This is not 1991. That was the message India’s finance minister, Pranab Mukherjee (pictured), wanted to make plain on Monday to a meeting of his fellow top Congress Party members.
And he’s right, though there are some striking similarities: 1991 had Aung San Suu Kyi being awarded the Nobel Peace Prize, 2012 has her accepting it; 1991 saw the whole world listening to Bryan Adams’ “Everything I Do (I Do It For You)”, 2012 sees every Indian bar playing the same song, in no way ironically, on a daily basis.
But Mukherjee was focused less on such parallels than on accusations that India’s economy today mirrors that of the crisis that triggered the reforms of 1991, which in turn launched India toward what was once expected to be sustainable double-digit growth.
Well, India came close to but never quite managed that achievement. With GDP growth for the quarter ending in March at 5.3 per cent – a nine-year low – inflation above 7 per cent, the rupee at record lows, industrial production dismal and every conceivable deficit at or near record highs, the calls for major, sweeping reforms are growing.
Things were worse in 1991. As Arunabha Ghosh of Oxford’s Global Economic Governance Programme put it:
In 1991 India experienced a classic external payments crisis – high fiscal deficit, external borrowing to finance it, rising debt service commitments and resulting inflation, inadequate adjustments in the exchange rate and a deteriorating current account.
The fiscal deficit then was 9.4 per cent of GDP, much higher than the 5.76 per cent in the fiscal year that ended in March 2012. According to the finance ministry, external debt peaked at 38.7 per cent of GDP in the fiscal year ending in March 1992, compared to Citi’s estimate of 17.5 per cent for the recently ended fiscal year.
In 1991, like today, the global economic situation deteriorated, causing India’s export partners to cut back – according to Ghosh, export growth fell to 4 per cent a year in the fiscal year ending in March 1991. By comparison, in the fiscal year that ended in March – hardly a stellar one by any macroeconomic metric – exports grew 21 per cent.
Back then, the lead-up to the first Gulf War caused oil prices to spike. That was devastating for an oil-importing nation with hundreds of thousands of citizens forced to flee jobs in the Middle East, which had provided essential foreign exchange by sending money back home. India’s foreign exchange reserves fell to $1.2bn in January 1991. By June, they could cover just two weeks of imports.
Today, oil prices are high and India remains a big oil importer – in fact, oil imports soared 46.9 per cent to $155.6bn in the fiscal year ending in March – with a record trade deficit of $184.9bn, or 9.9 per cent of GDP. But the Reserve Bank of India’s foreign exchange reserves are much higher than they were in 1991, at $288.3bn.
In 1991, the rupee suffered a severe adjustment after a period of overvaluation – the government had the RBI devalue it by 20.5 per cent over three days. While the currency has fallen 24.4 per cent against the dollar over the last year, from Rs44.76 to Rs55.69, many argue that the rupee is not very far from its ideal rate of somewhere near Rs50.
While most lament its weakness, few worry that it will tip India into the sort of crisis it saw in 1991. For something approaching that level, most eyes are trained on Europe.
In 1991, India responded to its crisis. Granted, that was because it was forced to. Among the conditions of its bailout from the International Monetary Fund were demands that it open up trade and dismantle the license Raj. These were bold steps – bolder still because they were forced upon a nationalist country by foreign actors.
But the Indian government bit the bullet. And it worked. The Indian economy roared back and joined China at the top of the emerging markets heap.
So of course, Mukherjee is right – 2012 isn’t anything at all like 1991.
In 1991, India had a government that was committed to reforms and governance, rather than electioneering and power. It had a government willing take bold, even drastic steps, in order to save an economy on the brink.