Friday, August 30, 2013

Is India's forex crisis akin to the one in 1991?

With India's widening current account deficit and dwindling forex reserves, it is quite obvious that one would be tempted to compare the current situation with the crisis faced in 1991. As you would recall, India was on the verge of defaulting on its sovereign debt owing to very low forex reserves. At that time, India was left with forex reserves that were enough to cover just 15 days of import bills. It was only after India pledged gold with the International Monetary Fund (IMF) that we were rescued from bankruptcy.

Currently, India has forex reserves of about US$ 280 bn. This amount would cover about seven months of our import bills. While this is not as bad as it was in 1991, it is the lowest import cover since 1996. And also the lowest among BRIC nations! And the Indian rupee has been falling sharply against the US dollar, making new all-time lows. It goes without saying that there is a lot of panic in the financial markets. Indian share markets have been falling. Foreign investors are pulling out of India. So this has put the government and the RBI in damage-control mode. Prime Minister Manmohan Singh has been asserting that the current situation is not akin to 1991. World Bank chief economist Kaushik Basu has seconded the PM's opinion. As per him, India has enough forex reserves and it wouldn't have to go to the IMF again for a rescue.

Well, that's fine, but does that make this crisis any less worrisome? We believe the current adverse scenario is not just a temporary passing phase but a reflection of all our inadequacies and incompetence as an economy. Temporary fixes are not going to do us any good. If we really want to grow and compete in the global economy, we need radical changes.    

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