India back to 1991-type economic crisisBy Naresh Minocha
"AS regards import compression, you may well be right that in previous years, there was some fat in the import bill. However, in the last five months, a savage import cut has been imposed and today there is no scope for any further import compression. Even the import compression that is now in place, will have serious consequences. It will hurt industrial production, lead to large scale unemployment and will give rise to serious unrest and disruption.
“It is in this context that I seek your understanding of what we have been doing to deal with the worst economic crisis in the history of Independent India. My effort is that somehow we should avoid a situation where are declared a defaulter.”
That was Dr Manmohan Singh, as Finance Minister, justifying the Government’s handling of foreign exchange crisis/balance of payments (BOP) situation in a letter dated July 8, 1991 to the then West Bengal Chief Minister Jyoti Basu. In that year, India had to mortgage the country’s gold reserves abroad and had to twice devalue Rupee to avert default in payment of foreign debt.
Dr Singh might have to resort to similar rationalization by the end of term of UPA Government if it does not bridle imports and boost exports to prevent runaway increase in trade deficit. The current account deficit (CAD), the BOP barometer, touched the danger mark. CAD touched 2.5 per cent of gross domestic product (GDP) in 2010-11, the same level as in1990-91, the year of unprecedented economic crisis.
CAD is bound to rise in the coming years as the fat in the imports that Dr Singh mentioned in his 1991 letter has increased several-fold as is borne out by official and international statistics. It is bound to increase further with UPA’s preference for easy options such as importing coal, increasing imports of crude oil, giving big push to import-based nuclear power generation.
CAD is not the only major indicator that either confirms India’s downslide on some indicators, or shows its status quo or marginal improvements since the launch of big-bang economic reforms by Dr. Singh through his budget speech in July 1991.
The country’s ranking on global indicators such as UNDP’s Human Development Index (HDI), International Food Policy Research Institute’s Global Hunger Index, the World Bank sponsored Worldwide Governance Indicators (WGI), IFC’s ease of doing business and reforms indices, Transparency International’s Corruption Index and World Justice Project’s Rule of Law Index.
Dr Singh’s claim that the Congress would pursue reforms with human face sounds hallow if we note that India’s HDI global ranking has improved to only 113 in 2010 from 123 in 1991. This means 112 countries are still ahead of India in areas such as health, education, income, human security and poverty eradication, the elements that constitute the HDI index. Leave aside this index, the absolute number of poor people, even by the Government’s absurd definition of poverty, has increased manifold since 1991 due to twin failure to control population growth and to make the economic growth inclusive.
WGI project assesses 212 countries on six parameters of governance from 1996 onwards. The parameters are: voice and accountability, political stability and absence of violence/terrorism, government effectiveness, regulatory quality, rule of law and control of corruption. India’s performance chart on these counts has hardly anything to cheer about.
Aam Aadmi actually does not have to look at any global index. His plight itself is an index of the socio-economic and governance reforms!
Reverting BOP, Reserve Bank of India has voiced concern over the country’s rising vulnerability in this area. In its Financial Stability Report (FSR) released in June 2011, RBI has estimated CAD for 2010-11 at 2.5 per cent which appears to be artificially suppressed as compared to 3.3 per cent reckoned by International Monetary Fund (IMF) in February 2011 in one of its two annual reports on India. IMF believes that CAD would rise further to 3.5% in 2011-12. IMF data shows that CAD, turned from surplus to deficit in 2004-05. CAD was estimated at whopping $ 49.9 billion in 2010-11.
IMF has cautioned Indian Government that a rise of the CAD above 3 per cent would increase the risks arising from volatility of capital flows. It has identified Balance of trade (BOT)/trade deficit, has primary concern that needs to be addressed to manage CAD.
Even the Prime Minister’s Economic Advisory Council (PM-EAC) has called for vigilance on CAD front. In its Economic Outlook for 2011-12 released on August 1, 2011, EAC says: “Given the current trends in the world economy and the behaviour of international capital markets, we should strive to contain the CAD below 2.5 per cent of GDP. This will itself mean a larger inflow of capital in absolute amount as our GDP keeps growing.”
The Union Department of Commerce has gone one step ahead of IMF. The former has pressed the panic button on BOT and CAD in its Strategy for doubling exports in next three years (2011-12 to 2013-14) released in May 2011.
Pointing out that unabated increase in trade deficit would cast its shadow on CAD, the Strategy Paper shows that trade deficit has risen from $ 8.7 billion in 2002-03 to estimated $ 114 billion in 2010-11. If foreign trade is conducted in the same fashion as at present, the trade deficit would shoot up to projected $ 281.8 billion in 2013-14.
As a percentage of GDP, trade deficit is set to increase from 1.7 per cent in 2002-03 to an estimated 11.5 per cent in 2013-14.
“The projected BoT (balance of trade) deficit on merchandise account of 11.5 per cent is clearly a cause for serious concern because it can lead to an unsustainable CAD,” warns the Export Strategy paper.
It has forthrightly explained that even further acceleration in exports growth rate would not be sufficient to keep trade deficit and CAD within manageable limit. It has thus recommended a slew of measures to control surge in imports. The proposed measures call for reforms in domestic policies relating to coal, petroleum, fertilizers, engineering goods, pharmaceuticals, etc.
That the UPA Government has slipped badly in the reforms front is evident from the fact that it has not yet announced the eagerly-awaited national manufacturing policy, which has been on the works since 2004!
In his reforms-unveiling budget speech delivered on 24 July 1991, Dr. Singh had stated: “We must make a conscious effort to reduce the internal debt of the Government and the external debt of the nation, so that we rely more and more on our own resources to finance the process of development.”
Both internal and external debt has increased severalfold since then. External debt, for instance, has increased from $ 83.80 billion in 1990-91 to $ 297.51 billion by December 2010.
RBI’s FSR says: “a few external sector indicators suggest some deterioration. While FDI (foreign direct investment) flows have been muted, net FII (foreign institutional investment) flows remain strong and ECB (external commercial borrowings) flows have seen a significant rebound. Consequently, un-hedged positions of corporates accessing foreign currency funding need to be monitored both by the banks from the credit risk angle and by the systemic regulator from a stability perspective.”
Credit rating agency CRISIL already sees the writing on the wall. In May 2011, it issued an analysis FCCB (foreign currency convertible bonds) redemption woes looming over India Inc.
FCCBs worth around Rs 315 billion, issued by Indian firms, would be due for redemption by March 2013. They have to either converted into equity shares or repaid. CRISIL believes that FCCBs worth Rs 220-240 billion may not get converted into equity shares, as the current stock prices of issuing companies are significantly below their conversion prices. Companies have the option to either redeem FCCBs or reset their conversion price downwards to make conversion attractive.
Like CAD, managing inflation remains is today as serious a concern as it was in 1991. In his famous budget speech of July 24, 1991, Dr Singh had observed: “the people of India have to face double digit inflation which hurts most the poorer sections of our society.”
Has the price situation during the UPA-II regime not been similar to the one that existed in 1991?
As foreseen by PM-EAC, “the headline WPI (wholesale price index) inflation rate would continue to be at 9 per cent or higher in the months of July-October 2011
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