RBI's D Subbarao on difference between 2012 and 1991 crisis

Mumbai: RBI governor D Subbarao made a presentation while speaking at an event organized by Indian Merchants Chamber in Mumbai recently. A slide in his presentation gives an insight on the difference between the economic crisis India faces now and the one the country faced in 1991. The debate occurred when India saw foreign exchange reserves fall below a level enough to cover for only 8 months of imports.  The crisis situation in 1991 was triggered by the balance of payment pressure where India’s foreign exchange reserves fell to a level where they could cover for only two months of imports.

 

 

Also Read: By doing nothing, Subbarao speaks his mind




Is 2012 going to be a repeat of 1991?

 

The 1991 crisis triggered by balance of payment pressures was due to a fiscal profligacy of the 1980s.  In 2012, twin deficits once again. Large fiscal and current account deficits are lead indicators of stress building up in the system.

 

In 1991, an implosion was imminent. In 2012, an implosion is not imminent. Why?

 

• Structure of the economy has changed in fundamental ways. The share of services sector in the economy has increased from 41 per cent in 1991 to 67 per cent in 2012. Performance of the services sector of the economy is less variable than that of agriculture and industry.

 

• Today, Indian financial markets are more mature, diverse and deep. Have resilience to absorb shocks.

 

• Our regulatory systems and crisis response mechanisms are more robust and sophisticated.

 

• In 1991, rupee was overvalued by more than 20 per cent. Today, exchange rate is largely market determined, and therefore able to absorb shocks.

 

• Foreign exchange reserves are much larger; provide 8 months of import cover as against 2 months of import cover in 1991.

 

• External sector vulnerability indicators have deteriorated over the last year, but they are still at safe levels and much better when compared to 1991.