More than a year ago, I argued that China’s GDP in purchasing power parity (PPP) dollars had overtaken that of the United States in 2010. This calculation is used in my book, Eclipse: Living in the Shadow of China’s Economic Dominance and plays a role in my conclusion that China has overtaken or is close […]
The RBI’s big decision is not how much to ease but whether to monetise the fiscal deficit.
Some years ago, Montek Ahluwalia, early in his tenure as Deputy Chairman of the Planning Commission, argued for using India’s foreign exchange reserves to finance a ramp-up in infrastructure. That proposal received a lukewarm response. One of the concerns was macroeconomic: the proposal really amounted to monetary financing of a larger, albeit public investment-driven, fiscal deficit. Many worried about this prospect of deficit-monetisation, especially since inflation (based on wholesale prices) was then running at about 5-6 per cent.
When the history of the impact of this global financial crisis on emerging markets is written, two questions that will have to be answered are whether residents in emerging market countries behaved differently from non-residents and indeed differently from the way they behaved in the earlier emerging market crises of the 1990s; and if so, why?
We must use the crisis to find the sensible middle ground between finance fetishism on the one hand, and status quo statism on the other.
This crisis is not over, by any means. The future may yet surprise us. But Indian policy-makers must draw lessons, premature though those might be. Here are possible lessons in several areas of macro-policy.
To guard against all capital outflows, forex reserves would have to be at least $1 trillion.
This crisis must leave Indian policy-makers shaken, not just stirred. Unlike the Asian crisis of ten years ago, the financial impact of this crisis has been severe (we are yet to see the full effects on the trade and real sides). The stock market has lost about half its value, the rupee has depreciated by 25 per cent, reserves have declined by about $60 billion, and the successive waves of liquidity scrambles have been unprecedented.
The upcoming G-20 summit meeting in Washington provides an opportunity for India to help shape the new global economic architecture in line with its strategic and economic interests. India should propose short-term, crisis response actions to help limit the economic downturn; advance a clear, medium-term agenda; and push for a political commitment by all countries to keep markets open and prevent trade barriers from going higher.
Writing in the Financial Times last week, Kishore Mahbubani rightly drew attention to the contrast between the handling by the United States and European countries of their own financial crises and their stance as advisers, lenders, and conditionality-setters when emerging markets faced their crises back in the late 1990s.
Cutting interest rates is not obviously positive for credit expansion.
This newspaper posed the question well: how can there be a credit crunch if credit continues to grow at a torrid 30 percent? Yet, it is undeniable that call rates have risen sharply to double-digit levels. What is going on? And how should monetary policy respond?
Preserving financial sector confidence, not monetary easing, is key.
“Brand India” is being buffeted by the global financial crisis. India has been more financially integrated than was generally supposed, and hence more affected by financial contagion than expected. The stakes are high because policy hesitancy or missteps can turn mild contagion into virulent disease.
The financial crisis has now caught up with emerging markets—with a vengeance. Wherever you look, in Eastern Europe and the Baltics, Latin America or Asia, the financial carnage is evident. Even China, the most immune to contagion, is going to see its growth decline from 12 percent to 9 percent. Elsewhere, panic in global financial markets has compelled the International Monetary Fund (IMF), which previously was trying to adapt to a no-crisis world, back in the lending and financial rescue business. While the IMF engages in talks with Hungary, Iceland, Ukraine, Pakistan, and other countries, the United States and its European partners have begun discussions about stepping in with credit lifelines to middle income developing countries in desperate need of dollar loans to avoid default.