QE/India: India and the United States aren’t just the biggest democracies in the world. They’re also monetary kissing cousins. So it was no surprise to see India’s prime minister offering qualified support for the Federal Reserve’s attempt at monetary stimulus. India has a large budget deficit, negative real interest rates and an ongoing payments deficit. Like the United States, India wants cheap global money to keep its party going.
While China, Brazil and other emerging markets have sharply criticised the Fed’s additional $600-billion quantitative easing, Prime Minister Manmohan Singh was quietly supportive, saying: “Anything that stimulates the underlying growth impulses of entrepreneurship in the United States would help the cause of global prosperity.”
That reflects the fact that India has benefited greatly from the current flood of global liquidity and needs it to continue. While growth in consumer prices is troublingly high and its domestic interest rates are well below inflation, its domestic money market is tight, even with 15 per cent growth in M3 money supply in the year to October. Bank borrowings from the central bank hit a record Rs1.2 lakh crore ($27 billion) on October 29.
The local money market’s heat derives from the country’s 8.5 per cent GDP growth and its high government borrowing. Government receipts recently benefited from $23 billion of 3G cellphone spectrum sales, but the central government deficit is expected to be 5.5 percent of GDP in the year to March, with additional substantial state deficits. Overall government debt is officially estimated at 73 per cent of GDP, nearly all domestic, although foreign inflows to purchase domestic debt are currently being encouraged.
Since India runs a continuing payments deficit, the rupee has not been particularly strong, rising only six per cent against the weak dollar in the past year. High international liquidity encourages fund flows into the market, providing necessary capital for business growth and helping finance the national and state budget deficits. Moderate inflation seems a cheap price to pay for rapid growth and increasing prosperity, while the principal threat to India’s recovery remains as always a liquidity crisis, either domestic or international. Loose fiscal and monetary policies may eventually produce difficult economic times in India – as in the United States – but meanwhile the good times roll on.
