Singh Taps Curbs as Rupee Drop Fuels Stagflation Danger: Economy

India’s latest economic data and a renewed bid to pare a record current-account deficit that’s spurred a rupee slide show stagflation conditions persist almost a year after the government started a drive to revive investment.

The nation plans to curb imports of gold, silver and some non-essential items, as well as demand for crude oil, Finance Minister Palaniappan Chidambaram said in New Delhi yesterday. It will also make another push for capital inflows, including allowing state-owned financial companies to issue “quasi-sovereign” bonds to finance long-term infrastructure investment.

Eleven months since India began easing caps on foreign-direct investment and restrictions on the bond market to spur growth, data this week showed an economy struggling with falling industrial production and elevated inflation. The latest measures could generate about $11 billion of inflows and keep the current-account gap at $70 billion, or 3.7 percent of gross domestic product, in the current fiscal year, Chidambaram said.

“It shows you that the structural reforms that are necessary to bring about a sustained improvement in growth and sustained narrowing in the current-account deficit are not working fast enough,” said Leif Eskesen, chief economist for India and Southeast Asia at HSBC Holdings Plc in Singapore. “This implies that the central bank will likely have to keep its currency stabilization measures in place for a while longer.”

The government today increased the import duty on gold, to 10 percent from 8 percent. The levy on inward shipments of platinum and silver was also pushed up to 10 percent.

Rupee Defense

India raised two interest rates last month to fight a slump of about 10 percent in the rupee versus the dollar in 2013 that risks fueling inflation. Nations from Brazil to Indonesia have also boosted borrowing costs to aid currencies, as the prospect of reduced Federal Reserve monetary stimulus saps demand for assets in emerging markets.

The rupee, which reached an all-time low on Aug. 6, appreciated 0.4 percent to 61.0062 per dollar as of 2:46 p.m. in Mumbai.

Industrial production fell 2.2 percent in June from a year earlier after a revised 2.8 percent contraction the previous month, while consumer prices rose 9.64 percent year-on-year in July, government reports showed yesterday. The current-account imbalance widened to an unprecedented 4.8 percent of GDP in 2012-2013.

‘Stagflation’ Risk

India’s growth and inflation indicators show that the economy is “taking longer to come out of the stagflation-type environment,” Chetan Ahya, an economist at Morgan Stanley in Hong Kong, said in a note after the data. The recent monetary tightening and uncertain global capital-market environment could mean weak growth for at least two more quarters, he said.

“The RBI has taken a number of measures to increase the interest rate at the short end and this has contained the depreciation of the rupee to some extent,” Chidambaram told lawmakers. “However, we believe that we have to do more to contain the current-account deficit to reduce the volatility in the currency market and to stabilize the rupee.”

Rules governing overseas commercial borrowings and certain deposit programs for non-residents would be eased, and state oil businesses would raise funds from abroad, he said.

‘No Surprises’

“The government’s broad strategy throws up no surprises and is mildly disappointing, given the build-up of expectations,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. “There is no detail on sustainably lowering the current-account deficit. The real issue still remains financing the deficit.”

India, the world’s largest buyer of gold, previously increased taxes on bullion imports in January and June to tackle the shortfall. The central bank estimates the sustainable level for the deficit is 2.5 percent of GDP. Goldman Sachs Group Inc. predicts it will narrow to 4.2 percent of GDP in 2013-2014.

Another report yesterday showed the goods trade deficit was $12.3 billion in July as exports rebounded and imports dipped.

The South Asian nation’s consumer inflation is the second fastest in the Group of 20 major economies, according to data compiled by Bloomberg. A gauge using wholesale prices probably quickened to a four-month high of 5 percent in July, the median estimate in a Bloomberg survey shows before an Aug. 14 report.

The economy may expand 5.5 percent in the year through March 2014, compared with a decade-low 5 percent in the previous 12-month period, the central bank estimates.

Car Output

A moderation in domestic demand and exports has hurt output of items such as automobiles. Local passenger vehicle sales in an industry that includes companies such as Maruti Suzuki India Ltd. fell 8.3 percent in July from a year earlier.

Prime Minister Manmohan Singh’s drive to revive investment has seen the government ease caps on foreign-direct investment and loosen restrictions on inflows into the bond market since September to spur growth and avert a credit-rating downgrade.

Incoming Reserve Bank Governor Raghuram Rajan helped to spearhead the effort as the top adviser in the Finance Ministry since 2012. A former International Monetary Fund chief economist, he takes over at the head of the RBI in September.

Rajan is in a tough spot as the recent “liquidity-tightening” steps will probably have to be kept in place for longer to support the rupee, suggesting “a bigger growth sacrifice” could be necessary, HSBC’s Eskesen wrote in a note.

Elsewhere in Asia, Japan’s core machine orders fell a less-than-estimated 2.7 percent in June from the previous month, a report showed today. Philippine exports rose at the fastest pace this year in June from the same month in 2012 as shipments to Japan and China increased.

Retail sales in the U.S. probably rose 0.3 percent in July, from a 0.4 percent gain in the previous month, according to a Bloomberg survey.

Before it's here, it's on the Bloomberg Terminal.