More Rupee Crashes in future as FDI Inflows Stall

Posco, the world’s third-largest steelmaker, took seven years to gain permission to build a mill in India, only to have the environmental approval suspended by a tribunal in March.

Bahrain Telecommunications Co. (BATELCO) may sympathize after selling its share of mobile-phone operator STel Pvt. following the Indian Supreme Court’s revocation of 122 licenses in a corruption probe. Star India Pvt. Ltd., a unit of New York-based News Corp., waited even longer than Posco, finally exiting an eight-year television channel venture after the government failed to relax rules on news media ownership.

The reversals reflect policy paralysis in Prime Minister Manmohan Singh’s administration that leaves India risking deeper damage from any global crisis now than it experienced during the 2008-09 turmoil. A Greek exit from the euro could see growth in Asia’s third-largest economy careen to a rate unseen in a decade, according to Bank of America Merrill Lynch. Morgan Stanley sees 59 percent odds that the rupee, already Asia’s worst performer in the past year, will weaken further against the dollar.

Growth Weakens

Slowing exports contributed to gross domestic product growth holding at the weakest pace in almost three years in the three months ended March, a government report may show today. GDP rose 6.1 percent from a year before, according to the median estimate of 31 economists in a News survey, the same as the previous quarter. India averaged 8.6 percent annual expansion over the six fiscal years to March 2011.

Overseas investors’ disenchantment makes it tougher for India to lure enough foreign currency at current exchange rates to pay for its excess of imports. India has foregone potential investment from overseas insurers, pension funds and retailers including Wal-Mart Stores Inc. in the past year. Singh’s efforts to lift barriers were rejected by his coalition allies.

The gap in India’s current account, the broadest measure of trade, is forecast at 3.23 percent of GDP this year, its second-worst reading in International Monetary Fund data back to 1980. That would exceed the shortfall Singh contended with as finance minister in 1991, when India was on the brink of default on $84 billion of overseas debt.

Rupee Risk

The rupee has tumbled 20 percent in the past year, the most among 11 Asian currencies tracked by Bloomberg, and reached a record low against the dollar on May 24. It was at 56.2325 per dollar yesterday in Mumbai. Morgan Stanley’s “FX probability analyzer” on May 30 estimated a 59 percent chance it will reach 57 in the coming three months, with an 18 percent risk of hitting 60.

Six-Year Wait

The slowdown in investment is compounded by difficulties companies face in getting government approvals. ArcelorMittal, the world’s largest steelmaker, has waited more than six years to get land for projects. Last month, the Luxembourg-based company’s India-born Chief Executive Officer Lakshmi Mittal called for greater transparency in mining-rights allocation.

A parliamentary committee in India proposed banning land purchases by the government on behalf of private companies, making it harder to acquire sites. Posco (005490) has been trying to build its $12 billion steel mill in eastern Odisha state since 2005. Posco spokesman Vikas Saran declined to comment on the delay.