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VIEWPOINT: KAUTILYA
Mercies
Of The Past
Why
India is not facing an economic crisis despite political and stock market
turmoil.
By Jairam Ramesh
Atal
bihari Vajpayee's Government is facing a slow bleed. His NDA allies are
uneasy. The Opposition has smelt blood. The swadeshi lobby within the
Sangh Parivar, which had been lying low for some time, has got a fresh
lease of life. How all this impacts on economic policy time alone will
tell. The Government is dependent on Parliament to introduce and pass
legislation. However, privatisation does not depend on Parliament and
will be driven wholly by the tenacity of Vajpayee and his colleagues.
WTO deadlines will be met. In other areas like power, progress will depend
on how proactively Vajpayee reaches out and cements alliances with reforms-oriented
chief ministers, something that he hasn't adequately done during his tenure.
But how is is that despite political turmoil
and stock market shenanigans, India doesn't face a first-rate economic
crisis? As, say, Turkey, Brazil and Argentina? These countries, more aggressive
reformers than India, have collapsed in recent months and have approached
the IMF for emergency bail-outs because of domestic convulsions that have
caused interest rates to soar, capital to fly out and investor confidence
to be eroded.
 India
has escaped lightly. Its relative security for the time being comes from
four factors-all a valuable legacy of Manmohanomics. In some ways, we
have become victims of our own success. If these factors were not present,
perhaps we would have been confronted with a 1990-91 type crisis and that,
in turn, would have precipitated another round of big-bang reforms, of
the type introduced by the P.V. Narasimha Rao government in June-July
1991. But for now we must thank ourselves for what Manmohan Singh accomplished.
First, short-term debt (debt that normally has
an original maturity of less than a year) as a proportion of foreign exchange
reserves, that, for instance, destroyed East Asia in 1997, has been reduced
dramatically from about 146 per cent in 1990-91 to about 12 per cent now.
Short-term debt as a proportion of external debt has also been slashed
to less than 5 per cent now. Second, while foreign institutional investors
(FIIs) have brought in close to $13.4 billion in the past seven years,
over 96 per cent of these funds have gone into equities. Therefore, these
FIIs are not speculative investors or carriers of "hot" money
but investors who take a medium and long-term view of investment prospects
in both sectors and companies. Third, the current-account deficit in the
country is hovering around 1 per cent of the GDP, half the safe level.
The current-account deficit is in the secure zone, because the economy
continues to be sluggish and there has been a phenomenal increase in dollar
earnings from "invisibles" like software exports and remittances.
Fourth, the Indian rupee is not freely convertible on the capital account
for domestic residents. Experience from Mexico indicates that in times
of crisis, domestic residents take their money out first before the much-maligned
foreign investors. Convertibility on the capital account means that we
as ordinary citizens cannot exchange rupees for dollars and take that
out, for instance, to buy property and shares.
India is different in other ways. Unlike in
Brazil where the threat of default by the state of Minas Gerais was enough
to momentarily bury the country, Indian states are not allowed to borrow
abroad. Unlike in Turkey, we have not started taking tough decisions with
regard to public- sector banks whose performance conceals more than it
reveals. However, the absence of a visible crisis should not become a
recipe for complacency. Once confidence takes a knock, the deterioration
can be very rapid. Fundamentals may be looking good but if the sentiment
turns negative, then it is downhill all the way. India's external vulnerability
is not all that great at the moment but if policy paralysis persists then
we may well see the onset of disenchantment.
We may not worry too much about an external
crisis but we are already in the throes of a grave internal crisis. Two-thirds
to three-fourths of government expenditure is being consumed by interest
payments, salaries and pensions of government employees, subsidies and
public-sector losses. It is this completely distorted structure of public
expenditure that is causing an investment famine in the country. In turn,
this famine is contributing to the deceleration in economic growth.
Political arithmetic will probably ensure Vajpayee's
continuance. But the chemistry has dissipated itself substantially. He
has to rebuild and change his style of functioning. So far, he has cast
himself in the Ronald Reagan mould, but only partially. Reagan may not
have been a details man but he was a superb communicator. Vajpayee has
failed to cash in on his greatest asset and has reduced himself to reading
anodyne speeches written in the worst possible bureaucratic English. If
he becomes himself, there is hope for his administration. Otherwise, it
will continue to be in intensive care. That will not be good for the economy.
The author is with the Congress party. These
are his personal views.
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