Good governance is a key to sound economy

India’s economy is crumbling by the day. The Indian currency, rupee, has hit a record low of 65 against the U.S. dollar in the past few days and the plunge continues to the extent that Deutsche Bank has claimed that rupee may tumble to as low as 70 in the coming months.

But the situation is not as worse as the way it was in 2011. In the year 2011, the rupee went from  44.80 to 54.20 in a few months. This means that the rupee almost fell down to over 20 percent against the dollar in a matter of few months; whereas, this time around, the decline in rupee is around only 10 percent (from June till now).

There was no hue and cry back then.  But the gloom and doom overspread in the media and public debate in the country over the plummet in the rupee is hard to justify. World Bank chief economist Kaushik Basu who is also a former chief economic adviser to the Indian government said on this issue that the current situation is not as nearly as bad as very often being reflected in the headlines.

The fear which has grown into the minds of the people regarding the fall of rupee is mainly due to lack of confidence in the government. The economy is crashing down, the market is terribly unstable and the government has done little to improvise the situation.

The scenario relating to economy hasn’t changed much in the past few months.  Food inflation is high,  the current account deficit (CAD) is widening, Gross domestic product (GDP) growth is low, imports are ballooning, the bulk of mega projects are yet to take off or are moving slowly.

The main problem with Indian economy is that our imports are way more than our exports, due to which the current account deficit has been burgeoning day by day. In such case, the weakening of rupee should be perceived as a great opportunity to produce those goods in the country which are now being imported. This shall be achieved by strengthening the manufacturing sector.

The government has a decisive role to play in boosting the economy. The RBI and the Finance Ministry lack co-ordination which has led to further disintegration of the economy. Recently, Finance Minister blamed the RBI for the predicament of the economy due to its tight monetary policy (high interest rates). RBI governor D. Subbarao backlashed at Chidambaram saying that the RBI is as committed to growth as it is to controlling inflation.

Prime Minister Manmohan Singh asserted that there is no throwback to the 1991 economic crisis, even if rupee is plunging. But back in 1991, due to the introduction of the ‘Foreign Economic Policy’, there was a way out of the catastrophe then.

Kaushik Basu has said that there is no substitute for ‘good governance, improved bureaucratic efficiency and better business ethos to drive growth’. Hence, in order to regain people’s faith in the system, the government needs to take stern steps and decisions and devise plans and policies accordingly. All hopes are pinned on Raghuram Rajan to revive the economy, when he joins office as the RBI governor next month.