InFocus

India in crises

Similarities and dissimilarities

Every flashpoint is not the same but follows a broad pattern such as weakening of currency, dip in financial markets, deceleration in GDP
growth, high inflation, and capital outflows
1991

1997

2013

GDP Growth

Growth moderated from a record

Growth nearly halved to 4.3% in FY
high level of 10.2% in FY 1989
1998 from 8% in FY 1997 and improved
to 5.3% in FY 1991 and dipped to soon to 6.7% in FY 1999
1.4% in FY 1992 to rebound to
5.4% in FY 1993

Growth moderated sharply from 9.3%

touched in FY 2011 to a decade-low
level of 5% in FY 2013. The RBI has
projected 5.5% growth for FY 2014

Rupee
Movement

The rupee depreciated by around

71% during FY 1991-93 on
devaluation to boost exports and
meet CAD gap while adopting a
dual-exchange rate regime

The Indian rupee depreciated 19% during

FY 1997-99, under the floating exchange
rate since 1993, but the depreciation was
lower compared with Indonesias rupiah
(83%) and Thailands baht (40%)

The Indian rupee weakened 21% during

FY 2012-14 so far, particularly after
the US Fed mooted tapering of the
bond purchase program in June 2013
raising capital outflow concerns

Monetary
Policy

The RBI sharply raised the CRR

and bank rate and took steps to
phase out of the automatic
monetisation of budget deficit

The RBI announced liquidity

The RBI tightened monetary policy by
slightly increasing CRR and bank rate for tightening measures with a view to
push up short-term interest rates and
short periods
check forex volatility

Fiscal policy

Fiscal deficit surged to 7.8% in FY Fiscal deficit was around 6% amid various
fiscal reforms. The FRBM Act, 2003,
1991 with higher expenditure on
ushered in a regime of fiscal rules aiming
subsidies and interest payment
to cut fiscal deficits and restrain debt

Inflation

Inflation entered double digits of

10.3% in FY 1991 and remained
elevated for the next five years
with higher share of fuel, power
and manufactured products

Current
Account
Deficit

CAD jumped to 3% of GDP in FY CAD comfortable at 1.0-1.5% of GDP

1991 as the oil import bill swelled with rising share of invisibles surplus
amid Gulf war and exports eased in
the absence of software services

Fiscal deficit targeted at 4.8% of GDP

for FY 2014, while upside risks have
emerged due to the sharp rupee
depreciation

Inflation rate was relatively lower

Inflation rate was higher around 9%,
around 5%, with lower contribution from driven by primary articles and the fuel
manufactured products
and power group

CAD at stubbornly high level of around

5% of GDP. Focus mainly on curbing
gold import o bridge CAD gap

Capital Account Capital flows to India were

confined to small official
concessional finance, while the
share of external borrowing was
rising

Capital flows gained momentum from

the 1990s after initiation of economic
reforms undergoing a shift from official
and private debt to non-debt-creating
flows

The global economic crisis increased

uncertainty over capital flows, while
inflows rebounded from lows in FY
2009 with massive liquidity injections
by advanced economies

External Debt

The external debt-to-GDP ratio

jumped to a record level of 38.7%
in FY 1992 on higher government
debt and changed definition to
include short-term trade credits

The external debt-to-GDP ratio at 25%

in FY 1997 was lower compared with
that of financial crisis-hit Indonesias
61% and Thailands 62%

External debt started going up from a

low of 17% in FY 2006 to 21% in FY
2013, while rupee depreciation would
cause further increase in the debt-toGDP ratio in FY 2014

Forex Reserves

Forex reserves dwindled to barely

two weeks of imports due to
significant drawdown for financing
of CAD in the earlier years

Forex reserves were improving, raising

the import cover from three months in
FY 1991 to eight-months in FY 1997,
10 months in FY 2001, and as high as
17-months in FY 2004

Forex reserves were steady after the

global economic crisis of 2008, while
the import cover eased to seven
months in FY 2013

Key Measures

Gold reserves pledged, nonessential imports discouraged, and

credit sought from the IMF and
other donors. Structural reforms
under the IMF programme
undertaken with emphasis on the
external sector

Monetary tightening, flexible exchange

rate and steps to bolster reserves through
issuance of Resurgent India Bonds helped
in stabilising the BoP

Monetary tightening by increasing

short-term rates, FDI hike in certain
sectors, increase in the FII limit in the
debt segment, partial diesel price
deregulation, and clearance of key
infrastructure projects

Impact

Economic liberalisation measures

helped India to return to life

India escaped the 1997 financial crisis

Though situation is not tough as in
engulfing Asian Tigers, which were hit by 1991, India will have to ensure smooth
surge in external debt and dip in
financing of CAD
domestic currency, with key reforms in
the earlier years
Year end March. FRBM: Fiscal responsibility and budget management. CAD: Current account deficit. CRR: Cash reserve ratio. BoP: Balance of payment.
Compiled by Vijay Ghutukade

Sep 02 15, 2013 CAPITAL MARKET

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