Why Reforms are the Only Answer to the Current Crisis Confronting India

Similarities between 1991 and 2014

The present crisis that has struck India has many experts wondering whether the country is witnessing a repeat of the 1991 crisis when India had to mortgage its gold to pay for imports. Though now, India has foreign exchange reserves that cover more than seven months of imports, there are still some voices that are expressing concern about the twin challenges of a high current account deficit and a high fiscal deficit.

Further, many experts are drawing parallels between the 1998 Asian financial crisis that followed a similar crisis in 1997 and which resulted in many Asian countries witnessing sharp depreciation of their currencies in a relatively short period of time. Indeed, it would be correct to say that the current crisis affecting India is a combination of all these crises, which is further compounded by high inflation. In this context, it would be the case that the policymakers in India have to ensure that they undertake a combination of reforms and insulating themselves from global economic headwinds.

Reforming the Economy is the only Solution

Continuing the last point, the way out would be for the government to clear the backlog of infrastructure and industrial projects that are stuck at various stages of the approval process because of policy paralysis, political gridlock, and administrative logjam. Next, the high subsidy burden must be cut down to manageable levels so that the fiscal deficit comes down. Third, the point needs to be made that India must reform the bloated PSU or the Public Sector Institutions like the LIC or the Life Insurance Corporation of India and other financial and industrial ventures so that they do not become a burden on the country.

In other words, reforms are an absolute must if the economy has to recover from the crisis. Apart from this, the country also needs to allow more FDI or Foreign Direct Investment into the country if it has to ensure that the economy becomes competitive again. However, and a big aspect that also has to be taken care of is that India must insulate itself against global economic headwinds and tailwinds or otherwise, it would be vulnerable to the global economic conditions. Of course, in practice, it is very difficult to do this as reforms and integration into the global economy goes hand in hand. Therefore, the implication here is that a delicate balancing act between opening up the economy and reforming the sectors within along with some fences to protect the country from global factors must be the chosen course of action.

We cannot afford Economic Populism

It is clear that the Indian state cannot afford economic populism anymore. By economic populism, we mean those policies that have been adopted over the decades since Independence when the people were kept happy through giveaways, subsidies, and freebies have to be somewhat curtailed or brought in line with the goals of reducing the subsidy burden.

Of course, it is not the intention here to suggest that the poor and the needy must be neglected or their welfare abandoned. Rather, the key aspect here is that subsidies must be given to those who need them the most rather than enriching those who are already rich. In other words, this means that instead of indulging in reckless spending, the focus must be on a calibrated and measured approach that takes into account the identifying of the correct beneficiaries and targeting them in a precise and accurate manner rather than a please all approach that bleeds the economy.

Concluding Remarks

Finally, the discussion above makes one conclude that the way forward for the Indian economy is indeed tricky and tough and the path is strewn with obstacles. It remains to be seen as to how much the policymakers succeed in charting a course through the turbulent waters and the stormy winds blowing across the horizon that are confronting the country.


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