What all these countries are facing is essentially a liquidity crisis, brought about by their premature celebration of their status of an advanced country and inefficient use of resources. High-rise buildings in Thailand, Indonesia and Malaysia, mostly constructed with foreign funds, have become status symbols. Indonesia, in particular, has also set off an ambitious military programme. The building boom best symbolises the inefficient use of resources by these countries.
To finance such inefficient use of resources, these Asian countries resorted to heavy short-term borrowings. The bubble had to burst one day. There had been enough warnings. Once exports slowed down, the crisis overtook them. But the fundamentals of these countries seem to be basically sound. A high saving rates is a common feature. The present crisis, therefore, is primarily a liquidity crisis and these countries are likely to emerge out of it in two or three years. But it will certainly be a painful experience for them.
The crisis in Asia is not a systemic one. It has been precipitated by lack of reforms. All along market signals had been ignored. As a result, the IMF and foreign bankers will now insist upon heeding market forces. But will the social and political situation in these countries allow these reforms to take place? In Thailand, a resurgent democracy has already taken the toll of its prime minister. In Indonesia, President Suharto is facing rough weather. In South Korea, the presidential elections are due in a month. Thus, one can look forward to exciting times ahead in these countries.
How will India fare in the midst of this crisis? Indias problems are vastly different. She has never experienced an investment boom as has been by these countries. But India did experience FII inflows into the stock markets. Her savings rates has been modest compared to these Asian countries.
In the first flush of reforms, there had been some investment in the luxury goods sector. But overall, there has been a mismatch between investment and demand potential. Thus, the economy is now facing a demand recession. Money supply has expanded by 17 per cent, yet there is no demand. No wonder the budgetary and credit policies, aimed at stimulating the non-existent demand, are failing. One way to break the stalemate is by pushing public investment in infrastructure, but the finance minister has been strongly resisting it.
The other problem being faced by the economy is low exports. This has been caused by the exchange rate policy. Imports are also not growing fast enough. FIIs have invested in the stock markets, but their investments are stuck. The moment they make any move to sell, the stock market and the rupee go down. When they had started, the dollar fetched about Rs 33. If they decide to leave now, they will buy the dollar at Rs 38-39, and the stock market prices will tumble. Thus, they will be double losers. The only way to devalue the rupee is by stimulating imports. And this again can be done by increasing public investment in infrastructure, which is import-intensive.
Thus, the key to Indias problem lies in boosting public investment in infrastructure. But can this be done when the government is facing a crisis almost everyday? It needs a strong government to take such decisions since there are risks involved. Money supply is already expanding at 17 per cent. A further dose of reflationary policies will increase the danger of inflation. But there seems to be a feeling that India can live with a little more of inflation. One day monetary expansion is sure to catch up, but by that time India would have built up a sufficient production capacity in the shape of infrastructure as a compensation for the pain generated by inflation.
The country can ill-afford to live with slow industrial growth. In the agricultural sector, by and large, the country has entered a phase of jobless growth. In this scenario, the potential for creating jobs lies only in the organised sector. At a time when the secular ideology has become weak, the growth of unemployment can grievously injure the countrys social health. With Asian neighbours in a mess and struggling to emerge out of it, India cannot afford to stay isolated from the effects.
But the country seems destined to live in a phase of political uncertainty at least for another two to three years. Even if there are fresh elections, the prospect of any single party gaining a majority is bleak. It is fashionable to say that India has entered a phase of coalition politics. But coalition politics by its very nature means a weak government, whereas what India requires is a strong government. However, a strong and effective government does not seem to be anywhere in sight. Till that time, all we can do is have patience.
Finally, three proud Asian countries Thailand, Indonesia and South Korea have had to approach the International Monetary Fund (IMF) with a hat in their hands. It must have been particularly painful for South Korea since it is a member of the OECD. The fourth country, Malaysia, is so far resisting going to the IMF. Japan, though it will not need to go to the IMF, is facing its own set of problems.
What all these countries are facing is essentially a liquidity crisis, brought about by their premature celebration of their status of an advanced country and inefficient use of resources. High-rise buildings in Thailand, Indonesia and Malaysia, mostly constructed with foreign funds, have become status symbols. Indonesia, in particular, has also set off an ambitious military programme. The building boom best symbolises the inefficient use of resources by these countries.
To finance such inefficient use of resources, these Asian countries resorted to heavy short-term borrowings. The bubble had to burst one day. There had been enough warnings. Once exports slowed down, the crisis overtook them. But the fundamentals of these countries seem to be basically sound. A high saving rates is a common feature. The present crisis, therefore, is primarily a liquidity crisis and these countries are likely to emerge out of it in two or three years. But it will certainly be a painful experience for them.
The crisis in Asia is not a systemic one. It has been precipitated by lack of reforms. All along market signals had been ignored. As a result, the IMF and foreign bankers will now insist upon heeding market forces. But will the social and political situation in these countries allow these reforms to take place? In Thailand, a resurgent democracy has already taken the toll of its prime minister. In Indonesia, President Suharto is facing rough weather. In South Korea, the presidential elections are due in a month. Thus, one can look forward to exciting times ahead in these countries.
How will India fare in the midst of this crisis? Indias problems are vastly different. She has never experienced an investment boom as has been by these countries. But India did experience FII inflows into the stock markets. Her savings rates has been modest compared to these Asian countries.
In the first flush of reforms, there had been some investment in the luxury goods sector. But overall, there has been a mismatch between investment and demand potential. Thus, the economy is now facing a demand recession. Money supply has expanded by 17 per cent, yet there is no demand. No wonder the budgetary and credit policies, aimed at stimulating the non-existent demand, are failing. One way to break the stalemate is by pushing public investment in infrastructure, but the finance minister has been strongly resisting it.
The other problem being faced by the economy is low exports. This has been caused by the exchange rate policy. Imports are also not growing fast enough. FIIs have invested in the stock markets, but their investments are stuck. The moment they make any move to sell, the stock market and the rupee go down. When they had started, the dollar fetched about Rs 33. If they decide to leave now, they will buy the dollar at Rs 38-39, and the stock market prices will tumble. Thus, they will be double losers. The only way to devalue the rupee is by stimulating imports. And this again can be done by increasing public investment in infrastructure, which is import-intensive.
Thus, the key to Indias problem lies in boosting public investment in infrastructure. But can this be done when the government is facing a crisis almost everyday? It needs a strong government to take such decisions since there are risks involved. Money supply is already expanding at 17 per cent. A further dose of reflationary policies will increase the danger of inflation. But there seems to be a feeling that India can live with a little more of inflation. One day monetary expansion is sure to catch up, but by that time India would have built up a sufficient production capacity in the shape of infrastructure as a compensation for the pain generated by inflation.
The country can ill-afford to live with slow industrial growth. In the agricultural sector, by and large, the country has entered a phase of jobless growth. In this scenario, the potential for creating jobs lies only in the organised sector. At a time when the secular ideology has become weak, the growth of unemployment can grievously injure the countrys social health. With Asian neighbours in a mess and struggling to emerge out of it, India cannot afford to stay isolated from the effects.
But the country seems destined to live in a phase of political uncertainty at least for another two to three years. Even if there are fresh elections, the prospect of any single party gaining a majority is bleak. It is fashionable to say that India has entered a phase of coalition politics. But coalition politics by its very nature means a weak government, whereas what India requires is a strong government. However, a strong and effective government does not seem to be anywhere in sight. Till that time, all we can do is have patience.
