Are we reliving the 1991 economic crisis?

By Sanuj Shah

The recent economic crisis due to the rapid depreciation of the Indian Rupee and persistent inflation had drawn parallels to the economic crisis our country had faced in 1991. The reforms suggested by various prominent economists and the ones implemented by the RBI were being compared to the big bang reforms of the early 1990s. Just like our former finance minister and our current Prime Minister, Dr. Manmohan Singh had been the messiah then, people were calling the newly elected RBI governor, Mr. Raghuram Rajan the messiah of modern day India. However, the description of these recent economic issues by various economic and political analysts contain shades of ideological bias. Some of them believe that the external sector situation this time was far worse than the crisis of 1991. Others beg to differ.

At no point can the fundamental difference between then and now be negated. In 1991 the western economies were still strong, having an outward mind-set with the purpose of strengthening the process of globalisation. The world is very different now with OECD countries having an inward approach, trying to strengthen their domestic economy in order to minimise the impact of international crisis and high volatility in the international market. The reasons for a substantial increase in the current account deficit (CAD) are also different. Back then the Gulf War had triggered a sharp rise in international oil prices. Being one of the largest importers of energy, India’s import bill was on the rise due to the twin reasons of increase in the prices of crude oil and a surge in oil import volume. This crisis in the Middle East had also slowed down the economies of India’s trading partners. The partial loss of export market slowed India’s export volume growth to 4% in 1990-91. Furthermore, India’s political crisis added to a crumbling economy with a loss of investor confidence and a downgrade of the country’s credit rating. These called for structural reforms, the liberalisation of the Indian economy and a step towards globalisation. The recent current account deficit (CAD) has a story of its own. India’s imports rose from $8 billion in 2007 to $90 billion. Rising imports were accompanied by the tapering of the loose monetary policy of the Federal Reserve as the US economy steadied itself on its path of recovery. Investors began pulling out their money from the Indian Economy as they forecasted a better investment climate in the United States. The rupee began to weaken against the dollar. Imports became costlier but gold showed an exception to the law of demand. To add to this the Syrian crisis was creating an upsurge in international oil prices. The financial markets had taken a beating. People thought history had repeated itself, this time more venomous. The belief however can only be termed as illusionary. After 2010 the inflow of excess global liquidity, a persistent rise in international food and oil prices along with the domestic mismanagement of supply of essential resources like land, coal, iron-ore and food items created a potent cocktail of high inflation and low growth. One major difference between 1991 and now is the availability of global financial flows. Back then the western financial capital had not penetrated India. Now, a substantial part of the western capital is tied to India and the outflow of foreign capital due to the depreciation of the INR had been one of contributors to the Indian economic crisis earlier this year.

Both the 1991 and the current economic crisis have taught us important lessons. After 1991 we learnt to never keep the exchange rate fixed and overvalued. The government stopped the automatic monetisation of government deficit and switched over to an auction based market, borrowing for meeting the fiscal deficits. Liberalising equity flows along with opening up of the Indian economy rendered an increase in GDP as foreign investors looked at India as an investment destination. Even though the economy has revived considerably over the past couple of months, there are lessons which need to be learnt. Indians needs to bear in their minds that the injection of billions of dollars in the US market could suddenly cause an inflationary pressure in their market thereby affecting the international economy. Also the cheap, finance capital flowing into India, needs to be used judiciously to increase domestic productivity or else it will become an external debt trap. The domestic companies had created financial and not real wealth. As a result the interest payable on their foreign loans far exceeds their annual earnings. The lesson taught here is that there is no substitute for real wealth and higher productivity. Playing stock market games will only add to their distress. The government could allow an increase in the extraction of its coal and iron-ore reserves to reduce the CAD. A tighter fiscal policy is an urgent requirement to supress the domestic demand. It is surprising to see that the men in power now, had been the heroes then. Constant conflict with the judiciary and lack of economic foresight by the same men now has risen questions on their credibility. Maybe it’s time for change. More than the people of India, the markets are looking forward to the upcoming elections.

There is a common opinion that the heroes of 1991 are the villains of present day India. Did someone say history was being re-written?


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