New Delhi, Aug 17: The Spectre of 1991 is dead.
Prime Minister Manmohan Singh, the architect of India’s economic reforms that guided the country past the shoals of its worst economic crisis, believes there is no chance of re-living the nightmare again.
“There is no question of going back to 1991 (when the balance of payments crisis erupted). At that time, foreign exchange in India was a fixed rate. Now, it is linked to the market. We only correct the volatility of the rupee,” he said today.
Singh was refuting critics who have slammed the UPA government for the ham-handed manner in which it has tried to deal with the dramatic fall in the value of the rupee since March.
Earlier this week, investors took fright when the government re-imposed capital controls on outward remittances by individuals and companies — the first time it has done so since February 1992 when it adopted the liberalised exchange rate management system (LERMS) — and pummelled stocks triggering a market meltdown on Friday.
Individuals can now remit only $75,000 a year under LERMS against $200,000 earlier. Restrictions have also been placed on companies looking to fund their overseas subsidiaries. The prospect of further measures to control dollar outflows — strenuously denied by the finance ministry and the Reserve Bank of India — had re-ignited talk of 1991.
In June 1991, India was on the verge of a payment default when its foreign exchange reserves shrank to $1.1 billion, which was just enough to pay for 15 days of imports.
“We now have reserves to cover seven months of imports. So there is no comparison,” the Prime Minister said at a small ceremony at his residence to mark the release of the fourth volume of RBI’s history.
But some parallels are inescapable.
In 1991-92, India was forced to clamp down on imports, especially oil and oil products, which fell 11 per cent to $5.36 billion from $6.03 billion in 1990-91. As a result, India was able to slash its current account deficit — the gap between imports and exports and net financial transfers — to $2.83 billion from $7.72 billion in the previous year.
CAD has turned into a big area of concern today after it ballooned to 4.8 per cent of GDP in March — way above the 2.5 per cent that the RBI believes the economy can sustain. This time the government is clamping down on gold imports.
It cannot curb oil imports as it did in 1991 because that would scupper growth, which has slumped to 5 per cent from the levels of 9 per cent between 2009 and 2011.
Admitting that CAD was a problem area, the Prime Minister said: “We seem to be investing a lot in unproductive assets.”
The government wants to hold bullion imports this year to well below last year’s figure of 845 tonnes.
Like in 1991, the government has been wrestling with the problem of a slump in fund flows. At that time, it fought its way out of trouble by negotiating a standby arrangement with International Monetary Fund in October 1991 for $2.3 billion over a 20-month period (till May 1993). It also negotiated a structural adjustment loan with the World Bank of $500 million in December 1991.
It also floated the India Development Bonds to mobilise funds from non-resident Indians and managed to raise $1.63 billion.
Foreign investors have been reluctant to invest in projects or in India’s low-yield capital markets this year, sparking worries on how it will finance the widening CAD. Last year, fund flows were adequate and the government did not have to dip into its foreign exchange reserves to fund the $88.2 billion current account deficit.
So, the government has been thinking of floating quasi-sovereign bond issues through state-owned entities. Like in 1991, it is looking to raise money from NRIs again by increasing the interest cap on their deposits in India.
The bond flotations will swell the external debt, which was estimated at $ 376.29 billion at the end of December 2012, or 20.6 per cent of GDP