Is IMF loan a viable option?

Economists call it a tough call that policymakers will have to take

The government is mulling options to tackle a bit difficult balance of payments (BoP) situation. A high current account deficit (CAD) looms large this financial year, besides dwindling capital flows, putting pressure on the rupee. While no one has officially talked about India resorting to a loan from the International Monetary Fund (IMF), there are murmurs about it among independent experts.

Economists say seeking an IMF loan is a difficult call policy makers will have to take. While a few said there should not be any allergy to a loan, others said instead of taking recourse to this extreme option, India should set its macroeconomic  house in order to cut the CAD in the medium term. Still, there would be enough foreign exchange cover to take care of short-term imbalances. Besides, going for an IMF loan at this stage when six Assemblies will go to elections four months down the line and the country by the next year, would be a risky proposition for the government, they opine.

“Tough call. Only those very close to the situation can determine this. What I can comment on is the pros and cons,” Professor of Economics at Columbia University Arvind Panagariya told Business Standard. “If there is even a small chance that there could be a run on the rupee, it is most helpful to have the IMF standing by to back us up to minimise the damage.” “The risk is that in our system, where nearly everything leaks out, this will be very difficult to do without it becoming public, which can itself cause a run on the rupee by triggering the expectation that the rupee is in trouble.”

Others were opposed to the very idea at this juncture.

“There is absolutely no need for a loan from the IMF. The forex reserves are enough,” Indian-born British economist Meghnad Desai said.

Even after a fall of $985 million, India's forex reserves stood at $279.20 billion as on July 19.

Former RBI Governor and Rajya Sabha MP Bimal Jalan did not find the idea of seeking an IMF loan realistic at this point of time when elections are not far. “I am sure we can tackle the situation without taking recourse to an IMF loan and that is a preferred option in the current situation, when we are preparing for elections,” he said.

India's CAD stood at $87.8 billion or 4.8 per cent of gross domestic product (GDP) in 2012-13 against $78.2 billion or 4.2 per cent of GDP in the previous year. Even then, $3.8 billion was added to forex reserves in 2012-13. Only in the second quarter of 2012-13, forex reserves declined marginally by $0.2 billion due to the CAD.

“You go to IMF when you simply do not have the foreign exchange cover. I don't think the situation has turned that grave. As of now, forex cover is enough. We don't require IMF loan at this point of time,” National Statistical Commission Chairman Pronab Sen said.

India took loans from IMF thrice — on November, 9, 1981; January 18, 1991, and October 13, 1991, to the tune of $3.9 billion special drawing rights (SDRs), $551.93 million SDRs and $1,656 million SDRs respectively.

India's forex reserves had depleted to $1.2 billion in January 1991, and that too dried up by half by June of that year. This forex reserves could finance only three weeks of essential imports. India had to pledge 67 tonnes of gold reserves to seek the IMF loan.

“India does not have a balance of payments problem, not yet at least, given the size of its reserves. It certainly does not need an IMF loan and there should be no talk of this, as it can turn into a self-fulfilling proposition, which will be deleterious for the economy,” Gita Gopinath, professor, Harvard university, said.

State Bank of India chief economic adviser Soumya Kanti Ghosh finds the idea of going for an IMF loan laudable, but said India should take care of its macroeconomic problems to address the issue of CAD.

“You will be surprised to note that sustainable amount of CAD was 2.6 per cent of GDP against actual 2.7 per cent in the 11th Five-Year Plan (2007-08 to 2011-12),” he said. Sustainable amount of CAD is the one which India could sustain given its capital flows.

So, it is only in recent years that CAD has started rising over sustainable level. In India’s imports, capital goods accounted for 11 per cent and electronic goods six per cent in 2012-13. This is due to lacklustre manufacturing in recent times, Ghosh said.

To correct the CAD situation, manufacturing needs to be given a push. “Even if we resort to an IMF loan, how much will we borrow — around $16 billion. This would suffice to meet a month of trade deficit, that we witnessed in 2012-13,” Ghosh said.

In this context, there are many who feel RBI's recent measures to suck up liquidity to arrest the rupee slide against the dollar would rather strangulate economic growth. "RBI should stop defending the rupee. Its recent tightening has choked the markets and delayed recovery," Lord Desai said.

After falling to over 61 against the dollar earlier, the Rupee did recover after RBI measures and stood at a one month high of 59.04 as on July 26.

India's economic growth declined to a decade low of five per cent in 2012-13. There were hopes of recovery this financial year, but that is not visible so far. The index of industrial production declined 1.6 per cent in May to lend 0.1 per cent growth in the first two months of the current financial year. Exports contracted 4.6 per cent in June for the second straight month, resulting in 1.4 per cent fall in the outbound shipments in the first quarter of 2013-14.

IMF loan comes with conditionality and that is why it is protested by many. The nature of conditionality depends on severity of crisis. In India's case, these might not be that tough compared to some Euro zone countries. Earlier this month, Pakistan negotiated $5.3 billion with IMF to boost its rupee amid depleting forex reserves.

WHAT EXPERTS SAY

"Tough call. Only those very close to the situation can determine this. What I can comment on is the pros and cons. If there is even a small chance that there may be a run on the rupee, it is most helpful to have the IMF standing by to back us up to minimize the damage. The risk is that in our system where nearly everything leaks out, this will be very difficult to do without it becoming public, which can itself cause a run on the rupee by triggering the expectation that the rupee is in trouble."
 

-- Arvind Panagariya, professor of economics at Columbia University

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"There is absolutely no need for a loan from the IMF. The forex reserves are enough. The RBI should stop defending the rupee. Its recent tightening has choked the markets and delayed recovery."
 

— Lord Meghnad Desai, Indian-born British economist

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"I am sure, we can tackle the situation without taking recourse to IMF loan and that is a preferred option in the current situation, when we are preparing for elections."

— Bimal Jalan, former RBI governor and Rajya Sabha MP

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" You go to IMF when you simply do not have the foreign exchange cover. I don't think the situation has turned that grave. As of now, forex cover is enough. We don't require IMF loan at this point of time."

— Pronab Sen, National Statistical Commission chairman

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"It is a laudable idea, but India should boost manufacturing to tide over difficult situation in medium term."

— Soumya Kanti Ghosh, State Bank of India chief economic adviser