Saturday, April 21, 2012

1991 - 2011 Liberalization India's Journey to Nowhere

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1991-2011 – Liberalization – India’s Journey to Nowhere
The caretaker government in India headed by Prime Minister Chandra Shekhar, and Finance Minister Yashwant  Sinha’s immediate response was to secure an emergency loan of $2.2 billion from the International Monetary Fund by pledging 67 tons of India's gold reserves as collateral. Reserve Bank of India had to pledge India’s gold reserve to secure an emergency loan from the IMF which caused national outrage resulting in the caretaker government’s ouster and Congress won the fresh elections.
The move helped tide over the balance of payment crisis and kick-started Manmohan Singh’s economic reform process.
Crisis was caused by current account deficits and currency overvaluation.
The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s. During mid eighties, India started having balance of payments problems. Precipitated by the Gulf War, India’s oil import bill swelled, exports slumped, credit dried up and investors took their money out.
Due to the currency devaluation the Indian Rupee fell from 17.50 per dollar in 1991 to 26 per dollar in 1992. The investor confidence also played significant role in the sharp exchange rate depreciation. (Government stole money overnight from people, and country become poor.)
Root cause of the crisis: Gross (state and center combined) fiscal deficit (Expenditure more than Revenue) reached 12.7% in 1990-91. The Government borrowed from RBI to cover up the shortfall (deficit) not covered by the revenue. Money supply expanded as a result which led to high inflation. Government debt increased to 53% of GDP at the end of 1990-91 and the interest payments increased to 20% of the total central government expenditure in 1990-91.
Where Do India Stand Today
Are we heading towards the dangerous economic crisis of 1991? According to a report presented by major industry body FICCI on, the current financial situation is somewhat similar to 1991. The report presents a very gloomy picture of the economy. Report said that current state of borrowings and fiscal imbalance is more worrying than the crises two decades earlier.
FICCI’s report says that in the decade prior to 1991, the government’s borrowings increased significantly by annual average rate of 12 percent. Whereas in last five years, government’s borrowings increased by annual average rate of 32 percent. Similarly in the decade of 80s, non-plan expenditure saw an annual average increase of 20 percent whereas it is growing by annual average rate of 30 percent presently.
In last five years, fiscal deficit has grown by annual average rate of 30 percent as compared to annual average rate of 18 percent prior to the 1991 crisis. In the present scenario, growing revenue deficit is seen as a threat by economists.
Situation may worsen further by consistent slow revenue collection figures. In the last five FY, tax revenue growth has been 13 percent whereas it was 16 percent in the decade ended in 1990-91.
Trade deficit records new high at $185 b
The rising trade deficit, touching $184.9 billion mark, was a worrying factor.
Owing to the huge trade deficit, the current account deficit (CAD) is likely to be close to an uncomfortable 4 per cent of gross domestic product (GDP) in 2011-12.
The economic indicators are worrisome certainly. After the massive overrun of the budget estimate last fiscal, the projected fiscal deficit for 2012-13 at 5.1 per cent appears ambitious.
History of selling the Countries Assets
(How we reduced fiscal deficit by selling stakes in PSU)
Trends in the current account deficit are even more troubling. At 4 per cent of GDP in the first nine months of 2011-12, the current deficit is at levels not seen in a while. Rising oil prices, the consequent higher import bill, and a surge in gold imports seem to have combined with a fall in capital inflows to push up the deficit. Net FII investment in the stock market fell by more than half to Rs.47,935 crore in 2011-12, with most of it coming in the last quarter, according to SEBI data.
The trend of a rising current account deficit and falling capital inflows should be seen in the context of the foreign exchange reserves, which have been falling in recent months, thanks to the central bank's market intervention to support the rupee. At the current level of a little over $258 billion, the reserves cover about five months of imports, which is not a very comfortable position.
How much Precious Assets have been sold
In the name of divestment India has sold RS.  1, 00,264.71 (USD 25 billion) of assets i.e. public sector enterprises. Basically this is used to show fiscal prudence, but this is not fiscal prudence. Today situation is worst and with ONGC fiasco in selling FPO, government is looking at other alternatives. According to Bloomberg report government is planning find innovative way to sell the nation. This fiscal prudence has come from selling assets, auctioning natural resources. In 2010 it was one time profit from auctioning 3G telecom licenses.
The government had in 2010 mobilized Rs 1.08 lakh crore from auctioning of spectrum for 3G and broadband wireless access (BWA) services.
Nation for Sell
Now comes this wire from Bloomberg on another new plan. India plans to borrow as much as 500 billion rupees ($9.5 billion) using land and shares as collateral to bridge a budget deficit. The South Asian nation will set up a fund manager by Jan. 15 that will pledge stocks it holds in non-state companies including ITC Ltd. (ITC), Axis Bank Ltd. (AXSB) and Larsen & Toubro Ltd. (LT), the officials said declining to be identified before a public announcement. The company will use the proceeds to buy the government’s stakes in state-run firms.
The new holding company will pledge the stakes and real estate properties transferred to it from the Specified Undertaking of the Unit Trust of India, an agency formed in 2003. The state-run firm will be wound up within 3 weeks and the assets will be transferred to the new company, the officials said.
This is amazing jugglery and engineering to manage the fiscal deficit. Each year something like this comes…Though execution will be a task. Pledging land etc is a task which takes a long time.
A Myth Called Foreign Currency Reserve
India has foreign currency reserves of around 295 billion USD. Important question is it enough. If we look at its contribution, which has almost 142 billion USD in securities which is considered as hot money and can fly anytime. This will crash the stock market and rupee will collapse, this is reality. In real term we may consider this amount to be in the range of 175 billion USD to 195 billion USD. This may be enough for 3 months imports. If oil goes to 150 USD or more then all calculations will go awry.
The second problem is India’s coverage of foreign debt with foreign currency reserve. It stands at around 88% and may go down further. This is alarming situation.
What India Achieved
If we came back and situation looks similar then what really India achieved. In last 20 years we sold assets to be prudent, we opened market and still we are at the situation. Liberalization is starring at India’s policy makers.
India was Once a self sufficient in all aspects, now we are importing food i.e. Pulses, Edible Oil and many more items.
India’s consumer electronics is dominated by foreign companies and BPO is always criticized by great friend USA.
If we look at India’s HDI report (Human Development Indicators) we are doing poorly rather than excellent. Poverty is reduced by taking down poverty line. Is this economics, or politics?
In 2000 INDIA has been ranked 128th amongst 174 countries for which the United Nations Development Programme (UNDP) has released its latest computations of the Human Development Index (HDI).
In 2011 India ranks a low 134 among 187 countries in terms of the human development index (HDI), which assesses long-term progress in health, education and income indicators, said a UN report released on Wednesday. Although placed in the "medium" category, India's standing is way behind scores of economically less developed countries including Iraq and Philippines and Sri Lanka has been ranked 97. Iran is much higher at 88 and Cuba at 51.
The countries which are facing discrimination and ban from capitalist nations are doing good and liberalized India is doing badly. In fact its rank has gone down from128 to 132. Is this called development?
The most important question is why India liberalizing?