Views| A crisis is a time to take stock

Views| A crisis is a time to take stock

New Delhi: Last week’s burst of liberalization measures to encourage foreign inflows is reminiscent of past crises’ responses. Thus the government allowed foreign direct investments in single-brand retail sector and raised investment ceilings for foreign investors in government and corporate bonds; to match, the Reserve Bank of India raised interest rate limits for domestic firms’ borrowings abroad as well as on foreign currency deposits by nonresident Indians and asked exporters to repatriate export earnings to reduce the lags.

Crises are a time to take stock. Moving beyond the desperate liberalization, authorities could thus engage in somber introspection at this inflexion point. To start with, it is incongruous that the two deficits – fiscal and current account - that flashed red when the economy sank into a macroeconomic crisis in 1991 still have the capacity to push the economy towards vulnerability twenty years down the line.

The fiscal dynamics persists as before: the structural gap remains unaddressed with temporary improvements driven by the economic cycle. Notwithstanding some fiscal reforms, the tax base remains low in international comparison while expenditures have risen with alarming deterioration in quality; much worse, the revenue deficit that had shrunk to 1% of GDP by 2007-08 has expanded three times that number since 2009-10 with market borrowings financing more than a third of the mounting expenditures.

Crises are also a time to change tack. Unlike 1991, India’s global economic integration is now gone too far ahead to allow sanguinity about important macroeconomic indicators, which determine confidence levels externally as well as within the country. It’s important to change course and redeem the fiscal position; could the preparatory beginnings for the 2012-13 budget signal a departure? Likewise, a shift towards better quality, long-term foreign capital flows to meet the economy’s growing needs would be a better option to close the external gap. Finally, it is worth pondering over whether these chronically weak characteristics support the freely floating currency of recent years; or whether a partially-flexible exchange rate supported by reserves accumulation would better address the rupee’s wild gyrations to provide a beneficial environment for the real sector.

Renu Kohli is a New Delhi based macroeconomist and former staff member of the International Monetary Fund and the Reserve Bank of India.

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