With the value of the rupee plunging to new lows, the current account deficit at an all-time high and inflation running at nearly a ten-percent annual clip, India is in serious economic trouble. Indeed many are beginning to wonder whether the country is edging toward a replay of the events in the summer of 1991. Back then, an acute balance of payments crisis forced New Delhi into the indignity of pawning its gold reserves in order to secure desperately needed international financing.
At a small public event the other week, Duvvuri Subbarao, the outgoing head of the central bank, pointedly referred to a recent book, This Time is Different: Eight Centuries of Financial Folly, and conceded that policymakers rarely learn from their mistakes. He conceded that:
“… in matters of economics and finance, history repeats itself, not because it is an inherent trait of history, but because we don’t learn from history and let the repeat occur.”Enjoying this article? Click here to subscribe for full access. Just $5 a month.
This is a theme that policymakers have been pondering for a while. More than a year ago, at what was ostensibly a celebration of an updated book on the economic reforms catalyzed by the 1991 debacle, Subbarao warned that the dangers sparking that crisis – ballooning fiscal and current account deficits – were once again lurking. At the same time, a high-ranking commerce ministry official told a group of business leaders that economic indicators were provoking “a sense of déjà vu.” Worried that conditions were ripe for a replay of the 1991 crisis, he exclaimed:
“Why are we dodging these [policy challenges]? In 1991, we were candid enough to take these decisions. The quicker we take these decisions, the better it would be, instead of acting like ostriches.”
Prime Minister Manmohan Singh flatly rejects the comparison, however, stating that “There is no question of going back to 1991.” He is basically right, since the country is in a much more resilient position than two decades ago. That said, it would do wonders if the political class were once again seized with the sense of urgency that gripped New Delhi back in 1991. Perhaps then a solid determination will emerge to push forward with a new round of economic reforms that have been put off for years.
Shoddy management of the economy has been a hallmark of Singh’s second term, which is highly ironic given that he and his current economic team are widely credited with pulling the country out of the fire 22 years ago. Then serving as the newly appointed finance minister to Prime Minister P.V. Narasimha Rao, Singh famously inaugurated the reform era by quoting Victor Hugo: “No power on Earth can stop an idea whose time has come.” These days, however, he gives every sign of being trapped in Samuel Beckett’s absurdist play, Waiting for Godot.
Still, whatever Singh’s merits as a policymaker, he hardly deserves all of the criticism he receives for India’s travails. A good part of the fault lies in New Delhi’s peculiar structure of decision-making. Singh’s diarchal arrangement with Sonia Gandhi, the Congress Party’s risk-adverse, redistributionist-minded matron, has been a recipe for policy inertia and inconstancy, prompting one Western diplomat to exclaim a while back that “Even the power structures in North Korea are clearer than those in India.”
Officials also argue, with some justification, that India’s immediate problems are not of its own making and other countries are in the same leaky boat. The proximate reason for the current crisis can be traced back to three months ago when the U.S. Federal Reserve hinted that it would begin curtailing its ultra-expansionary monetary policy, which has kept global liquidity at an artificially high level in recent years. That signal caused foreign investors to begin pulling their money out of a number of emerging markets. India has been hit most severely, but the repercussions have also been felt in Indonesia and, to a lesser extent, Thailand, Malaysia, South Africa, Turkey and Brazil. Indeed, some analysts (here and here) are warning of calamity redux –something similar to the 1997-98 Asian financial crisis that triggered months of global economic distress.