Web Sify
Follow us on
Mail
Print

India should now approach the IMF for money

Last Updated: Tue, Apr 02, 2013 13:41 hrs
G24 Chair and India's Finance Minister Palaniappan Chidambaram reads a documents prior to the International Monetary and Financial Committee at the annual meetings of the IMF and the World Bank Group in Tokyo

It seems to be well understood that India is a little at the mercy of foreign capital.

Tax provisions and reform are changed, postponed and watered down to ensure portfolio funds keep on coming in; the finance minister is hard-selling India to investors in various world capitals.

It has been argued that this is what needs to be done in order to ensure that the enormous current account deficit - 6.7 per cent of gross domestic product in the last quarter of 2012 - does not cause a full-scale external crisis.



If, however, the threat of an external crisis is indeed major, and sufficiently so that it is dominating the thinking of policy makers, it is worth wondering why, instead of placating international capital, the government doesn't just go to the one-stop window for such problems: the International Monetary Fund, or IMF.

India should now approach the IMF for money.

As any business owner knows, if tough times are expected, you should secure your overdraft at the bank while things still look good.

Going to the IMF now would demonstrate that India understands the magnitude of a possible crisis and will not let it happen. It would shore up confidence and prevent the rupee from suddenly tanking catastrophically.

IMF funds, after all, are not for countries on the brink of a crisis alone. Even in non-emergency, there are various credit lines available designed specifically to stave off crises in well-managed countries subject to specific periods of stress.

The Precautionary and Liquidity Line, for example, is supposed to help countries with "identifiable vulnerabilities". But perhaps more appropriate for India is the Flexible Credit Line, meant for strong performers with comfortable reserves and no history of trouble accessing international credit markets.

The problem is that "going to the IMF" is seen as somehow shameful, rather than as a necessary precaution while the causes of a possible crisis are addressed. This is a short-sighted and dangerous way to approach the primary guarantor of international financial stability.

It is best to go to the doctor for prevention, rather than cure, even if you don't like being seen at the doctor's office.

India's history provides strong examples of the wisdom of going to the IMF and negotiating from a strong rather than a weak position.

When the Centre approached the IMF in 1981, it received the money on terms that helped it stave off a crisis. Then, when it should have gone again in the late 1980s, the approach of an election scared off the then Congress government.

After a succession of two minority and politically unstable governments - one led by V P Singh and the other by Chandra Shekhar - India was in full-fledged crisis in 1991 before it approached the IMF for a standby loan. The parallels to India's situation today are easily visible, and the mistakes of the late 1980s should not be repeated.

If India truly wants to send a strong signal that it intends to fix its external account troubles and speculators should not bet on a crisis, the IMF is the place to be seen, not the place to avoid.

More from Sify:
blog comments powered by Disqus
most popular on facebook
talking point on sify finance