Year 2012 is quite unlike 1991, says Subbarao

A ballooning fiscal deficit, historical-high current account deficit, precarious balance of payments situation….

Comparisons abound, but the Indian economy of year 2012 is quite unlike 1991 when it had threatened to default, says Reserve Bank Governor D. Subbarao.

EXCHANGE RATE

Delivering a lecture hosted by Kerala Planning Board here, he said that the exchange rate has since come to be market-determined.

The forex reserves position is much stronger. There is a sophisticated financial market of reasonable depth where there was practically none.

Last but not least, there is a booming services sector, constituting as much as 65 per cent of the GDP.

But Subbarao pin-pointed areas where the country lags and needs to urgently get its act together, 21 years on.

These are de-bottlenecking of infrastructure; skill upgradation; fiscal consolidation; governance reforms at the centre and states; and managing challenges of federalism.

PRE-CRISIS RATE

Pre-crisis growth rate of 8.7 per cent during 2003-2008 even peaking to 9.3 per cent briefly was much celebrated as breaking of Indian economy from the ‘Hindu’ growth rate of 3.5 per cent of the 1960s and 70s.

Aspirations were built around the economy being able to achieve double-digit growth on par with China.

It was as if nothing could wrong with India, an even more promising economy for its own reasons.

Some people attributed the growth acceleration to reforms; some others to better integration with the world; still others thought entrepreneurial spirits and productivity did the trick.

There were others who were of the view that it had nothing to do with any of these. It was just that good tidings in the world economy merely rubbed off on India.

Increased savings had found its way into investment in production lifting up productive capacity.

DECOUPLING THEORY

Consumption too was at high levels. Additional production went into exports. The surge in exports backed up by investments seemed to fire up the economy.

There also was the decoupling theory suggesting that some of the emerging economies were able to decouple from the rest of the world and grow on their own strength of fresh thinking and reforms, elevated foreign exchange position and a strong and resilient banking and finance sector.

But this decoupling theory fell flat on its face as things started to unravel from late 2008. “No country can hope to be an island in a globalised world,” Subbarao said.

Just as we emerge out of that crisis more or less unscathed, the Euro zone crisis hit us with a vengeance in 2011.

>vinson.kurian@thehindu.co.in

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