Back to square one

The government has imposed a ban on import of Gold coins and reduced the external remittance to $75000 from $200000. It is going back to the erstwhile Capital controls before 1991-92. While these measures are welcome in view of Current Account deficit , these measures are only short term medicine. The real culprit is Diesel decontrolling and kerosene subsidy which I mentioned is not likely to happen before May 2014 or after the general elections.

Mr. Manmohan Singh said in the independence day speech that the phase of slow growth will not last long. There was no mention of the Current Account Deficit or the excess fiscal imprudence.  That was very much along the expected lines. Meanwhile for the time being the government has stopped the rupee slide in the markets. But how long can it support the rupee which is going against the exporters is one which needs to be seen. The magical mark the RBI waited to act looks like 61 to the dollar but does the RBI has the resources to hold it for long (meaning the General elections next year at that point needs to be seen).

The new Governor of RBI has his task cut out as there will be a clamour for reducing the interest rates to boost growth. How independent the RBI Governor is needs to be seen as there is likely to be an acid test very soon.  If he reduces the rates now he can show growth within the next 6 months and that is what the government wants. But that will go against the prescription that the Doctor ordered( meaning long term pain over short term relief).

The petroleum minister seems to indicate that the Government is looking at a one time increase in diesel prices. This will be a welcome move if the Government has the courage to bite the bullet. As usual there will be a call for rollback of the prices if done and there will be a minor price reduction that will follow (that is Politics Indian Style).