Losing currency in the West
The US debt crisis may give the UPA enough wiggle room to pull itself out of a hole.india Updated: Aug 08, 2011 21:28 IST
The world is eyeballing a currency crisis. Countries like China blame it on the West's response to the 2008 credit meltdown. The United States and the European Union merely kicked the can down the road and are now seeing faith evaporate from their currencies, runs the argument, pushing global trade and investment into a bigger hole than the one it had clambered out of. A spend-and-borrow US administration also faces flak at home from the Republicans for debasing the greenback. Credit rating agencies caught napping over the sub-prime crisis are trigger-happy this time around. Standard & Poor's has lowered the US sovereign risk rating. If others follow suit, gold could become the sole AAA+ currency in the world. Politicians now must convince investors they are serious about fixing the causes that led to the credit meltdown. They cannot keep talking up markets indefinitely.
All this takes some pressure off Indian policymakers who have been trying to cool an overheated economy. Prices here have been on a tear in part because some of the newly minted dollars are washing up on our shore. The call to cut back government spending will be muted till the latest crisis blows over. Depending on how much of India’s trade in merchandise and services is affected, an expansionary fiscal stance will find takers in the government. The central bank may have to temper its zeal to raise interest rates in an effort to put the inflation genie back in the bottle. The Indian government has been able to do very little about the prices of commodities, especially oil, in international markets. The costs of cushioning the Indian consumer could fall on the prospects of a protracted slowdown in the US.
Politically, too, global events could overshadow developments at home. A government cornered over a rash of high-profile graft charges and accused of policy inertia could use this opportunity to play on the front foot. If serious demand destruction were to recur, charges of corruption will take a backseat to the more pressing need to keep the economy ticking over. The UPA has demonstrated its crisis management skills once before, this time though the options will be fewer than in 2008. The fiscal headroom has shrunk and monetary tightening is fairly well advanced. A fresh flight of international investments to safe havens could be a good time to announce measures that make it more attractive to do business in India. Capitalism's latest paroxysm will perversely help the government put out home fires.