Subbarao Sees 1991 Crisis Rerun Unlikely in Trade DeficitKartik Goyal and Haslinda Amin
India probably won’t suffer a repeat of its 1991 financing crisis even as it faces a record current-account deficit, central bank Governor Duvvuri Subbarao said.
“We’re unlikely to have a balance-of-payments crisis,” Subbarao said in an April 6 speech in the southern Indian city of Bangalore, flagging a more liberalized economy and mainly market-determined currency. Officials are in “no way interested in seeing the rupee” drop, top government adviser Raghuram Rajan said in a Bloomberg TV interview aired today.
The deficit swelled to $32.6 billion in the quarter ended Dec. 31, or 6.7 percent of gross domestic product, stoked by gold and oil imports and subdued exports. Subbarao said the imbalance in the widest measure of trade isn’t “sustainable,” exceeds the desired level of 2.5 percent of GDP and is “worrying” as it comes amid slowing economic growth.
The shortfall has triggered memories of the 1990s crisis, when India pledged gold as collateral for a loan from the International Monetary Fund after foreign reserves slid. The present-day deficit has led the nation to change policies since September by easing curbs and levies on capital inflows. India has also cut interest rates to boost faltering growth.
Two decades ago the country devalued the rupee, tackled government monopolies, cut tax rates and let foreign companies take majority stakes in sectors including automobiles and pharmaceuticals to rescue the economy.
“Rupee depreciation isn’t going to help that much in the short run” in spurring exports as overseas markets are suffering “deep” economic problems, Rajan, the chief economic adviser in India’s Finance Ministry, said in the television interview.
The former IMF chief economist said India has received significant inflows in the last few months and “there’s no real necessity to believe that we’re going to see a substantial fall in the rupee.” It may take two years to bring the deficit back to reasonable levels, he said.
The currency has depreciated about 6.6 percent against the dollar in the past year, the second biggest decline in a basket of 11 Asian currencies tracked by Bloomberg. It has climbed 0.6 percent in 2013 and was at 54.735 at 9:34 a.m. in Mumbai.
The current-account gap was probably “significantly” narrower in January to March, Rajan said separately in an interview in Singapore on April 6.
Inflation remains stubborn and elevated, Subbarao also said in Bangalore. Consumer prices climbed almost 11 percent in February from a year earlier.
Finance Minister Palaniappan Chidambaram said in New Delhi two days ago that India needs to contain inflation. Chidambaram has pledged to narrow the nation’s budget shortfall further to help restrain the climb in the cost of living.
India’s GDP rose 5 percent in the fiscal year ended March 2013, the slowest pace since 2003, hampered partly by a moderation in investment, the statistics agency estimates.
The Reserve Bank of India has cut interest rates 50 basis points to 7.5 percent so far this year to support economic expansion. The next policy review is due May 3.