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Economy Apr 4, 2013

Should India see IMF doctor before it falls sick?

By Firstbiz Staff

Free advice given by newspapers to governments is very often worth only as much as it costs. Virtually every day, thunderous newspaper editorials give a cacophony of advice - in editorials, op-eds and analyses - that, even if they were not contradictory, would not always be easy to implement given the politics that rides on them.

An editorial in the Times of India today, for instance, exhorts the Manmohan Singh government to implement "bold reforms".An op-ed article in the same newspaper by Kirit Parikh, chairperson, Integrated Research and Action for Development, urges the government to "denationalize" coal and cut fuel subsidies.

These are all capital suggestions, but even when they come from people who have worked in the policy space on which they make recommendations - Parikh, for instance served as a member of a Planning Commission in the UPA-1 government and was in charge of energy - their advice seldom scales the ivory tower in which policymakers reside.

In fact, even within the ivory tower fortress within which policy is made, well-meant early warning alerts issued by officials specifically charged with making recommendations, is frequently passed up or ignored. On occasions, this can lead to an economic crisis of monstrous proportions, as happened in 1991, when India had to hock its family jewels in order to get out of a crippling balance of payments crisis.

In today's edition of The Hindu, TCA Srinivasa-Raghavan offers a fascinating insider's account of how the Rajiv Gandhi government pointedly ignored advice proffered twice by the Finance Ministry at that time to approach the International Monetary Fund for a loan.

Srinivasa-Raghavan recalls that during a visit to India in March 1988, the then IMF managing director Michael Camdessus told Rajiv Gandhi that the lender would consider a soft loan request from India, and in fact both the Finance Ministry and the Prime Minister's Office counselled Rajiv Gandhi to opt for it. But since Rajiv Gandhi, then ensnared in the Bofors scandal, was considering a mid-term election, he turned down the advice.

Twice over the next year, the Finance Ministry again advised Rajiv Gandhi to make a loan request with the IMF before things turned too dire, but again, they were overruled by political considerations. Rajiv Gandhi evidently felt that the loan application should wait until after the elections - since it would have made for bad political optics.

Of course, the Congress was defeated in the November 1989 elections, and VP Singh came to power. But although signs of a debt payment crisis were loud and clear, his Finance Secretary at that time, failed to advice the Prime Minister to go in for the IMF loan - because it would have been "politically inconvenient", given that the National Front government was supported by the Left parties.

Soon enough, the VP Singh government fell, and was replaced by the Chandra Shekhar government, supported by the Congress. By then, the balance of payments crisis was in full flow, and India had to pledge its gold reserves to secure a bailout.

Today, India's macroeconomic fundamentals - in particular, the fiscal deficit and the current account deficit - are similarly flashing warning signals, and fears of a repeat of the 1991 crisis run high, although economist Bibek Debroy dismisses such a comparison. "There is a frisson of worry," he writes, about the current account deficit, which at 6.7 percent of GDP, looks "dangerously high." Comparisons have been made to 1991, but these he says are wrong. Today, he points out, India does not face a debt repayment problem,

Given that elections are due by 2014, and will likely throw up another fractured mandated, we're probably looking at a rerun of the 1990-91 political scenario

Given that elections are due by 2014, and will likely throw up another fractured mandated, we're probably looking at a rerun of the 1990-91 political scenario. Reuters

The external debt stock/GDP in 1990-91 was 28.7 percent; the figure for 2011-12, the latest available, is 19.7per cent. Likewise, debt service ratio was 35.3 percent in 1990-91; today, it is just 6 percent. And short-term external debt/foreign exchange reserves ratio was 146.5 percent in 1990-91; today, it is just 26.6 percent. Any way you look at it, "there is no external sector crisis trigger, unlike in 1990-91," adds Debroy.

And, yet, an editorial in the Business Standard recommends that India should approach the IMF for a standby loan rather than have Finance Minister P Chidambaram run to global financial capitals in order to hard-sell the India story and keep portfolio inflows coming so as to ensure that the current account deficit does not cause a full-scale external crisis.

"If... the threat of an external crisis is indeed major, and... is dominating the thinking of policy makers, it is worth wondering why, instead of placating international capital, the government doesn't just go to the one-stop window for such problems: the International Monetary Fund, or IMF," the editorial wonders. "As any business owner knows, if tough times are expected, you should secure your overdraft at the bank while things still look good." It is best, it adds, "to go to the doctor for prevention, rather than cure, even if you don't like being seen at the doctor's office."

It may seem like the kind of gratuitous advice of the sorts that are proffered by newspapers every day of the year. But on the strength of his insider's account of the goings-on of 1990-91, Srinivasa-Raghavan wonders if there is more to it.

The "influential business newspaper" (by which he means Business Standard) counts on its editorial board a former Chief Economic Adviser to the government (Shankar Acharya) and a former Deputy Governor of the RBI who demitted office just now (Subir Gokarn).

When the advice to go in for a standby loan from the IMF comes from erstwhile insider with their ear to the ground perhaps there may be something afoot. "Is something along those lines being contemplated?" asks Srinivasa-Raghavan.

Or will well-meant advice be ignored, as it was in 1990-91, until a crisis does present itself? Given that elections are due by 2014, and will likely throw up another fractured mandated, we're probably looking at a rerun of the 1990-91 political scenario, with disastrous consequences for the economy.

Perhaps there is a case for the government to take some of the free advice from newspaper editorials seriously...

by Firstbiz Staff

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