Are risks to the economy greater than in 1991? Yes

It is possible to argue on the basis of the import cover of forex reserves (about three weeks in mid-1991, against seven months now) that we are much better off now than in 1991. Fiscal deficit and inflation looked worse then. But macroeconomic aggregates do not tell the whole story. Our forex reserves of $290 billion seem shaky — especially if a haemorrhaging rupee is to be defended. It appears that in a climate of global uncertainty, with emerging market currencies taking a hammering, the forex crisis will not go away in a hurry.

As a worst-case scenario, the government may well end up negotiating another IMF loan -- unless FII and FDI flows rush back into India. That would require some external trigger or an unlikely surge of ‘confidence’ in the Government. So, does 1991 seem like a far cry?

Our current account deficit (CAD) is stubbornly high — at nearly 5 per cent of GDP, against 2.5 per cent in 1990-91. Apart from curbing gold imports, the Government has no clue on how to contain the CAD. Instead, it is desperately focused on attracting capital flows to plug a CAD that is constantly under pressure — on account of inelastic energy imports — that too, at a time when FII and FDI players are deserting India. Our situation of weakness is not dissimilar to what was on display in 1990-91, when we parcelled out gold to secure a contingency loan from the IMF. Now, the Government is on its knees to placate ‘investor sentiment’.

We are more open to policy blackmail today because of the lower levels of capital controls. (The slightest suggestion of controls leads to ‘market mayhem’, and the move is shelved — such is the loss of independence in policymaking.) An elected Government is unable to formulate policy with the interests of its people in mind. Foreign investors drive down the rupee at will, while the RBI is unable to emphatically defend the currency because it is unsure of its forex firepower. It is all very well to argue that the rupee must depreciate to, say, 70 to a dollar to spur exports and growth, but who’s driving the process? When the Government, in July 1991, devalued the rupee by about 18-19 per cent to boost exports and bridge the CAD, it was more in control of the situation. There were no random financial flows to reckon with. Even during the 1997 East Asian crisis, India was not as globally ‘integrated’ as Thailand, Malaysia and Indonesia. That helped the RBI ward off currency shocks, without ‘investors’ scuttling its moves — as they did a few days ago, after the hike in marginal standing facility. Today’s crisis informs us that a high CAD with loose capital controls is a bad idea. A closed, even if mismanaged, economy looked better.

Read also: >Are risks to the economy greater than in 1991? No

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