Thursday, February 01, 2007

India & Liberalization

Its been a long time since I wrote something serious in this blog. So I apologize if I sound rusty or worse - naive. I just want to learn from people who know better rather than claim the following to be my opinion. I am taking a course called Global Competition and one of the chapters in the course syllabus covers foreign exchange, valuation/devaluation, inflation, pegging against other currency and gold. It also takes through the various currency crises that happened in the last 30 years. It also talks about increases in Real Exchange Rates, influence of nominal exchange rates, current account balances, interest rates etc.

At some point during the lecture, a student, an Indian, got up and asked the professor a question. The question was roughly "during the gulf war crisis, India pledged its gold to the IMF to secure money. What is you opinion on that". The professor's answer surprised me. Did I learn something new in that class? He said and I approximate "during the gulf war, most countries went into a fuel crisis and India could not afford to pay the gulf countries money to get the fuel required for her people. It approached the IMF for loan. The IMF said 'your economy is poor, your policies are poor, we can't give you a loan unless you open up your economy and liberalize'. The guy who is the Indian prime minister now, was finance minister then. He was pro-liberalization but his party wasn't - so he used this situation to pass the liberalization bill through parliament. The gold was used to merely secure the loan." The import essentially was - that liberalization came out of a necessity rather than a calculated strategy. This is a professor I respect so much and one whom I consider to be very knowledgable about India.

I didn't really think about - why we liberalized. But just assumed that it was Manmohan Singh's brain-child (even if it was to counter a balance-of-payment crisis). I was torn between India's traditional political habit of exagerration/brain-washing and the possibility of this IMF pressure, being a coincidence. I just went hmmm.

I would be interested in listening to non-jingoistic objective facts on this issue that aren't adultrated by patriotism.

10 comments:

Nilu said...

athellam seri, it should be crises

krishna senthil said...

dude,

plz can u reply to my mail.

thanks bye

Anonymous said...

I believe your professsor is right. During 1991 or so, the Indian foreign exchange reserves were really low and IMF and World bank refused any loans unless India opened up and de-value the currency. My father, who was negotiating with the world bank at that time said that basically we were forced to do what we did.

--Ramesh

platospupil said...

There is another interesting anecdote that i read. During the Gulf War, India took on the responsibility to repatriate all its citizens who were in Kuwait at that time to wherever they wanted to move to including USA. This proved to be a very costly drain on foreign exchange and added to the crisis. There is an economist who works at Moodys(young guy in his 30's) who was from one of these families and was motivated by this incident to specialize in Macroecon.
So in a roundabout way we owe our liberalization partly to Saddam Hussein. Talk about the power of unintended consequences.

RaajK said...

It's actually a common knowledge. What the prof. said is absolutely true. Also, the original liberalization started when Rajiv Gandhi was the PM in the 80s. He first started liberalization in "White Goods".

I P said...

I heard a different story. That George Bush sr. being the business friendly man he is wanted Indian market opened for American goods. Mainly because GE, and coke were lobbying very hard to get into India. Bush Sr. also used this to use IMF to put pressure on India.

Hawkeye said...

nilu,

danks. again its like those processes analyses huh?

krishna,

itho panren.

ramesh,

thanks. on the father bit - awesome!

Hawkeye said...

platos,

:-) the irony is there. maybe that explains the unintended protests over sadam's hanging.

IP,

there has always been pressure to open up. so Bush Snr's request neednt haveinflunced us so much.

I said...

Now, Indians are talking as if they were the original pioneers of freemarket economics. (only reg. H1B, outsourcing et al)

You had to stand in a queue to 'order' HMT watches, not so long ago. Even now, mosy sectors are very heavily regulated.

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