Indian Economy 2012 - Reminiscence of 1991?

Posted in Finance Articles, Total Reads: 3104 , Published on 20 August 2012

Plethora of scams, a precipitously falling GDP, slowing industrial growth, depreciating rupee, deepening economic crisis ,a Government seemingly in shambles, a once looked upon finance minister who has retired to the lawns of Rashtrapati Bhawan- all quite symptomatic of the current turmoil the country is in today. So where are we heading towards? Is the growth chart that we had in mind for our nation remained just for the theoretical purpose or is there something that is absolute about it.

It is hard to believe the fact that even after 21 years; we are again going through another turbulent phase. True, we have definitely grown since 1991 but the main imbalances then -fiscal deficit and current account deficit- are in reckoning again and have become the main concerns of today. Drawing parallels across decades may seem incongruous but We, Indians always have a tendency to compare what all comes our way. The contentious issue this time is the proximity of the 2012 crisis with the economic crisis of 1991?

People have started drawing parallels based on similarities in the economy like - Current Account Deficit in 2012 is 4% as compared to 3% of 1991. Fiscal Deficit is 6% in 2012 as compared to 8% in 1991.But a closer insight will help us realize that there are a varied number of factors that need our attention today besides the above mentioned terms. Yes, to an extent there is a semblance but the picture does not end there. Through this article we have tried to evaluate both the crises in terms of similarities and differences and then chalk out if 2012 is really another 1991 crisis.

The main argument for believing that 2012 is another 1991 crisis is the sense of crisis in both years. As mentioned earlier Current Account Deficits and Fiscal Deficits of both times are very much comparable and it is hard to choose between the two. It implies our borrowings are exceeding our capacity to pay them back time and again. The situation will go beyond control if necessary measures are not taken urgently. Also, the economic condition which we are in makes such measures a mandate. The situation hasn’t risen out of the blue. Poor sentiments wreak havoc as we know. India was in a much better position just prior to the 2008 crisis.  

Eventually, due to questionable governance and limiting factor of coalition politics, investor’s money started flooding out of India. Consequently, reserves wore down by $60 billion in a span of only 7 months between April and November 2008 when the crisis was at its peak.  The country’s balance of payments around 1991 also suffered from capital account problems on account of a loss of investor confidence and it led to the widening current account imbalances and reserve losses. India, structurally a far developed economy in 2012 as opposed to 1991, has analogies being drawn between the domestic debts.

Foreign Exchange Reserves can cover six months of imports in 2012 while in 1991 India had reserves for two weeks – our domestic debt being 67-68 percent of GDP (this figure almost a replica to the bankrupt 1990s). Another argument in this regard can be that there are quite a few advantages of equating the 2012 crisis to the 1991 one. By claiming both the crises as identical will actually reinforce the policy inertia. It’s a well noted fact that the Government in contention only takes action when it is pushed to the corners. 

Although our domestic economy is in a more acceptable shape but the disarrayed global economy is one which is indeed a major reason to worry especially for an economy which is tightly integrated and significantly influenced by economic fluctuations in the external environment than was the case 2 decades ago. Our external environment standing weak compared with 1991, the commodity prices henceforth are relatively weaker (exception being oil) than in 1991.

And if you consider our economy as one that’s heavily reliant on a strong export demand now than in 1991, that's indeed worrisome. Consider the sufficiency of foreign exchange reserves that we had been bombastic about- India currently has enough to suffice for about six-seven months of imports, compared to nearly 15 days in 1991. But such a comparison is inappropriate since India's balance of payments is majorly affected by foreign investments, which were low 20 years ago. India has to become self-reliant sooner or later to survive.

Item/Year                                 91-92                     2012-13

1.  Growth of Exports               -1.1                             3.2

2.  Growth of Imports              -24.5                           3.8

3.  Reserves to Imports            5.3                             9.4

4.  Debt service Ratio                30.2                           5.6

5.  Current account balance*   -0.4                           -3.7

6.  External Debt*                      41.0                           17.8

The main argument behind considering the two crises different is that the external environment was quite strong then and India was on the verge of unveiling its economic reforms in 1990s freeing the nation from several of its state controls and restrictive policies that cramped investments both domestic and foreign. The situation in 2012 is also due to the impact of the dull investment climate, oil prices invariably running high, portfolio investments rolling out from essentially the stock exchanges as capital seeks to achieve a balance across the globe for best returns, high inflation triggered by food and commodity prices including vegetables and other essential commodities, which again is a global phenomenon. Greece, Spain, Portugal, Ireland and Cyprus are the front runners in the European Sovereign Debt Crisis (popularly known as The Eurozone Crisis).

The Jasmine Revolution shook the Arab World at its very core. The United States of America has a combined total public debt of $15.85 trillion which is approximately 103% of its GDP. With such a gloomy global economic scenario it was only a matter of time before India became a part of the gloom. The second argument in this regard that we will like to state is that in 2012, banks are better capitalised than they were in 1991. We all realize the fact that the banking sector is so very critical to the health of our economy.

The country has a much bigger and stronger banking system today and the issues are readably addressable. The mandatory disclosures that we have today were nowhere to be seen as in 1991. At that time, the phase was such that we were primarily concerned with tightening of our monetary policy by increasing the interest rates, but currently we have started loosening the monetary policy. Compared to 1991, in terms of infrastructure, we are in a far better off position to bring about regulations needed in the economy more efficiently. Also unlike 1991, the market determines rupee's exchange rate which invariably is our great strength. Financial markets today are more resilient and robust than what they were in 1991 as per our economic experts.

Indeed ironic is the situation, we would now start believing that we are not in the same crisis as in 1991 considering the above reasoned points and carry with our daily proceedings but may eventually find us landing in the same crisis. A quick path-breaker will be firm pre-crisis policy implementation, occurrence of which won't let us feel like 1991 anymore.

At both occasions, wrong economic decisions of the government are accountable for the economic crisis. 1991 saw very conscious citizens of India who were prepared for what was a serious crisis. They knew that they were in for some pretty difficult economic decisions. But what we see in the past two years is very discomforting. No major reforms/innovative ideas coupled with compulsions of coalition politics have made self-denial/restraint whatever you may call it more prominent and obvious steps more abstruse to implement.

The sputtering economy needs to push-on from here on towards the path of technological advances, reforms, healthy atmosphere for FDI’s and FII’s along with stringent emphasis on tax compliance. But believe us when we claim that there are no easy measures.  Implementation of above mentioned aspects would require conformity across the radius of the country which is easier said than done but we all need to stand and deliver at this point of hour. 2012 is definitely not 1991 but it does not give us the freedom to live in a mode that’s primarily on self-denial because while the world has changed, adjustment and adaptability remain a prerequisite for us-which are still an aberration in our country.

This article has been authored by Ankur Saurabh & Subha Mookherjee from IIM Ranchi.



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