What the IMF would prescribe for India
India’s web of vulnerabilities has certainly expanded, and its macroeconomic environment is not getting any better, despite the government’s policy responses, the merits and timing of which are open to debate. But is India better off with some advice from the International Monetary Fund (IMF)? Neither the prime minister nor the finance minister will ever breathe a word on whether the IMF’s doors have been knocked on for support or guidance. Because the political fallout of that could be disastrous for the UPA government, which successfully steered India out of the global economic crisis of 2008 but frittered away opportunities to consolidate the domestic economy over the next couple of years. The fall of the rupee, sharper than the fall of the currencies of many other emerging markets, has raised global concerns, including the IMF’s. A top hedge fund manager in New York says there are some who are buying one-year call options of Rs 100 to a dollar. These buyers feel the rupee is defenceless, a scary view. Many FII analysts are making quick tours to India to meet policymakers and make a first-hand assessment of the economic climate. The situation is grim.
At an official press briefing in Washington DC, a questioner asked Gerry Rice, director of the communications department, IMF, whether the Fund had had any discussion with India about supporting its economy or offered any advice. Rice said, “Well, I wouldn’t want to speculate on any support or programme needs. But...” If nothing else, his answer only raised curiosity. Why didn’t Rice respond with a resolute “no”? That would have quashed doubts, if any, among analysts tracking emerging markets. But he chose to say he didn’t want to speculate, and added quite a bit about the prevalent economic scenario in the country. “The combination of large fiscal and current account deficits, high and persistent inflation, sizeable unhedged corporate foreign borrowing and reliance on portfolio inflows are long-standing vulnerabilities that have now been elevated as global liquidity conditions tighten, and this clearly has affected market confidence,” Rice pointed out.
A few days ago, addressing central bankers in Jackson Hole, Wyoming, Christine Lagarde, the IMF’s managing director, said first the US financial crisis had brought the world economy to its knees in 2008. Then came the eurozone troubles. The worry today is the risk of a slowdown in emerging markets pulling back growth in