Figures sourced from the Reserve Bank of India (SDRs are special drawing rights)
Disclaimer: Before I write anything about the current mood of doom about the Indian economy, let me just say that I know almost nothing about how an economy works. However, what I do know is enough to write this post today.
A mood of doom seems to have gripped many in India and outside who keep track of the country’s economy. With the rupee crashing to its lowest against the dollar to 62.70 and Indian shares going down by over 6 percent since last Friday, there are those who are evoking the specter of India returning to its dire economic position of 1990-1991.
First, let me challenge those who say that it may be 1990-1991 all over again. Incidentally, the period refers to a time when the Indian economy was still significantly trapped in its state control shackles and was on the brink of a veritable disaster. As a journalist based in New Delhi then, I had a ringside view of the crisis as well as an opportunity to report about the country’s debilitating foreign exchange crisis.
When P V Narasimha Rao became prime minister of India in 1991 in the aftermath of Rajiv Gandhi’s assassination, India was in the midst of a nearly terminal economic crisis.
Gandhi’s assassination on May 21, 1991 and Rao’s wholly unexpected rise in June, 1991 had created a great deal of political flux which the latter used rather cleverly to dismantle the established wisdom of state control.
Dr. Manmohan Singh, who had been a lifelong academic/bureaucrat until he was roped in by Rao in 1991 as the country’s finance minister, was 59 years old and had been handed a politically secure platform to execute fundamental economic reform.
Even Rao’s motivation to introduce the reform was not necessarily out of conviction but out of economic expediency. Sometime in the early 1990s I got a tip-off from a top government functionary that India’s foreign exchange reserves were down to a point where the country would run out of it in a month after paying for oil and other crucial imports. In 1991, India was down to $5.8 billion foreign exchange reserves, enough for barely a few weeks’ imports. So severe was the crisis that India had to export rhesus monkeys to earn some precious foreign exchange. That particular species of monkeys has long been a favorite of the medical and biological research fraternity in the United States because they are quite low-maintenance.
I wrote the story for the New York-based India Abroad as well as its wire service. In less than 24 hours I started receiving angry calls from the bureaucratic and political establishments asking me to withdraw it. I had one simple question for them—Are you officially denying the story to be untrue? All of them said they were not. So that’s how I ended all my conversations. The story stayed and was obviously proven to be accurate.
That was 1990-1991, the period many are warning India could slide back to. Let’s jump to May 22, 2004 when Dr. Singh took over as India’ prime minister. According to the statistics maintained by the country’s central bank, the Reserve Bank of India, (See the table above), as of July 16, 2004, about week before he took over, the country’s total reserves were $121.1 billion, of which $115.7 billion was in foreign currency assets, predominantly the US dollar. Nine years later the figures are $278.3 billion in total reserves with 251.3 in foreign currency assets as of August 9, 2013. So it is hard to argue that 2013 is like 1990-1991.
Of course, statistics do not necessarily tell the full story or, often, even the wholly accurate story but they are useful in so much as they tell some story. From that standpoint what India is experiencing , while troublesome, is not particularly fraught with doom. I remember even in the 1990s there were those who used to argue that the realistic value of the rupee against the dollar would be about 60. I have a whole different perspective about the system of global currency valuation, which is quite arbitrary. But that is not the focus for now.
At this stage there are genuine apprehensions about flight of capital. According to news reports, since June 1, overseas funds have pulled out $11.58 billion from India’s stock and debt markets. I am not entirely certain whether the danger is as serious as made out to be. I mean rhesus monkeys roam the power center of the capital reasonably unmolested unlike in 1990-91 when their export was an important element of raising some quick foreign exchange. You might say that I am setting my benchmark rather low and by that benchmark everything might seem right. That is really not the case. I have given you the RBI figures which do not support the idea that the Indian economy is about to go tree-jumping not knowing which branch might snap.
That said, there are obviously serious issues confronting it and perception of stasis is an important one. The annual rate of growth having dipped to a decade-low of 5% in March this year has also had a negative impact. Unless the Indian government shores up international confidence, things could get very tight. Barely a year before the 2014 general election, this is clearly not a good sign for the Singh government and his Congress Party. But then whoever said that a political party should rule all the time? Some years outside government might help it repair the many wrongs that afflict the party.