A sweet spot, bitter round the edges.

Is India in a sweet spot, economically speaking? Figures seem to indicate that the economy is slowly getting off the floor, where the Congress had left it. In 2013 the rupee fell to 69 to the dollar when Federal Reserve Chairman, Ben Bernanke hinted at tapering the bond buying program, which came to be know as ' taper tantrum '. But now with the quantitative easing program having stopped and the Fed expected to raise interest rate by 25 basis points in September, the rupee is quite comfortable. Too comfortable, according to some. The Euro has declined by 21.30% against the dollar, the pound sterling by 6.01%, the Indonesian rupiah by 9.26%, the Brazilian real by 26.09% and even the mighty Swiss franc has fallen by 7.44% against the dollar but the rupee has barely budged with a fall of just 3.03%. The rupee fell sharply in previous dollar rallies in 1980-85, 1995-2001 and in 2008-09. This time the Reserve Bank has built up its foreign currency reserves to $353 billion, to smooth over undue volatility. This puts us in ninth spot behind the likes of China, Brazil and Russia. But is it enough? We are tempted to think that the more foreign exchange we have the better for us. But, as with everything in life, it is not that simple. The RBI has to buy dollars from the market which releases large amounts of rupees. This depresses the value of the rupee and causes inflation by increasing liquidity. The RBI has been mopping up excess money supply through open market operations. All very complicated. Some have calculated that $420 billion of reserves would provide adequate cover for any eventuality. This is comprised of $200 billion to pay for 5 months of imports, $112 billion to cover unhedged corporate debts, $85 billion to repay short term external debt and about $23 billion to cover outflow of foreign portfolio investment. Total $420 billion. Capital expenditure is increasing, which means new investment, and the government is spending more on infrastructure projects which have a wealth multiplier effect in the long term. The government is seriously clamping down on black money which will reduce inflation and increase tax collections. But in the short term it may result in a crash in real estate prices and result in a fall in consumer spending. Hindustan Unilever's earnings failed to meet market expectations and a fall in rural income means that earnings growth of companies producing consumer goods will be weak. Then there are both internal and external enemies. The opposition will not allow any bill to pass on frivolous grounds and the International Labour Organization has criticised the changes in labor laws, which are essential if manufacturing is to thrive in India. Only manufacturing can create millions of jobs for the poor. The monsoon has been very good so far, despite predictions of El Nino. Signs of spring but dark clouds just beyond the horizon. We live in hope.