The whole economy is in shambles. The RBI and the central government will have to put their heads together by taking the right steps to boost growth

The present foreign exchange imbroglio and economic crisis faced by our country brings back to memory the near disaster faced in 1991, when the country had to airlift 67 tonnes of gold to pledge with Bank of England and Union Bank of Switzerland to raise $605 million of foreign exchange loan to avert a default in international payments. In January 1991, the foreign exchange reserves of our country had reached a precarious position of $1.2 billion, which was barely enough to last for meeting three weeks of imports then. This necessitated the pledging of gold followed by sharp devaluation of rupee that took place in two doses—first by 9.5% on 1st July and by another 11% on 3 July 1991 and these steps temporarily helped tide over the balance of payment crisis.

But the ramifications of the crisis in 1991 were echoed not only within the country but also overseas. A little known fact is that when it was clear that our country was on the verge of default on its external balance of payment obligations in 1991, the international banks in London and New York refused to accept the letters of credit (LCs) opened by a few public sector banks from India and even their branches abroad, putting them in an embarrassing position of having to face humiliation from the very same banks which had to be bailed out by the US and UK governments during the world financial crisis of 2008. But the real panic was caused when a few public sector banks operating in London then were refused credit lines by the international banks even for inter-bank overnight borrowings, giving a big jolt to the banking fraternity of our country. Fortunately, the economic liberalization that followed got India out of that precarious situation and we have not looked back since then.

But in 2012 India’s economy again appears to be going downhill and the symptoms are all showing signs of significant deceleration in all areas of economic activity. Though we are in a much better position today both in terms of the strength of our economy and the large foreign exchange reserves in our kitty, there are a number of similarities, which are a cause for concern. Added to our own problems are the global uncertainties, which, coupled with the impending threat of breakdown of Eurozone, will have its own impact on the world economy.

In 1991, inflation was running into double digits, causing considerable hardships to a large number of poor people of our country. It is no different now. The Reserve Bank of India (RBI) has been virtually fighting inflation during the whole of last year by raising interest rates as many as 13 times with not much success. Though there was a semblance of inflation coming down during early part of this year, there are signs of inflation rising again in the coming months, and if adequate and appropriate steps are not taken both by the RBI and the central government we may be back to double-digit inflation with all the attendant consequences.

The foreign exchange position shows a similar story. Against a forex reserve of $1.2 billion prevailing then, our reserves as of now are in the vicinity of $288 billion, which is good enough to cover some eight months’ imports. But the irony is that due to the growing current account deficit, and the recent slowdown in capital flows, the forex reserves which were continuously growing and had peaked to over $320 billion as on 28 October, 2011, have fallen by over 10% during the last few months and presently are around $288 billion. Though RBI has taken a series of steps to stem the fall of rupee, it has depreciated nearly 20% during the last 10 months and has reached a level of over Rs56 per dollar, fuelling inflation. The only silver lining in this precarious situation is that the international oil prices have cooled down and have fallen just below $100 per barrel, which may help to improve the country’s balance of trade to some extent.

There is a perceptible fall in the rate of growth of the economy, as GDP (gross domestic product) growth has fallen to a nine-year low of 6.5% during 2011-12. The macro-economic indicators are far from satisfactory. The fiscal deficit, which was 5.39% in 1991, has shot up to 6.9% in 2011-12. The current account deficit, which was 3% in 1991, is likely to be over 4% during the current year. The GDP growth during the current year is expected to fall further, what with the deteriorating economic situation in western countries, the chances of improving our own exports are remote. The whole economy is in shambles, and unless remedial steps are taken quickly, it may reach a point of no return with dire consequences.

Apart from the slowdown of the economy, there is one more dimension to the present crisis faced by the country; it is the crisis of trust and confidence in the political class. With a series of scams unearthed during the last two years involving both the public and the private sector, there is total loss of public confidence in the elected representatives of our country. The 2G (second generation) scam has exposed the extent of corruption in the highest echelons of the government.

The Adarsh building scam has put on the mat a number of civil servants and the higher functionaries in the defence forces. The land grabbing scams are dime a dozen, not to mention the one involving the highest office in the country. The illegal mining scam involving the state governments and the private sector is a testimony of the complicity of the high and the mighty in robbing the state to no end. The Tatra truck scandal involving a public sector company is a slap on the face of the miniratnas of our country. The 2010 Commonwealth Games scam is a national shame exposed in the presence of the international players. The curtains are yet to rise in respect of the coal scandal which is not officially unveiled by the CAG so far.
    
The gloom and doom prevailing in the country can only be reversed if bold decisions are taken to control inflation without affecting growth, by a coordinated effort of RBI and the central government and taking right steps with the alacrity and equanimity it deserves. In 1991, the new government that came to power under the prime ministership of PV Narasimha Rao with Manmohan Singh as finance minister unshackled the economy that changed the course of history.

Do we, therefore, need another change of government at the Centre to yet again evolve a new course of direction for our country?  But if we again get a fractured mandate in the impending elections, which is very likely, the only option is to have a national government with best brains in the country joining together to chalk out a path of least resistance to achieve that glory of being considered as the fastest growing nation in the world.

(The author is a financial analyst. He writes for Moneylife under the pen-name ‘Gurpur’)