Indian economic crisis in 2012 resembles the economic crisis in 1989

We often compare Indian economy today to that in 1991 and say we are in a crisis. Though we have grown since 1991 but the main imbalances then -fiscal deficit and current account deficit- have once again become the main concerns   today.

Yes, we have GDP growth rates and higher forex reserves now which provide some comfort. Though forex reserves which also aren’t as much when seen as % of monthly imports. The monthly import cover stands at about 8 months  (Forex Reserves/Avg. Monthly Imports = 294/38 = 8 months or so). Moreover, this has been declining as forex reserves are declining and imports rising.. here is someone who has seen it all from close quarters in both 1989 and 2012- Rahul Khullar, commerce secretary. In this candid interview, he says times are quite similar to the one in 1989:

Recently, you had said the crisis today is reminiscent of the 1989 crisis. But foreign exchange reserves then were in a bad shape, today it is different. So how do you draw the similarity? 
What I said was many problems we face today and many of the solutions to them we know and we have known for quite some time. In that context, I had said in 1989 we were drawing up a list of things that the new government should do and we had mentioned setting power tariffs right, sorting out coal since Coal India prices were very poor, we had problems with food subsidies and we needed to bring the fiscal deficit under control and get a sound fertiliser policy. Today, the sectors are the same but the problems have changed but the gravity of the problem is no less serious. I said in 1989 the central utilities did not have money and could not pay the coal companies. The difference today is that power generation companies in the states are not recovering enough from their downstream distribution and they cannot pay the coal companies. Entire power projects have been set up but few supplier arrangements are tied up. Some of these problems are getting solved as we speak but the point I was trying to make is it is not that we don’t know what the problems or the solutions are, we have known them for the past 20 years. I think the inability of our system to put things together and implement is what is costing us.

Moreover, reforms were much easier then:

Another point I made that day was it was easier doing reforms in 1989 than in 2012, quite simply because all the low-hanging fruit are all done and over with. Now we have to take care of the much more difficult parts of reforms. Then there is the problem of counterfactuals, which is that it is one thing to tell people that we will grow at six per cent but today growing at eight per cent has become a reality, so when your growth slips, everybody is willing to believe the worst. No one is willing to give latitude or listen to another point of view. Right now, over the last one year or so, we have seen all sorts of accusations being made pertaining to corruption, policy matters, governance and all. And somehow, each time that happens, the public is willing to believe it, industry is willing to believe it. But there are other difficulties involved and I think there is a need to think more carefully before jumping to conclusions about what is causing what. Finally, I believe that some things have to be done immediately.

It is my personal view that citizens must learn that they need to pay a higher price for some goods because without that there would be no conservation, there would be no restriction on demand because implicitly we are subsidising what we are consuming. We cannot afford that luxury anymore because we then get clobbered on our fiscal deficit and balance of payments. If oil companies are in the red, at some point that has to be corrected. Similarly, I believe that we need to do something urgently on fertiliser and food prices.

Lastly, central issue prices were last increased eight years ago. Prices cannot be kept frozen like this. And it is not as if poverty has not declined and it is not as if incomes have not increased in the past seven to eight years. So everybody’s capacity to pay has increased. I do not see why rice will be sold at ‘2 and we cannot increase it to ‘3. Has the paying capacity of our poor not increased sufficiently to pay for that? I am not underestimating the political difficulties in taking these decisions. Today, we cannot say let’s forget about fiscal prudence but let’s be fiscally-profligate and growth will take care of the rest.

And we are being made to believe that all that is needed is to push for reforms. Wish it was so easy…

We are into a soup given all the political logjam. It is like this interesting game right now. Govt is clueless and the opposition just wants to criticise and hoping things do not improve. So, it is like this frog’s game where each one wants to pull each one down.

However the interviewer does not ask him if this is like 1989, when is 1991 coming?



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