With the rupee scaling new historic lows against the dollar every day, the spectre of India knocking the doors of the International Monetary Fund (IMF) to seek a bail out is just a matter of time. While the establishment is still in denial mode with the likes of Planning Commission deputy chairman Montek Singh Ahluwalia still ruling out the IMF option, independent voices like former FICCI secretary general Rajiv Kumar believe the time has come to bite the bullet to rescue Indian currency from going down the drain.
In an exclusive conversation with Zee Media’s Amish Devgan in Bharat Bhagya Vidhata’s ‘Mudda Aapka’, Kumar says the time has come the government should approach the IMF to rescue the plunging rupee. Not only that, Kumar suggests three key measures to improve the country’s economic situation.
But, first priority should be to approach the IMF and the delay will only worsen the situation.
“The government should immediately approach IMF to stop rupee plunge and it will send positive signals to the market that we are ready to bite the bullet.”
Kumar also thinks that India could have better managed the 1991 economic crisis if it had approached the international lending body in 1989.
While a loan from the IMF is a short-term solution, the crisis that haunts the Indian economy cannot be ward off without carrying out massive supply-side reforms, particularly cutting out the middleman in vegetable, fruits and dairy chains. The reforms also entail abolition of the Agriculture Produce Marketing Committee Act. Last, but not the least, Kumar thinks the Food Security Bill should be scrapped to restore investor confidence.
The low confidence in the economy after 2010 has seen decline in investments.
“Between 1998 and 2007 the supply had increased manifold. But, after 2010, we have created a situation where investors have been spending more abroad than in the country,” Kumar said.
To dismiss the current inflationary tendencies as a demand side problem is wrong diagnosis. Instead, as Kumar asserts, it is the result of supply side irregularities.
“There is confusion among economists today that inflation is due to rise in demand. This is only a myth because in a poor country demand will always rise. In our country the main reason for inflation is shortage of supply.”
Nowhere the problem is more glaring than food supply chains which have resulted in steep escalation in prices of essential food commodities. Data is self-explanatory in this regard, stressed Kumar. “In the history of modern India, perhaps it is for the first time that the food inflation has been above 10 % for more than 60 months.”
Blaming external factors as most of our politicians do won’t help tackle the problem at hand. Tough measures must be adopted to address the issue.
“The inflation has come because of our own mistakes but unfortunately our politicians do not want to admit this. They (Politicos) always blame external factors for inflation. But, taking correct measures is the need of the hour,” he said.
The current legislative drift and acrimony won’t do India any good. Our politicians must behave more responsibly and be accountable.
“Our leaders should work diligently to deal with rising inflation,” Kumar added.
Freebie-culture or the politics of dole must be shunned and focus should shift to capacity augmentation and skill development, stressed Kumar while responding to a question from the audience. Governance must improve so that we don’t have to cope with rising prices of onion.
No unanimity among economists on the IMF option
While a section of economists argued that the government should send a positive signal to the markets and investors by approaching the IMF, others averred that the current economic situation doesn’t warrant that kind of approach.
In sync with Kumar’s view, Brinda Jagirdar, consulting economist (former chief economist at SBI) opined, “Perhaps, it may be a good idea to approach IMF on two counts. One, it will push the government to take some reform measures. Second, it will give a reassurance to the markets and investors that we have something to fall back on.”
Taking a glance at the macro-economic situation in 1991, India faced severe balance of payments (BoP) crisis and at that time India’s foreign exchange reserves could merely finance the import bill for a fortnight. However, this time India’s forex reserves (nearly 278 billion dollars) are sufficient to finance nearly seven months of imports. Furthermore, in 1991, there didn’t exist any capital account like FDI, FII, ECB (external commercial borrowings). Today, the government has access to other options also like sovereign bond, swaps lines with foreign central banks.
Agreeing with the facts which reveal that current economic conditions are not as precarious as they were in 1991, DK Pant, chief economist at India Ratings asserted, “As of now, the situation is not so bad that India has to approach the IMF for a bailout package. India has sufficient forex reserves to finance the import bill for almost seven months. Going to IMF means that you become subservient to the institution in terms of conditions imposed by it. In 1991, IMF imposed conditions which were met with but in case of current scenario whatever conditions they would like to impose won’t be acceptable because of compulsions of coalition politics.”
Likewise, Madan Sabnavis, chief economist at CARE Ratings averred, “Normally, we approach the IMF for a loan in case we are not left with any option and there is a fundamental imbalance in the Balance of Payments (BoP). We have not reached that stage where we have no solutions. Although things are adverse yet there is nothing fundamentally wrong with the BoP.”
The show airs on Monday @ 10pm