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Millennium Post

Of Kaushik Basu and his doublespeak...

What had changed of eminent economist turned administrator Kaushik Basu between April 2012 and August 2013? A lot, actually. Basu was then the chief economic advisor to the then union finance minister, Pranab Mukherjee. The official positions of both have changed. While Pranab Mukherjee is now the President of India, Basu had moved on, well before his mentor occupied Rashtrapati Bhavan, to take up a higher responsibility at the Washington-based World Bank head office as the chief economist cum vice-president for development economics. In April, last year, Basu sang a different tune with regard to the situation of Indian economy. He likened it to nearly the 1991 crisis situation which he now denies despite further worsening of the state of Indian economy and a massive debt repayment crisis looming for the country’s external commercial borrowers. Curiously, Basu’s perception of India’s current economic situation is now more on the lines of the UPA government.

The World Bank chief economist’s latest assertion that India’s economic problems, including a wide current account deficit that has pushed the rupee to record lows, cannot be compared to the country’s 1991 balance-of-payments crisis appears to be a contradiction from his earlier position when he matter-of-factly blamed the policy paralysis and indecision in the government for the economic slow-down and felt that the situation would not improve till 2014 Lok Sabha elections. Basu’s views, expressed before a learned audience in Washington DC, had stirred up a hornets’ nest among Indian politicians, policy makers and intelligentsia to the embarrassment of the UPA government and the Congress party, then. A few days ago, he said
different things in Delhi.

This time, Basu cited a raft of economic data to show that the current situation was healthier than that of 1991, describing such comparisons (with the 1991 situation) as a ‘non-question,’ and suggested India should use its foreign exchange reserves to help stabilise the Rupee. Incidentally, Basu avoided mention of policy paralysis or the need for a fresh round of economic reforms considering the fact that the latest relaxation of FDI norms in a number of areas from infrastructure, civil aviation, defence, insurance, M&A to retail and real estate has evoked little response from foreign investors. But, the most surprising part of Basu’s treatise on Indian economy was to rate the current situation much healthier than that of 1991 and his advice to release Dollar reserves to stabilise Rupee. Wasn’t he clearly endorsing the UPA government’s position on the present state of economy?

It is difficult to believe that the World Bank chief economist is unaware of the quality and true worth of India’s current foreign exchange reserves and the impact of the falling Rupee on the economy and people of the country, which is highly import-dependent for essentials such as petroleum, coal, fertiliser and inputs, edible oil, industrial raw materials, machinery and equipment, defence hardware, aircraft and ocean-going ships. The falling Rupee poses the single biggest threat to the stability of Indian economy. The trend today is much worse than what it was in 1991, when the value of the Indian currency was much higher – Rs 17-19 to a US$. Following the official devaluation of the Indian currency in 1992, the exchange rate was: Rs 24-31 to a US$. The currency remained stable at Rs 31-33 for a US$ till the end of 1995-1996 which helped the process of the country’s economic reform become a success. The currency has already breached the psychological barrier of Rs 65 for a dollar and is still heading southward.

Similarly, there is little substance in the World Bank chief economist’s suggestion that India could use its foreign exchange reserves to stabilise Rupee. Basu should know that India’s present foreign exchange reserves of around $278 billion are causing more agony than ecstasy to the national and international business community and financial institutions as a good part of it is in the form of FII investment in the stock market, which has lost massive value in the last few weeks due to FII panic sale fearing payment default and repatriation hurdles if the economy continues to sink.
 A $172-billion external commercial debt repayment liability alone by end-March will reduce the RBI’s forex kitty to merely $105 billion if the reserves don’t get further depleted in the next six months. Considering that India’s average monthly import bill is around $50 billion, the forex reserves could be good for covering only two months’ import bill after 31 March, 2014. It may very well be a warning to the next government. Last year, India ran a trade deficit of over $192 billion as against 1990-1991 trade deficit of only around $ 10 billion. In fact, RBI hardly has any surplus forex resources to play with in the market to stabilise Rupee. If it had, Rupee would not plunge in the first place the way it did in the last three months and the market also would not gamble with Rupee.

The yawning trade gap, alarmingly large current account deficit, uncomfortably high fiscal deficit, continuing high inflation for three years in a row, large external commercial borrowing by the Indian corporate sector, huge central borrowing, sharp fall in FDI as well as FII, economic slow-down in two successive years, dwindling foreign exchange reserves under pressure of luxury imports, Rupee’s free fall, panicked stock market and the prospect of massive cost of implementation of food security bill through government subsidy have turned the country’s economic situation much worse than what it was in April 2012.

Incidentally in 2012, Basu was not the lone senior government functionary to raise the storm signal about India’s impending economic crisis. Rahul Khullar, the then commerce secretary, who was rewarded by the government with the post-retirement appointment as chairman of the Telecom Regulatory Authority of India (TRAI), had told the annual general meeting of the Confederation of Indian Industry (CII) in Mumbai that India’s current economic issues reminded him of the situation it was faced with in 1989.  ‘We all know 23 years have gone by. It is a sense of déjà vu, because it is the same problem all over again,’ he had said. Rahul Khullar, economist and a career bureaucrat, knew what he was talking about. So did Basu although he is singing a different tune now for reasons other than hard trade and economic data. 

It seems the government and its pet economists are simply clueless about how to tackle the current economic situation or lack courage to handle it requiring a series of radical steps which will eventually mean reversal of the liberal trade and investment policy showing the government in poor light at both home and abroad. With Lok Sabha election only a few months away, return to a control and permit regime by Congress will sharpen its political opposition’s attach and use it as a major poll campaign tool against the ruling party. Understandably, the World Bank chief economist chose not to extol the virtues of trade and economic control for India in a situation like this.
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