Is India on the verge of a BOP crisis?

Last week Krugman pointed out quite correctly that India is NOT on the verge of a Balance of Payments (BOP) crisis. Yes the rupee has depreciated sharply and the current account deficit is somewhat larger than what would be the comfort zone. Yet as he noted, foreign denominated debt is very low and, one should add, reserve coverage is reasonably large.

That does not mean that everything is fine. As noted here before (and here by Suranjana Nabar-Bhaduri, and a longer paper here), the development strategy in India, based on service-led growth, does suffer from significant limitations.

But obviously it is preposterous to argue, as the The Economist does, that more liberalization can in the long run, by attracting investors, reduce the limitations of the BOP constraint. In particular, services (think of call centers as the exemplar case) do not lead to higher wages for Indian workers in the long run, but rather to lower service costs for foreign corporations. Besides, even service exports have been unable to promote exports, and India has depended on remittances to finance the persistent trade deficits.

So contrary to what The Economist says India is NOT particularly vulnerable to the financial turbulence in developing countries financial markets. The graph below from The Economist should have made that clear.
Note that almost all developing countries, China being the exception, have had significant depreciations in more recent months. This has more to do with the increasing interest rates on long term bonds in the US after the Fed indicated that the bond buying policy might be close to an end, that with the particular situation of any of these countries.

Comments

  1. ISTM that the best way to manage these sort of things is to start restricting the import of certain items - so as to push the inflation onto those that can bear it.

    In india's case starting with gold.

    ReplyDelete
  2. Sure. But just wait for that inflation... 15% depreciation? Oh, they'll feel the inflation alright.

    But hey, you gotta open up those economies, right? Especially... erm... in order to bring down inflation.

    No, not a BoP crisis. That doesn't happen without a peg or some substantial hot money inflows. But this is going to hurt and for quite the opposite reasons than The Economist claims.

    And they've just appointed that cretin to the Bank of India so we know that this inflation is going to be passed on in the form of unemployment. Ugly, ugly, ugly.

    ReplyDelete

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