T N Ninan: Less fragile, not bullet-proof

Let's give credit where it is due. Over the last six months, the managers of the economy have converted a system in near-crisis into one of the safer places in a battered "emerging markets" grouping. Remember that India was seen last summer as one of the worst performing stock and currency markets, with nervousness underlined by a record current account deficit and the highest fiscal deficit among the major economies. So it is pretty dramatic change when India now presents a reassuring contrast to the traumas engulfing almost all the second-rung economies represented at the G20 high table. The Sensex is about 14 per cent higher than its 2013 trough. The quarterly trade deficit has dropped from $45-50 billion to $30 billion, and the current account deficit from $20-25 billion per quarter to just $5 billion. Capital inflows have held up, so foreign exchange reserves have stopped falling and indeed have gone up by $18 billion in the last four months. When many "G20 Junior" currencies teeter on the edge of crisis - and the roll call is pretty comprehensive - the rupee is reassuringly stable at a sensible exchange rate. It helps that the Reserve Bank of India is laser-focused on tackling inflation.

But we should hold the celebrations. First, there is a message in the failure of State Bank of India's share issue this week. Though the asking price was modest, less than $250 million came from abroad, for an issue size that was intended to be over $1.5 billion. If the whole thing was not a fiasco, it was only because domestic public sector entities (banks and insurance) bailed in - and you can guess whether they were following orders. Bear in mind that bad and restructured loans could eventually wipe out the existing share capital of India's government-owned banks, and they will need many billions of dollars of fresh capital (read last week's Ruminations: "Money in those vaults"). But if the largest and best of the pack can't generate foreign investor interest, what are the others going to do? Fall back on taxpayer money at a time of fiscal stress? A financial sector that is short of capital cannot meet the economy's credit needs, and will constrict growth. The reform of government-run banks has become essential and urgent.

Second, there is the business of government expenditure. At over seven per cent of gross domestic product (GDP), the fiscal deficit (for Centre plus states) is by far the largest among emerging markets. The outlook is that things may get worse, as state after state rolls back power tariffs, the cooking gas subsidy is increased, and road tolls are attacked. There seems to be an all-party consensus on more government giveaways, and implicitly therefore against fiscal correction. That this translates into higher inflation and macroeconomic instability seems beyond the ken of everyone from Arvind Kejriwal and Rahul Gandhi to Raj Thackeray. Mr Chidambaram may do everything possible to keep this year's deficit down to the target of 4.8 per cent of GDP, but something that is artificially compressed by a determined minister is likely to balloon next year.

Finally, there is the business of improving governance. Aadhaar was to have been a game-changer but has been sacrificed at the altar of expediency. If unique identity numbers are not to be used for enabling cash transfers, as a superior alternative to product subsidies that are poorly targeted and prone to large leakages (and cooking gas is a prime example), what is the justification for spending many thousands of crores on Aadhaar? Talk of lack of conviction in reform! India has escaped contagion for now, but the world's economic troubles are far from over. The anti-reform consensus could yet undo our future.