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2012 is not 1991, India can't live in self-denial

May 31, 2012

When I walked into the room of finance ministerManmohan Singh shortly after June 21, 1991, to congratulate him, he told me that "we will change India". Although I was a point-man dealing with the complex negotiations with the IMF and the World Bank, I had no inkling of the far-reaching changes to be unravelled in the budget presented to Parliamenton July 24, 1991.

Our economic landscape has changed permanently. Comparing the present economic malaise with 1991 may be exaggerated. Foreign exchange reserves were less than $1 billion in June 1991, adequate to cover two weeks of import, compared with $290 billion today, adequate to cover a period of seven months. Average GDP growth rate in 1991-92 (at 1999-2000 prices) was 1.3% compared with the average of the last five years at 7.95%.

The economic infrastructure is far more diversified, domestic savings rate -which impacts investment-gearing ratio at current prices - improved from about 20% of GDP to 31.6% last year and FDI inflows, which were a modest $500 million then, have touched $42 billion.

Indian corporates are healthier and are seeking meaningful global investment opportunities, including some high-profile strategic investments. Given our young population with unsaturated consumption as a driver of growth, the India opportunity and growth story is one of the most notable successes of the last decade.

So, are comparisons with 1991 totally misplaced? Notwithstanding many inherent strengths, some of which have been mentioned above, there are four significant vulnerabilities that prompt analysts to seek such comparisons. First and foremost, the macroeconomic vulnerability. The fiscal deficit, which was 5.39% in 1991, is 6.9% in 2011-12. Current account deficit, which was 3% then, was close to 4.3% in March this year. Domestic savings rate have come down sharply from 36.9% in 2007-08 to 31%, which adversely impacts GDP growth trends.

Domestic debt as percentage of GDP, which was 73.16%, is not significantly lower at 67.1% in 2011-12. Further, the shortterm external debt as a percentage of GDP is 22% compared with 10% in 1991. Inflation, while lower than 1991-92, has been consistently high over the past two years and in 2010-11, it was at 9.6%, uncomfortably close to the double-digit mark. This limits the flexibility of central bankers to ease liquidity, lower the cost of borrowing and make greenfield investments attractive.

Tax buoyancies have suffered due to decline in growth rates. Both subsidy bills and overall expenditure remain unsustainable, contributing to the stubborn fiscal deficit. The rapid economic growth experienced in recent years has multiplied the consumption of energy-intensive fossil fuel manifold. Crude prices have risen sharply and dependence on imported crude remains at stubborn 80%.

Second, the international economic situation has deteriorated sharply. In 1991, major economies of the world were growing rapidly and the international situation was benign and favourable. India was a new kid on the block and the world was ready to help India in its immediate crisis and encourage measures that could put it on a high-growth trajectory. Today, the situation is just the opposite. America's recovery is tentative and Europe is in deep crisis.

Recent policy changes, tardy reforms and governance deficit have deeply dented investor confidence. Both the exogenous and endogenous circumstances have worsened compared with 1991. We have frittered away many opportunities, postponed easier decisions and impaired our regulatory regime at a time when global capital is scarce. Third, in 1991 India was largely a closed economy.

Trade was highly regulated, tariff was high and quantitative restrictions had insulated the domestic economy from international changes. Trade as percentage of GDP was just 14% compared with 41.8% in 2011-12. Indian economy has integrated with the world more substantially and increased its vulnerability to exogenous changes. 


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