Why the IMF is a bad option

Few would dispute the notion that the Indian economy is currently in a febrile state. Equally, there is consensus on the root cause of the fever, as one caused by the economy’s gluttonous appetite for foreign goods and services, far more than what it can digest. Also true is the fact that the economy experienced similar symptoms back in 1990 and that the good doctor in the International Monetary Fund (IMF) not only relieved it of the immediate symptoms, but made prescriptions for some lifestyle changes that had remarkable results for the health of the Indian economy. But none of this justifies the case for a revisit to the IMF now for consultation and medicines.

There are clearly three compelling reasons why this is so. One, the composition and character of the Indian economy has undergone a dramatic change since the 1990s. Back then, an infusion of $ 5 billion in hard cash could help overcome the economy’s pangs of hunger for ready cash. Today, the economy is 16 times as big; this alone shows that our requirements are bigger than any rescue package that the IMF has attempted to put together for any country experiencing balance of payment difficulties. Moreover, the IMF is already committed to an open-ended rescue of crisis-afflicted economies in the European Union. Two, back in 1991, India had very limited exposure on capital account with non-resident bank deposits constituting the bulk of private obligations. Given this, its need for additional resources was driven primarily by the excess of the country’s merchandise imports over exports. Recourse to the facilities available with the IMF, while damaging to India’s image as a solvent nation, did not pose any threat to the flow of merchandise trade. The situation today is quite different. India has gained immensely from the flow of foreign private capital. The economy is, therefore, also vulnerable to the risk of flight of capital at a time when its private international obligations are far in excess of assets held abroad. So the worry what an approach to the IMF will do for India's reputation in the eyes of global investors is real.

Three, the country faces a very difficult external strategic environment with both China and Pakistan sensing an opportunity in the country’s domestic travails. Indeed, the US, given its compulsions to secure a greater degree of assistance from Pakistan for an orderly pullout from Afghanistan, may not be averse to leaning on India and make it extend additional concessions towards Pakistan on Kashmir and other disputes. Whichever way one looks at it, the crisis on the external account was caused by India’s inability to shore up its domestic production base. The solution too, then, must come from within.

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