MAIL TODAY COMMENT: India's governance deficit is fuelling the rupee crisis
Prime Minister Manmohan Singh's argument about banking problems - saying that it isn't a 'solvency' problem, but a 'liquidity' one - applies to policy as well
"The boom, not the slump, is the right time for austerity at the Treasury," John Maynard Keynes wrote - advice that has been assiduously ignored for decades now, and India is no different.
Despite experiencing remarkable growth through much of the 2000s, India did little to ensure that the supply-side concerns that would squeeze the economy in bad years were addressed.
In fact, 2008's economic crisis almost made things worse, because the US policy of unlimited Quantitative Easing ensured a substantial amount of cheap money was washing through the globe looking for a home.
As the government started to get even more profligate, little acknowledging that the factors that had led to the 2000s' export-led growth had changed, the rupee started to become seriously overvalued, especially in relation to an expanding current account deficit (CAD).
That shoe has now dropped, leading the rupee to lose 20 per cent of its value just this year.
"At its root, the problem is that we have been running a current account deficit well above the sustainable level for three years in a row," said outgoing RBI governor D Subbarao.
PM Manmohan Singh too admitted in Parliament that keeping a lid on the CAD - by cutting down on gold, economising oil and increasing exports - is of prime importance.
The recent glut of gold imports aside, why weren't these policy problems dealt with when the rupee was flying high?
The PM's argument about banking problems - saying that it isn't a "solvency" problem, but a "liquidity" one - applies to policy as well.
We are not stuck in the same impossible maze that some southern European countries have found themselves in.
From a sensible tax regime to infrastructure investment to further fiscal consolidation, and, - though it should go unsaid - strict action against corruption, the adjustments needed to put us back on the path to growth are self-evident.
"The easy reforms of the past have been done," the PM said.
Thanks to the government's incompetence, the difficult ones have now gotten much harder to carry out.
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