Edit: End of quantitative easing?

Financial markets globally are awaiting the final countdown to the winding up of US Federal Reserve’s extraordinary monetary measure, better known as “quantitative easing”. The Fed is also set to review its interest rate policy sometime early next year and target a hike in short-term rates — which have been close to zero since 2008. Global fund managers and institutional investors might recast their investment portfolios by moving away from the emerging markets economies (EME) which could bring in its train volatility in EME capital markets.  

It was under the shadow of these developments that last week’s meeting of G20 finance ministers’ deputies was held in Cairns in Australia. And it is in this light that we should perceive India’s finance secretary, Arvind Mayaram’s concerns about the US Federal Reserve’s decision to wind up QEs. His concern perhaps stems from past experience.  A year and a half ago, suggestions of tapering held out by the Federal reserve’s outgoing chief, Ben Bernanke, were immediately followed by withdrawal of funds from EMEs like India, Brazil, Russia, Mexico and others. Consequently, capital markets and exchange rates had nose-dived in these countries.  
With the Federal Reserve’s new chief indicating an early and decisive end to QE, the fears of another round of financial turmoil have resurfaced.  However, to protest resetting the US Fed’s monetary policy and to demand that it should be done keeping in view what happens to the EMEs, is not reasonable. The Fed had earlier stated that its primary goal was to take care of the macro-economic needs of the US economy. It’s just hard luck if the EMEs get hurt in that process. 
The fact is that a nation’s economic policies cannot be permanently tied to other nations. If the US Federal Reserve policies need to be recast to suit the needs of the US economy, so be it.  

The crux of the matter is that the EMEs have got used to easy money. Quantitative Easing, which pumped in funds to promote economic activity, led to a lot of the additional liquidity flowing into EME markets. That easy money sustained the large trade deficits of many of these countries. Take India’s case, for example. We faced the worst economic crisis in 2012-13 triggered by a reversal flow of funds. The stock markets tanked and the rupee depreciated  from around mid-45 to a dollar to almost 68, over just a few months. 

But we were then running an unsustainable current account deficit (CAD) on the back of huge spurts in gold and other imports. These runaway external deficits were being funded through capital receipts. The CAD become menacing only when the capital receipts started withering. We had developed the bad habit of using other people’s money for our consumption. 

Things have changed today. The current account is much more manageable with gold imports dwindling to a trickle. Other measures have kicked in as well. India is able to control better its imports of coal, oil and gas which ran up a bill of $160 billion in 2012. Currently, India looks a better investment bet. And our fears about QE seem exaggerated.  

We cannot blame others for our own laxity. Or demand that they lay down their policies to meet  our requirements.  The corrections should come from within. Mayaram’s advice follows the traditional Indian line which now needs to change.