Is the Indian economy heading for a 1991 like crisis?

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 Is the Indian economy heading for a 1991 like crisis?
Often credited with being the architect of economic reforms by pulling the economy from the brink in 1991, Prime Minister Manmohan Singh and his team must avoid taking us right back there.

In fact, on some parameters like current account deficit, India was far better off in 1991, then in 2013.

The media is now speculating whether we are headed for an external debt crisis like in 1991. A report in the Mint states that this fiscal, the country has to repay $172.35 billion-which is 44% of the country's debt stock of $390.04 billion. This is certainly worrying by any standards.

For the last two years our current account deficit had very few people worried, because of the huge hot money that came in from foreign fund flows into the stock and Indian debt markets. A small pullout by foreign funds in the debt and equity segments of the stock market has already jolted the rupee.

Analysts are now worried that more selling pressure in the equity markets by foreign funds could be bad for the rupee, markets and the economy.

A lot could have been done by the UPA in the last 9 years of rule, particularly liberalising FDI which would have bought in dollars. However, it did very little to either attract FDI or boost exports. The few reforms that have taken place have happened after Mamata Banerjee pulled out of the UPA, but the rupee has tumbled even more since then.

The last few months there seen knee jerk reactions from the RBI, SEBI and the government to help prevent a rout on the rupee, which is not going to solve the fundamental problem of a ballooning current account deficit. Of course, in the meantime you would keep finding Finance Minister Chidambaram on television trying to calm nerves of the forex market by talking of more reforms.

GDP growth rates are now at a decade low and the government is depending on the RBI to cut rates and boost growth rates. However, RBI is unlikely to cut interest rates anytime soon given that the rupee is in a freefall and we are going to have lot of imported inflation, particularly from crude oil.

The real worry for the Indian economy now is if US Federal Reserve decides to withdrawing stimulus in the US which could lead to liquidity being pulled back from around the globe. If that happens be rest assured that foreign funds would withdraw from Indian markets sending the rupee into a tailspin. In the mean time one has to also pray that global rating agency S&P does not downgrade India's sovereign rating to junk, which could see huge outflows from the market.

Clearly, we have an external debt crisis looming and a ballooning current account deficit playing havoc with the rupee.

Elevated interest and decade low growth rates are adding to the economic misery. We may not have a 1991 like crisis as yet, but the Indian economy certainly looks vulnerable, if the external environment changes rapidly.The only silver lining is the stronger forex reserves in comparison to 1991.

Read more about: chidambaram, economic crisis
Story first published: Wednesday, July 10, 2013, 8:34 [IST]
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