In a world where sclerotic economic growth is the norm, the idea of high growth creating risks can provoke scepticism. It should not.
In an interview to Mint on Friday, Dominique Strauss-Kahn, managing director of the International Monetary Fund, said that “the risk is growing too fast”. He meant the risk inherent in high growth. He showed awareness of the rather contrarian idea of high growth posing a risk when he added that “it is a bit of an irony to say that”.
In this context, he mentioned the problems arising from inflation and the current account deficit (CAD). Without sounding alarmist, one can say that India has problems on both counts. To be sure, on the inflation front, there has been some moderation in food prices and a favourable base effect may kick in to keep it in the 6-7% range. But this still remains high, perhaps uncomfortably so, for many.
There is also the issue of CAD. In India, this has risen to a rather high level. One estimate pegs it at close to 4% of the gross domestic product (GDP) in fiscal 2011. It is expected to rise to around 4.3% of GDP in 2012. This is an uncomfortable level, higher than in 1991, when India faced a balance of payments crisis.
That’s not all. Ever greater levels of short-term inflows are funding the CAD. Short-term debt has risen considerably since 2008. In addition, close to 80% of capital inflows are of non-foreign direct investment ones. It has been estimated that debt of maturity less than a year has risen to $115 billion (42% of gross reserves). The one comfortable feature of the situation here is that compared with India’s gross reserves, this type of debt is still within the zone of tolerance. The other issue is that of real exchange rate appreciation—the rupee has gone up by more than 11% this year against a basket of currencies—that adds fuel to this fire.
The danger is not from the absolute level of this debt but from what would happen if there were to be an external shock. The other concern, more in line with Strauss-Kahn’s concerns about the dangers from high growth, stems from the risk of rising commodity and oil prices globally. These add to inflationary pressures in India. The way out would be to make adjustments to ease these pressures in the next 12-18 months, so that there are no disruptions ahead.
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