1991 all over again

India needs a dose of the urgency for reform that marked the last time it faced an economy this troubled. With the value of the rupee plunging to new lows, the current account deficit at an alltime high and inflation running at nearly a ten-percent annual clip, India is in serious economic trouble. Indeed many are beginning to wonder whether the country is edging toward a replay of the events in the summer of 1991. Back then, an acute balance of payments crisis forced ew !elhi into the indignity of pawning its gold reserves in order to secure desperately needed international financing.

"t a small public event the other week, !uvvuri #ubbarao, the outgoing head of the central bank, pointedly referred to a recent book, $his $ime is !ifferent% &ight 'enturies of (inancial (olly, and conceded that policymakers rarely learn from their mistakes. )e conceded that%

*+ in matters of economics and finance, history repeats itself, not because it is an inherent trait of history, but because we don,t learn from history and let the repeat occur.-

$his is a theme that policymakers have been pondering for a while. .ore than a year ago, at what was ostensibly a celebration of an updated book on the economic reforms cataly/ed by the 1991 debacle, #ubbarao warned that the dangers sparking that crisis 0 ballooning fiscal and current account deficits 0 were once again lurking. "t the same time, a high-ranking commerce ministry official told a group of business leaders that economic indicators were provoking *a sense of d123 vu.- Worried that conditions were ripe for a replay of the 1991 crisis, he e4claimed%

*Why are we dodging these 5policy challenges67 In 1991, we were candid enough to take these decisions. $he 8uicker we take these decisions, the better it would be, instead of acting like ostriches.-

9rime .inister .anmohan #ingh flatly re2ects the comparison, however, stating that *$here is no 8uestion of going back to 1991.- )e is basically right, since the country is in a much more resilient position than two decades ago. $hat said, it would do wonders if the political class were once again sei/ed with the sense of urgency that gripped ew !elhi back in 1991. 9erhaps then a

solid determination will emerge to push forward with a new round of economic reforms that have been put off for years.

#hoddy management of the economy has been a hallmark of #ingh,s second term, which is highly ironic given that he and his current economic team are widely credited with pulling the country out of the fire :: years ago. $hen serving as the newly appointed finance minister to 9rime .inister 9.;. arasimha <ao, #ingh famously inaugurated the reform era by 8uoting ;ictor )ugo% * o power on &arth can stop an idea whose time has come.- $hese days, however, he gives every sign of being trapped in #amuel Beckett,s absurdist play, Waiting for =odot.

#till, whatever #ingh,s merits as a policymaker, he hardly deserves all of the criticism he receives for India,s travails. " good part of the fault lies in ew !elhi,s peculiar structure of decision-making. #ingh,s diarchal arrangement with #onia =andhi, the 'ongress 9arty,s riskadverse, redistributionist-minded matron, has been a recipe for policy inertia and inconstancy, prompting one Western diplomat to e4claim a while back that *&ven the power structures in orth >orea are clearer than those in India.-

?fficials also argue, with some 2ustification, that India,s immediate problems are not of its own making and other countries are in the same leaky boat. $he pro4imate reason for the current crisis can be traced back to three months ago when the @.#. (ederal <eserve hinted that it would begin curtailing its ultra-e4pansionary monetary policy, which has kept global li8uidity at an artificially high level in recent years. $hat signal caused foreign investors to begin pulling their money out of a number of emerging markets. India has been hit most severely, but the repercussions have also been felt in Indonesia and, to a lesser e4tent, $hailand, .alaysia, #outh "frica, $urkey and Bra/il. Indeed, some analysts Ahere and hereB are warning of calamity redu4 0 something similar to the 199C-9D "sian financial crisis that triggered months of global economic distress.

It,s likewise true, as Indian leaders point out, that much of the deteriorating trade balance is due to the country,s dire energy shortages and the conse8uent need to import copious supplies of dollar-denominated foreign oil.

.oreover, as #ingh argues, India is in a far stronger place than it was two decades ago. $he economy has more than 8uadrupled since then and according to the World Bank the country has

now overtaken Eapan as the world,s third-largest economy Ameasured on the basis of purchasing power parityB. In contrast to 1991, the Indian central bank today has a large buffer of foreign currency reserves Aaround F:CG billionB and, since the rupee,s value is now determined by market forces, the bank does not need to deplete those holdings trying to prop up a fi4ed e4change rate. or is ew !elhi today buried in e4ternal debt like it was in 1991 when the servicing of sovereign debt consumed HG percent of e4port earnings.

"nother key, largely unremarked difference regards political stability. India,s problem today is policy stasis, as opposed to the political turmoil raging two decades ago. "s parliamentary elections approached in mid-1991, the country had seen three governments, each with a different prime minister and finance minister, in 1D months. $he campaign was marred by greater violence than witnessed in previous elections. $hen came the assassination of the election frontrunner, former 9rime .inister <a2iv =andhi, whose death followed by 2ust seven years the assassination of his mother, 9rime .inister Indira =andhi. .a2or insurgencies in >ashmir and 9un2ab were also bla/ing. By the summer of 1991, many observers believed the country was on the brink of tragedy. $he ew Iork $imes .aga/ine published a long article detailing *India,s descent into confusion and despair,- while the newspaper,s editorial writers advised readers to *pity Indiabecause the country was in danger of fragmenting along sectarian lines.

onetheless, the echoes of 1991 are easy enough to discern. (irst, the trade imbalance is at a level 0 nearly five percent of =!9 0 much higher than it was two decades ago and almost twice what the central bank says is sustainable. "nd while the government itself is not encumbered by e4ternal debt, this is not the case for the corporate sector. India Inc. carries a relatively high level of non-rupee-denominated debt and its capacity for repayment on foreign obligations coming due is obviously abraded by the rupee,s precipitous decline. 9rivate-sector strains also could easily spill over into a state-run banking system already burdened by a rising share of non-performing loans. (inally, there is talk of ew !elhi needing to take out a loan from the International .onetary (und, 2ust like in 1991.

"dding to the sense of d123 vu is that, in an attempt to stanch the outflow of money, the government is reverting to actions reminiscent of an earlier era. " case in point is the controls that have suddenly been instituted on domestic capital. ?verseas investments by Indian businesses are now face new restrictions, as do outward remittances by householdsJ personal investments in foreign real estate are now prohibited. $he central bank says it is willing to grant waivers for legitimate personal outflows that e4ceed the new caps, but this mechanism bears an unfavorable comparison to the license ra2 that was supposedly laid to rest two decades ago.

)igher duties have also been slapped on gold imports, which drain the economy of foreign currency. #ingh chides Indians for *investing in unproductive assets,- even though one reason they import so much gold is to hedge against the high inflation rate. $he higher duties are also spurring increased levels of gold smuggling, an activity that led to the e4pansion of criminal networks in .umbai in the 19CGs.

But the most basic similarity to 1991 is, as $he &conomist noted last year, the *Bre/hnev-grade complacency- that afflicts ew !elhi, especially the top ranks of the 'ongress 9arty. $he problem is that, since economic reforms were born in the crucible of intense crisis two decades ago, there e4ists no intellectual tradition underpinning them nor has a political champion emerged to galvani/e public opinion. "s one commentator argues%

*the Koriginal sin, of 1991 is the fact that reform was pursued in crisis mode, with the underlying rationale never fleshed out or articulated once the moment of immediate crisis had passed.-

Both =urcharan !as, business leader turned public intellectual, and andan ilekani, one of the famed co-founders of Infosys, observe that reforms have been pushed more by technocrats like #ingh than by political leaders, a condition that ensures narrow and limited support. $he word *reform,- ilekani notes, remains *conspicuously absent from the election manifestos of India,s parties.- #ingh flagged the conse8uences in a newspaper interview last year%

*$he logic of an open economy and its benefits are still not widely understood among the general public. 9ublic discourse still sees markets as anti-public welfare. $he instinctive reactions of many, both in the political class and in the public at large, is to revert to a state controlled system. $here is no realisation that a reversal to an earlier era is neither possible nor desirable. &ven a neighbour like 'hina has understood the logic of an open economy and is developing the institutional framework which is re8uired for this.-

$his broad ambivalence, if not hostility, accounts for a great deal, including the perceived necessity in ew !elhi of *reform by stealth,- a mode that one observer describes this way%

*(aced with politically unpalatable proposals, Indian politicians and bureaucrats often go 8uiet, enact reforms in the dead of the night and then pray that the opposition is either too la/y or preoccupied to react.-

$he difference also e4plains the glaring silence in ew !elhi two summers ago at the twentieth anniversary of the 1991 reforms 0 even #ingh himself remained mute 0 as well as arasimha <ao,s erasure from the 'ongress 9arty,s institutional memory. Ironically, the economic transformations that #ingh set in motion two decades ago have only reinforced the status-8uo orientation of his party colleagues. "s a result, 'ongress has spent much of its time in power instituting e4pensive, market-distorting social welfare schemes instead of productivity-enhancing measures. $his attitude tolerated 9ranab .ukher2ee,s disastrous stint as finance minister in the critical years of :GG9-1:. &ven now, party leaders are ambivalent about the modest reforms that #ingh and his new finance minister 9alaniappan 'hidambaram are championing.

#ome contend that the upside of the rupee,s rapid depreciation will be a large e4port surge. But the undersi/ed manufacturing sector, along with the country,s decrepit infrastructure and the alienation of multi-national corporations, put strong limits on whatever bounce can be e4pected. India,s famed information technology sector will benefit from the lower rupee but, with an employment base of 2ust two million, it is much too small by itself to lift India onto a higher economic tra2ectory. "nd as a new report by the "sian !evelopment Bank makes clear, no emerging market can transform itself without developing a significant industrial base. Indeed, the report highlights India as a prime e4ample of an agriculture-based economy that bypasses the industriali/ation process and tries to leap-frog into a services-oriented economy. #uch a strategy, the "!B warns, generates only *low-8uality service sector 2obs.-

#o, let,s hope that the specter of 1991 lingers long enough to galvani/e ew !elhi elites 0 especially 'ongress 9arty leaders who are now in populist election mode 0 with the courage to implement game-changing reforms. $aking a cue from the "!B, they can start by dismantling the anarchic laws governing labor markets and the ac8uisition of land for industrial pro2ects which have stifled the growth of labor-intensive manufacturing. $his should be a huge comparative advantage, though worrying signs are emerging of Indian manufacturers shifting to other countries. But until some hard measures are enacted, all of ew !elhi,s talk about building the country into a global manufacturing hub will continue to ring hollow.

iti #rivastava