Financial reforms are like toothpaste.

We see toothpaste ads claiming that using a certain brand will give you milky white teeth in 15 days. Well, seems that financial reforms also give you a roaring economy in 2 weeks, if you believe the freeloading press that is. The Sensex has zoomed to over 19,000 today and Goldman Sachs is predicting that the rupee will reach 51 to the dollar because the Current Account Deficit will fall to 3.5% of GDP. Even the mighty Goldman Sachs maybe wrong. The rupee is already 51.71 to the dollar and the way it is going you would expect it to go to 45 in short order. So what magic did the World Famous Economist perform to bring about such wondrous improvements? He increased the pump price of diesel, cut the number of subsidised gas cylinders for each family and has allowed foreign retailers to own 51% of joint ventures in multi brand retail. Foreign companies were already allowed 100% ownership in single brand retail but companies like Adidas, Benetton and Levis are actually cutting the number of stores. So, apart from increasing inflation he has done nothing. The reason CAD has declined is because Non Resident accounts are now earning 9.5% interest allowing fantastic arbitrage opportunities to NRIs. However, higher NRI deposits means that external debt has risen to $350 billion, well above foreign exchange reserves. Another reason for dollar inflows is the recent Fed announcement of QE3 in which the Fed is going to buy $40 billion worth of mortgage backed securities every month for an indefinite period, until the unemployment situation improves. Some of this excess liquidity will come to India improving balance of payments. However, exports in July was 14% down on last year. Exports were $22.4 billion compared to $26.3 billion in 2011, imports were $37.9 billion compared to $41.1 billion in 2011 and trade deficit rose to $15.5 billion compared to $14.8 billion in 2011. The situation is similar to 2007 when excess liquidity abroad was flooding into India pushing the rupee up to 39 to the dollar, the Sensex was above 21,000 and property prices were rising daily. The Congress took advantage of those figures to spend trillions of rupees to bribe people and win the election in 2009. General elections are in 2014 so the Congress is gearing up for a similar exercise in next year's budget but this time Consumer Price Index is already above 10% and any attempt at bribery will push it out of control. We are told that a weak currency leads to inflation by increasing the cost of imports, especially oil. What no one seems to be willing to admit is that inflation will result in a weak currency. If the rupee continues to buy less and less the market will correct its price against other currencies at some point, leading to further inflation. The RBI must keep interest rates high, control inflation and not allow the rupee to appreciate beyond 50 by buying dollars from the market. That will improve foreign currency reserves. Sadly politicians are willing to destroy the country to win elections. Else how will they loot?