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Mainstream, VOL LIV No 29 New Delhi July 9, 2016

Devaluation and IMF loan: Leading Economists’ Alternative View

Saturday 9 July 2016

What the leading economists of the country had highlighted twentyfive years ago is of great sginificance even today. Hence it is being reproduced here. The statement—‘Structural Adjustment: An Alternative Viewpoint”—was issued on July 8, 1991 and carried in this journal’s July 13, 1991 issue.

To meet a financial crisis, the nature and magnitude of which have been shrouded in secrecy, the government has launched an all-out effort to obtain a large loan from the IMF. Despite protestations to the contrary, it is now clear that domestic policies are being refashioned in keeping with the requirements specified by the IMF. In a peculiar effort at a two-stage devaluation of the rupee, its value has been reduced by around 20 per cent relative to most leading currencies. And judging by statements by government spokesmen, a major liberali-sation of the trade regime, the financial structure and industrial policy, as well as a substantial reduction in subsidies on food and fertiliser are in the offing.

The implications of the devaluation are manifold. To start with, by rendering imports more expensive, it is inflationary. This would be so even if the government does not raise the administered prices of goods like oil which it imports. But that would mean an additional burden of expenditure on the government in a period when there is general agreement that the fiscal deficit should be cut. Further, the rupee cost of servicing external debt will rise in proportion to the depreciation, aggravating the fiscal crisis. So the net effect of devaluation will be higher inflation, worsening fiscal problems, greater recession, or a combination of these. Since the responsiveness of exports to the steady real devaluations of the 1980s has not been remarkable, it is not clear that the costs of this devaluation will be compensated by increasing exports, especially since export subsidies are to be reduced even as costs of production increase.

Some economists have argued that indepen-dent of the need for balance of payments financing from the IMF, policies of the type advocated by it are desirable in the Indian economy. This strategy achieves balance of payments adjustment within an open trade regime, essentially through domestic deflation via cutbacks in public expenditure and/or devaluation. Such a strategy is not merely recessionary, affecting industrial demand and employment, but also entails cuts in social and developmental expenditures, thus affecting both the growth prospects of the economy and the welfare particularly of the poorer sections.

Our perception is different. While there is definitely the need to reduce the fiscal and external imbalances, the mechanisms of ensuring this should include a more restrictive import regime, that corrects for the foreign exchange profligacy during the 1980s, a reduction in the revenue deficit of the government through increased direct taxes and rationalisation of expenditures and the provision of incentives in the form of tradable REP licences to those who earn hard currency through exports. This would improve government finances, while allowing some expansion in subsidies targeted at the poor, providing employment guarantees, raising expenditures on education, health, sanitation and drinking water and increasing capital expenditures aimed at raising the growth potential of the system.

In the short run, these measures must be accompanied by efforts to raise access to international liquidity. A gradual process of trade reform that helps enhance competitiveness without leading to closures and unemployment, a balanced approach to foreign investment and technology, special incentives to non-resident Indians and efforts at saving foreign exchange by cutting back on some mega-projects of doubtful value, could all play a role in this connection.

As opposed to this, there have been official declarations of acute financial stringency that makes IMF borrowing “inevitable”, panic statements about the foreign exchange reserves position and talk of “floating” the rupee, all of which reduce India’s bargaining position with the international financial institutions and in international capital markets. Instead, we strongely recommend a carefully modulated reform programme, wherein the highest priority is given to raising the productivity of all the Indian workers, through better education, while the system is debureaucratised and strengthened before subjecting it to international competition in a fundamentally iniquitcus world system.

Signatories:

Prof Bhabatosh Dutta,

Calcutta;

Prof C.H. Hanumantha Rao,

New Delhi;

Dr Rajni Kothari,

New Delhi;

Dr Ashok Mitra,

Calcutta;

Dr Arun Ghosh,

New Delhi;

Prof G.S. Bhalla,

New Delhi;

Dr K.S. Krishnaswamy,

Bangalore;

Prof I.S. Gulati,

Trivandrum;

Dr P.C. Dutt,

New Delhi;

Prof C.T. Kurien,

Madras;

Prof Amiya Bagchi,

Calcutta;

Prof Moni Mukherjee,

Calcutta;

Prof Deb Kumar Bose,

Calutta;

Prof Biplab Dasgupta,

Calcutta;

Krishna Raj,

Bombay;

Prof Krishna Bhardwaj,

New Delhi;

Prof Prabhat Patnaik,

New Delhi;

Prof Satish Jain,

New Delhi;

Prof Utsa Patnaik,

New Delhi;

Prof Atul Sarma,

New Delhi;

Prof D.K. Reddy,

New Delhi;

Prof M.C. Purohit,

New Delhi;

Prof D.K. Srivastava,

Varanasi;

Dr Raghabendra Chattopadhyay,

Calcutta;

Balraj Mehta,

New Delhi;

Prof K.N. Kabra,

NewDelhi;

Prof Ventatesh Athreya,

Tirchi;

Dr K. Nagaraj,

Madras;

Dr Pulin Nayak,

Delhi;

Dr A. Majid,

Delhi;

Dr Kumaresh Chakravarty,

Delhi;

Dr Arun Kumar,

New Delhi;

Dr Abhijit Sen,

New Delhi;

Dr C.P. Chandrasekhar,

New Delhi;

Dr Jayati Ghosh,

New Delhi.

(Mainstream, July 13,1991)