Different continents, different problems, different economies yet similar ambiguous speech. Following is the extract of speech of RBI Governor (the Indian counterpart of U.S. Federal Reserve, Ben Bernanke):
In 1991, India came close to defaulting on foreign debt payments when the first Gulf War drove oil prices up, leading to a depletion of foreign reserves and a currency crash. RBI Gov. Subbarao said the economy was far more resilient now and that the probability of an “implosion” was low. India’s current account deficit for last year is estimated to be higher than in 1991, and short-term debt makes up twice as much of total debt as it did in 1991, the RBI governor said. “That is quite a disturbing picture,” he said. “Nevertheless, I would still argue that in 1991 an implosion was imminent, in 2012, an implosion in not imminent.” “There are serious concerns about the macroeconomy, about our policy environment, and about our governance,” Subbarao said at a panel discussion attended by Prime Minister Manmohan Singh. “We should prove to the world that the current downturn is just a short-term phenomenon and that the long-term growth drivers will come back into play,” Subbarao said. (Source: http://in.reuters.com/article/2012/04/15/india-subbarao-idINDEE83E00D20120415)
At first translation of above speech into plain English, without being economical with truth: “In 1991 we were caught by surprise, this time we are more prepared as also strongly hopeful that same situation will not be repeated as we have replaced short-term debts with long term debts but if global recession or the high prices of crude continued for more than one or two fiscal years than we are as doomed as we were in 1991.”………….”Even though we could not come up with any idea to stimulate growth, in spite of high demand as we failed generating jobs or income of common man who is already hit by inflation @15%, we are still optimistic that some miracle will happen.” End of translation.
Now lets us come to hard figures. From 1985 to 1987 saw a growth of 6% to 15% (on month to month basis). In 1991 the bank rate of interest was 12% and compulsory deposits (CRR+SLR) which were to be maintained by banks were about 52%. In 2012 the rate of interest is at about 9% and compulsory deposits are @ 33.5%. Inflation from 1985 to 1991 had risen by 79 points with base year of 1995 i.e. annual increase of above 10% just like today. In April 1991 the growth saw a steep declined from 6.9% to -0.2% which it took several years to stabilize above 5%. The reason was squeezing the liquidity from the market by raising the compulsory deposits further by 5% to raise it to some what 57%. The next decade saw massive ‘Non Performing Assets’ by Banks and in 1996 Debt Recovery Tribunals were established to deal with the problems. So when we faced 2008 our banks had already purged their carrion of NPA from their closets while world situation is aptly described as under:
Banks lent to a bunch of low grade private and commercial customers who couldn’t pay them back, had overvalued the collateral and suddenly the whole world was in the shit. The governments around the world got very busy intervening in different ways. In some countries they put up giant guarantees, in some they lent (freshly printed) money to banks, and in some they bought their shares and therefore partly or fully nationalising them.( extracted from http://thebankers.blogspot.co.uk/2012/04/nbnk-who-are-they.html)
Now having seen the cycle of high growth from 1999 to 2000 and 2002 to 2008, The Government is just waiting for the next cycle of growth to happen, to take its credit. The figures I have given above, only to show that the releasing or sucking the liquidity has no connection with need of the hour, except to provide relief to the Government of the day. But it would not be over without explaining the cycle of growth.
India is a developing country with a very large number of population so poor that they live on one meal a day. Why? Because they have no job. Because all depend upon agriculture which depends upon rain among many factors. Unlike USA where growth means people will have to spend more, in India the growth means just few people start eating two times a day. And this happens inspite of the Government and RBI. It is not Government is not doing anything but the delivery mechanism is extremely corrupt and hardly 5% of subsidies meant for poor reaches them.
So what is in store. The country has to finance the Government and more liquidity would have to be sucked out of system which would be inflationary. Now add to this the burden of financing the oil subsidy and rise in crude oil price and fragile Humpty Dumpty falls again.
But there is always a silver line in India. The real economy is parallel. Yes it works in cash. No statistics no taxes only election finances. We all depend on that. Next General Election would be the real boost to economy.
© Sandeep Bhalla