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Middle-class dreams deflate as rupee falls
Publication Date : 03-09-2013
India faces a long list of challenges to pull the country out of its worst financial crisis in decades
Budding engineer Neel Sharma, 25, had been looking forward to a family friend's wedding in New Zealand this month. The plunging rupee dashed those hopes. It is just too expensive to travel now.
He had saved the rupee equivalent of US$5,000 but the value of that has now shrunk by US$700, says the intern with Indian power producer Lanco. "We'll watch the wedding on Skype."
The rupee's nosedive has made many in India fearful of a full-blown crisis. People like Sharma, who represent its 300-million-strong middleclass, are already making lifestyle adjustments. Most have cut luxuries such as eating out and holidaying abroad. Spending on such non-essentials is down by about 20 per cent, and the eroding rupee has meant redrawing all plans involving spending in foreign currencies, such as studying abroad.
Take Souryajit Ray, an executive at telecom firm Aircel, who falls in the middle-class band of US$4,000 to US$10,000 yearly income earners.
Rising food prices have eaten into his disposable income, forcing him to delay plans to buy a laptop and take a holiday. "(Cooking) oil prices have increased by 10 rupees to 15 rupees a litre. Petrol prices have gone up eight to nine rupees a litre over the past two months," he says.
As the rupee heads towards 70 to the US dollar, almost 15 per cent cheaper than its value just a month ago, the impact is being immediately felt in sectors depending largely on middle-class aspirations such as the automobile and travel industries.
Car sales fell by an annual 7.4 per cent in July.
Retail prices of almost all everyday goods and services have gone up, eroding purchasing power and triggering a slowdown in the domestic demand-driven economy. A movie ticket in New Delhi costs about 375 rupees, up from about 300 to 325 rupees six months ago, and a dinner at an average restaurant, which used to cost about 800 to 1,000 rupees, now costs 200 to 300 rupees more.
Prices of consumer goods which are imported or use imported raw materials such as cosmetics are rising. Consumer durables, too, are more expensive by about 7 per cent, industry figures show.
"Whenever there is a crisis, it's the salaried class like us which gets hit," says Deepak Gupta, a clerk. "Our income is fixed and if the value of that income keeps going down, how are we to survive?"
There are two main reasons for the rupee's slide. Investors are pulling out money from emerging markets such as India to invest in an improving US economy. A bigger reason, however, is the mismanagement of the economy that has led to high budget and trade deficits and high inflation.
Most economists agree it is not a full-blown crisis yet. The rural economy remains cushioned by past years of massive public spending, good harvests this season and incomes generated by farmland sales to industry. And India's poorest do not travel or spend on non-essentials.
Still, the sinking rupee is not just about deflated middle-class aspirations. If inflation remains high, as it does now at about an annual 6 per cent, it will slow the wheels of growth further from the current decade-low rate of 5 per cent. That, in turn, will spur layoffs or, at least , delay the creation of new jobs needed to absorb 100 million people expected to join the workforce in the next 10 years.