This year marks 35 years since India embarked on large-scale economic reforms. The country had been moving towards economic liberalisation since the 1980s, but the quantum jump occurred when the economy faced the prospect of a sovereign default and suffered the ignominy of shipping its gold to London as collateral for an emergency loan.
A terms-of-trade shock from the war in West Asia has combined with pre-existing capital flow headwinds to pose a balance-of-payments threat to the economy. Crisis management, on the economic front, is never not ugly and can entail price hikes, austerity, and offerings to foreign capital.
The root of the current crisis lies in the evolution of structural levers of the Indian economy in the last three and a half decades. The nascent Indian state adopted a conservative attitude to its economic fortunes, prioritising the foreign exchange constraint the most.
The 1991 reforms changed this for good, albeit incrementally. From scotch whiskey to international credit cards to foreign machinery and components, everything is within reach in India today if you have the money to pay for it. However, the merchandise trade deficit has actually increased since the reforms.
India's reliance on capital inflows to balance its current account deficit has made it vulnerable to external shocks. The ongoing war and its terms of trade shock have combined with pre-existing capital flow headwinds to pose a balance-of-payments threat to the economy.
Logically speaking, this leaves India in a situation with two choices: either reduce foreign exchange spending or earn more foreign exchange through merchandise exports. The inherent philosophy in both choices is the same: thou shall not spend what you do not earn.
The reality of three and a half decades of reforms is more sobering than satisfying. Rationality demands that the Indian state and its democratically elected custodians accept this fact instead of opportunistically grandstanding.
