Indian business over-invoicing to shift money abroad, expects rupee to sharply fall: Top US-based economist

Prof Kaushik Basu, who has worked as chief economist of the World Bank, has said that, given the Indian economy’s massive size and extensive global linkages, “its growth slowdown is a source of serious concern not just domestically, but around the world”, adding gone are the days when India was considered “a poster child for political stability and economic growth among emerging economies.”

Professor of economics at Cornell University and nonresident senior fellow at the Brookings Institution, Basu, in a strongly-worded commentary, says, “Though the country had a long way to go to eradicate poverty and extreme inequality, when it came to steady GDP growth, it was among the world’s strongest and most consistent performers. Not anymore.”
Even as pointing towards how, in the second quarter of 2017, India’s growth rate fell to 5.7%, which is a “tie” with Pakistan, and “behind” China, Malaysia, and the Philippines, even Bangladesh, Basu raises the alarm that there is another potential danger looming large over the economy – sharp rise in imports.
According to the top economist, this is coming in the form of people “over-invoicing, in order to shift money abroad”, adding, “This could indicate that big traders expect a correction in the rupee’s exchange rate, at which point they plan to sell the dollars that they are now accumulating for a larger sum of rupees.”
Noting that “annual export growth has fallen in recent years to just 3%, compared to 17.8% in 2003-2008, India’s rapid-growth phase”, Basu says, this “is partly a result of a stronger rupee, which has raised the price of Indian goods in foreign markets”.
He adds, “Imports have risen sharply as well, as the rupee’s appreciation lowers the relative price of foreign goods: in the first half of this year, nominal merchandise imports grew by 28%.”
Advising Reserve Bank of India (RBI) to “lower interest rates further, thereby aligning India’s monetary policy more closely with that of the world’s other major economies”, Basu says, “While the current tendency toward very low interest rates is not ideal from a global perspective, the fact is that as long as India remains an outlier, it will encourage the so-called carry trade, which artificially drives up the rupee’s value.”
Insisting that in the short term policymakers “must address declining demand for Indian products, both among domestic consumers and in export markets”, Basu says, “All signs point to falling consumer and business spending in India. India’s index of industrial production grew by a meager 1.2% in July, compared to 4.5% a year earlier. Output of consumer durables fell by 1.3%; a year earlier, it grew by 0.2%.”
Basu believes, the “bigger challenge facing India will be to nurture and sustain rapid growth in the long run”, but regrets, “India’s investment-to-GDP ratio is now slipping, from over 35% in the last eight years to below 30% today. This can be explained partly by an increase in risk aversion among banks, which are concerned about non-performing assets. Falling business confidence may also be a factor.”
Asking the policy makers to lay “the groundwork” for long-term performance, Basu says, “Once investment picks up, India will be able to recapture its past rapid growth – and sustain it in the coming years. That outcome would benefit not just India, but the entire global economy.”