many investors are also transferring their money to the opportunities in these markets.

“Since the financial crisis in 2008 Indian markets have had greater focus on attracting short-term money from foreign institutional investors (FIIs),” said Dr Banerjee. “This short term money was available in Indian markets because FIIs had less investment opportunities in the developed markets of Western Europe and North America. Moreover, short-term money became more easily available because of quantitative easing in the developed markets.

“But, with the turnaround of the recession-hit developed markets, FIIs 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 with FIIs and is forcing them to withdraw money from Indian markets. This too is driving the decline of the rupee.”

Dr Banerjee also believes the Indian manufacturing sector, once the heartbeat of its expanding economy, is suffering from competition from other developing markets with the Government offering little support.

“The lack of reforms, which has been termed by the media as ‘policy paralysis’, has made the Indian manufacturing sector less competitive than its counterparts in other developing countries,” said Dr Banerjee. “This lower competitiveness has hit Indian manufacturing exports and has surged 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.”

See this article featured in the New York TimesReuters, City A.M. and WSJ India      

Dr Sourindra Banerjee teaches Global Branding on MSc Marketing & Strategy and MSc Business, where he also lectures in Strategic Marketing. On Warwick Business School's undergraduate courses Dr Banerjee teaches International Marketing.

Join the conversation

WBS on social media