A Remedy Worse than the disease
Miles and miles away from the epicentre, the
tremors of South-east Asia has at least struck India. In mid-January the rupee
breached the psychologically sensitive mark of 40 to the dollar and, panicked
at the prospect of its free fall, the monetary authorities did a neat somersault.
Putting an abrupt end to the "easy money" policy followed since October’96
and particularly since April ’97, the new RBI governor Jalan with the support
of outgoing Finance Minister Chidambaram took stern measures to mop up excess
liquidity and checkmate speculation in the forex market. The bank rate (the
basic reference rate put out by the RBI for lending to banks and which in turn
set the lending rate for commercial banks) was hiked by two percent and the
cash reserve ration (CRR, or the portion of their deposits which the banks have
to keep in reserve, i.e., cannot lend out) was increased by 0.5%. The first
measure means that credit would become much costlier throughout the economy
(in fact the process has already started) and the second signifies that banks
are debarred from lending an additional Rs. 2,400 crores. Several other steps
were also taken, e.g., squeezing the credit facilities available to exporters
and importers through a reduction in the export re-finance limit and an increase
in the interest surcharge on import finance from 15 to 30%.
The extent of policy reversal thus effected would be evident if we look back a little. The Bank rate was reduced in April’97 from 12% to 11%, then to 10% in June, then again to 9% in October. As regards the CRR, in October’96 it was cut by 2 percentage points, from 12% to 10%, in four phases. A similar eight-phased cut 2% totalling was announced in October ’97. In November the cut was stopped and in December it was raised again by 0.5%, taking it to 10%. Finally on 16 January ’98 it was raised to 10.5%, simultaneously with the bank rate hike which took the latter to 12%.
All this was done in an atmosphere rife with speculation that the rupee would sink to around 45 to the dollar in February and in the face of the BJP’s mounting criticism about economic and financial mismanagement. The desired results were obtained instantaneously and for all to see: the rupee rose to around 39 to the dollar in a matter of 6 days. But the move has been widely criticised as one which opts for a stable rupee at the cost of growth. And this at a time when the economy is undeniably in the grip of a recession. The authorities, of course, have their own explanations and excuses. First, they point to the fact that even when the bank rate and the CRR were lowered sometime ago, there was hardly any enhancement in the general credit offtake by industry. To this the obvious counter-argument is that if the situation is already bad, why make it worse? Secondly, the RBI says that the measures are only a temporary step. But this only strengthens the widespread apprehension that the improvement in the rupee’s strength is only short-term.
While the debate thus goes on, we should grasp the basic fact that our economy is caught between the Goliath and the deep sea, with no easy way out. The RBI administered the bitter pill only after milder measures like regular off loading of dollars in the forex market — failed to arrest the drift, knowing fully well the harm it will cause the economy. The international ‘advisers’ also wanted this: thus Mr. Claude Smadja, the managing director of the World Economic Forum, dropped clear hints at the recently held India Economic Summit that the rupee should not be allowed to drop below 40 to the dollar. And precisely that was done, completely ignoring the recessionary impact that will discourage the inflow of investment dollars and thus keep up the pressure on the rupee.
As we write thee lines, the Indonesian Rupiah plunges to all-time low, pushing almost all currencies and stock prices in sought-east Asia; more than two dozen banks close down; the Fiji dollar is devalued by 20% — all paving the way for deeper and more demanding penetration of international finance capital which means further accentuation of the crises. What we see in India is an integral part of the whole process, and it is important to remember this.
What the recent measures most clearly bring to the fore is the deceptive and self-defeating character of India’s economic management. It is easily forgotten that the exchange rate of a particular currency is just a derivative of economic growth in that country: the former does not determine, but is determined by, the latter. By showing more concern for the derivative than for the real, i.e., for the exchange rate than for actual economic growth, the RBI has acted in a typically bourgeois manner of crisis management. As two young men observed in a small booklet published exactly 150 years ago: "And how does the bourgeoisie get over these crises?... by paving the way for more extensive and more destructive crisis, and by diminishing the means whereby crises are prevented."
--Arindam Sen