At a time when top leaders of the UPA Government have been dismissive of downgraded Indian growth projections by the International Monetary Fund and the World Bank, a senior US official on Thursday identified India as one of the world’s five fragile economies.
In remarks at the George Washington University’s Elliott School of International Affairs, Assistant Treasury Secretary for International Finance Charles Collyns named India, Brazil, Indonesia, Turkey and South Africa as the fragile ones among the emerging economies.
These five countries are fragile because they have large current account deficits and rely heavily on portfolio capital to finance those deficits, Collyns said. He also pointed to the steep depreciation of currency value that they have suffered in recent months. In order to stabilise their foreign exchange markets, these countries have had to take strong policy measures. Brazil, India and Indonesia raised their policy rates, Collyns said, noting that their policy response was “much broader than just raising interest rates”.
Interest rates have been hiked, with measures to tighten liquidity, market intervention, providing foreign exchange swaps and hedging against foreign currency risks.
Collyns, who served as IMF’s Resident Representative in India in the 1990s, said the country had let its current account deficit to widen.
“I remember the conversations we had at the time, the IMF encouraging India to increase capital account openness, India saying, no, we can’t do that because we would be very scared if the current account deficit were to rise beyond – 3 per cent was sort of the magic number that they had in mind at the time,” he said.
While acknowledging that India had witnessed tremendous boom by building on its strengths, Collyns noted that the country had failed to deal with a lot of the underlying structural problems, so the macro framework has remained fairly weak.
Commenting on the general elections next year, he said if the BJP wins, it would certainly try to push aggressive reforms. “On the other hand, if you had a coalition of regional Governments, it would probably be pretty negative for reforms. So it’s an uncertain outlook,” he opined.