Don’t Blame Ben

Prime Minister Manmohan Singh has joined others in his government by claiming, at the Group of 20 summit in St Petersburg, that the decline in the values of most emerging economy currencies is partly to be blamed on the West.

His argument is that when the Western central banks were pumping money into the system, it inevitably led to capital bloat in countries like India. Now, the capital is flowing back – or some of it, anyway – and the West should be a bit more mindful of what they are doing.

Singh’s comments are self-serving: presumably, they may help his negotiating stance at the G-20. His claims of having earned a special regard at the G-20 summit are not incorrect – but they are also irrelevant at a time when the developed world is making a comeback and India’s growth rate seems likely to touch 4% later this fiscal year. International diplomacy is hard-headed stuff.

More to the point, given how Singh has managed the Indian economy, the West doesn’t owe him a thing.

First, right from the start, when US Federal Reserve Bank chairman Ben Bernanke announced quantitative easing in its various forms, coupled with the European Central Bank’s rock bottom interest rates, there was no shortage of economists and institutions warning that all this easy money would bloat the emerging economies. And that it would end, eventually, so the emerging economies needed to watch themselves carefully. India did not watch itself carefully.

Second, it was no secret that the rupee was becoming overvalued during the periods of easy money. The rupee was rising against the dollar and other currencies even as India’s economic growth rate was tapering, inflation remained chronically high and India’s trade deficit was rising. Clearly, the rupee didn’t deserve where it was going and a reckoning had to happen.

Third, the current account deficit semi-crisis was also inevitable. The core macro was that the national savings rate was falling. Again, quite predictable: Indian corporations were seeing profits sink and debts rise, the government’s fiscal deficit was out of control and households were declining to put their money in savings accounts, which gave them negative real interest rates.

The surge in gold buying merged the last problem with a cultural affinity for the yellow stuff – and unsurprisingly aggravated the current account deficit more. Again, Singh can’t claim these were not gathering storm clouds hidden from his view.

Fourth, the outflow of foreign institutional investors and the speculators who shorted the rupee also flowed inevitably from the above three. FIIs would dump bonds in a stagflationary India as soon as Ben began indicating he would stop selling Treasury bonds.

Speculation against the rupee was also predictable – the forward markets were flashing volatility for quite some time, the hunt for hedges would follow and speculators would come in their trail.

Let’s put it another way. If India had been growing at 7% a year, urban consumer inflation had been 5%, the fiscal deficit was under control and the government was able to pass the odd bit of reform legislation – would it have mattered what Ben Bernanke did or did not do?

The answer is no. There would have been a steady flow of foreign direct investment because investor confidence would have been strong. Indian households would not have been pouring their savings into buying gold, either, since this was in large part driven by a lack of confidence in Singh and his government’s ability to control inflation. Yes, some FII money would have exited the bond market here, but it wouldn’t have mattered.

The prime minister is telling the world that the “onus” of ensuring the end of quantitative easing in a way that doesn’t rock countries like India is on the West. The real onus is on him, to explain why his government was sleeping when Bernanke’s traders were buying Treasury bonds by the billions and putting dollars into the pockets of the world financial system.

Copyright © 2013 the Hindustan Times.

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