Downturn exposes chinks in India’s armour

The current economic downturn shows chinks in India's economic armour while China remains relatively insulated thanks to its superior export competitiveness. This should make our economic policy makers reassess the utility of the existing economic planning which is premised on domestic consumption rather than export

Noor Mohammad Delhi, Hardnews

India has been lagging behind other emerging economies in attracting foreign investment inflows due to the slow pace of reforms in the absence of political consensus. The opponents of reforms often attribute India's resilience in the face of the South-East Asian economic crisis of 1998 to its relative under-exposure to the global economy. However, the current economic crisis has exposed the chinks in India's armour. The Reserve Bank of India (RBI) lost foreign exchange reserves to the tune of $43 billion in its bid to support the fall of the Indian rupee against speculators' attacks in the aftermath of the global financial crisis triggered by Lehman Brothers' collapse in September last year. On the other hand, China -- whose economy is more dependent on exports for growth than India's -- has added $ 40.4 billion to its forex reserves during this period. This metaphorically knocks the bottom out of the central argument of the opponents of further economic reforms.

The rupee has become target for speculators thanks to the country's rising current account deficit. And, if India has to correct its current account imbalance, it must expand the export basket while improving competitiveness in traditional sectors. To achieve that, India will require strong, steady inflows of foreign direct investment (FDI) and technology. That in turn hinges on availability of good physical infrastructure and skilled manpower. So, there is an obvious case for India further relaxing its FDI policy relating to key sectors including infrastructure and education.

This argument also carries conviction if we look into the constraints facing the government in fighting the current economic slowdown that is luckily much shallower compared to the mess in which some developed countries find themselves at the moment.

The central government's fiscal deficit is estimated to reach the level of 6 per cent of country's gross domestic product (GDP) by the end of the current financial year. This has left analysts wondering how much room the government has for fresh stimulus packages to support demand in the face of the current global economic crisis, finds Hardnews.

"With the economic uncertainty and pressing need to prime the economy, the new government will have to grapple with creating a medium term fiscal path that is both sustainable and credible," the credit ratings agency ICRA has said while sharing its perspective on the key implications of the country's rising fiscal deficit.

Brazil, Russia, India and China are often touted as the new emerging economies and economists refer to them as BRIC in discussion, a term coined by Goldman Sachs in 2001.Russia is the only BRIC country to have lost more foreign exchange reserves than India in the wake of the global financial crisis.

The Indian rupee has been under strong pressure against the US dollar since the collapse of Lehman Brothers. The rupee breached the psychological mark of Rs 50/dollar level in November 2008 and is still hovering around that level. In response, the RBI sold its dollar reserves to resist the fall in the domestic currency but to little avail.

From a peak of $ 315.6 billion in June 2008, a plunge of $67 billion in India's foreign exchange reserves to $ 248.6 billion in January end is apparently due to the strong measures taken by the apex bank to defuse the global pressures on the rupee.During April-November, the RBI net sold dollars to the tune of $31.4 billion against net purchases of $55.2 billion made during the corresponding period in 2007, as per data compiled by industry body Associated Chamber of Commerce and Industry (Assocham).

Between November and January, the RBI has sold its dollar reserves to the tune of 25.5 billion to offset mounting pressure from negative growth in exports during October-November 2008 and Foreign Institutional Investment (FII) outflow of $6.5 billion from the Indian equity markets.