Indian Economic Crisis 2013

Topics: Monetary policy, Macroeconomics, Inflation Pages: 4 (1326 words) Published: August 27, 2013
Economic Crisis In India

As we are in an economic crisis although in its early stages. A situation where economic growth has collapsed, industrial output has stagnated for two years, jobs are being shacked, consumer inflation is close to 10 per cent, the current account deficit (CAD) in the balance of payments is nearly five per cent of GDP at last count, investment is escaping abroad and high fiscal deficit are supposedly indicator of future casualty. It was all avoidable, if our policy-makers had been more competent and effective. It is useful to briefly outline the five biggest economic policy mistakes (out of a long list), apart from the persistent nine-year long drought of productivity-enhancing economic reforms. 

The fiscal blowout of 2008-09

In fact, the great bulk of the overshooting occurred before the Lehman crisis of September 2008, mainly in the form of pay increases, subsidy hikes and NREGA rollout. 

This exceptional stretch of fiscal recklessness may indeed have cushioned the fallout from the global crisis for a year or two. But the composition of the huge expenditure hikes (mainly government pay, subsidies and entitlement programmes) made subsequent denial politically difficult. As a result, the persisting high fiscal deficits since 2008 have fuelled the long stretch of inflation, kept interest rates high, reduced public savings and fed the rising CAD.

Exchange rate mismanagement since 2009
The CAD has been consistently above the prime minister's "safe benchmark" of 2.5 per cent of GDP since 2009-10. That means we are in the fifth year of a dangerously high CAD. A significant contributory factor has been the authorities (government plus RBI) shift since spring 2009 to a relatively "hands off" policy towards the rupee's exchange rate. So, when capital inflows recovered since 2009, the rupee was allowed to appreciate sharply in 2009 and 2010, despite a clearly rising CAD. As pointed out then, the authorities should have instead...
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