For a country that prides itself as a strong emerging economy in the global arena, the irony is that India’s economic fundamentals show some striking parallels with those prevailing just prior to the economic disaster of 1990-1991. In spite of two decades of growth, the economy is still very vulnerable to a prolonged global crisis.
Sure, the consensus among analysts is that the Indian economy is now more resilient than before as it is much larger, and has much larger foreign exchange reserves. But the fundamentals are deteriorating fast.
There are enough uncanny similarities between now and the pre-1991 period to be worried about. Take the engine of recent economic growth, for instance. In the two years preceding the balance-of-payment crisis, India’s gross domestic product (GDP) grew at a rapid pace, averaging 8.2%, fuelled largely by fiscal expansion. The average growth of 8.25% in the past two fiscal years has also been stoked partly by a fiscal stimulus programme, albeit of a different nature.
One could argue that the recent growth in the past two years was on a high base as the preceding period of 2003-09 saw an average growth rate of 8.5%. However, even the 5.5% growth recorded in the 1980s was considered to be as dramatic as 8% now, and was a significant break from the “Hindu” rate of growth in the preceding decades.
Industrial output growth in the five years leading up to 1991 averaged 8.4%, higher than the 6.6% growth in the past five years. Exports grew at an average pace of 15% in the 1986-91, slightly lower than the 20% growth recorded in the past five fiscal years.
The weaknesses then and now are also similar. The public debt-to-GDP ratio was 64.7% in 1990-91, roughly the same as what it is now. The current account deficit was roughly 2.5% of GDP in 1991 and it is expected to be roughly 3% of GDP in fiscal 2012. Inflation averaged 10% in 1990-91 and now it is a shade less than 10%.
As an 11 December report by Chetan Ahya, economist at Morgan Stanley Asia Ltd, pointed out, with a deeper inflation problem and a wider current account deficit, India is the most susceptible among Asian economies to global funding risks.
The saving grace now is that India’s forex reserves have grown to roughly $304 billion, enough to pay the import bills for around 10 months.
In 1991, India’s forex reserves had plunged to $1.2 billion, barely enough to finance two weeks imports. This means that India can avert a sudden crisis but its ability to withstand a prolonged global crisis has been eroded because of the weakening fundamentals. It is difficult to predict how long India can avert a crisis in case of a global shock such as a default by some members of the euro zone. Such an event is likely to cause a far more severe liquidity crunch than in the crash of 2008.
In the ultimate analysis, the crisis of 1991 was as much of an economic crisis as a political one as foreign lenders had grown wary of a minority government then in place. In 2011, the minority Congress party government at the Centre, too, has been under constant attack from the opposition parties, civil society and sometimes from its own allies.
The mismanagement of the economy has already led to slowing growth and unless the government acts decisively, the vulnerability of the economy to an external crisis will rise sharply.
It will be a sad twist of fate, if under Manmohan Singh, the nation loses all the gains from the liberalization measures he initiated.
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