How India nearly had to go to IMF with a begging bowl last Aug

During June-August this financial year, the buzz in New Delhi was that the government may be forced to approach the International Monetary Fund for a bailout loan.

The rupee was on a free fall. It hit a lifetime low of 68.84 against the dollar in August 2013. The current account deficit was worsening. The country had dollars enough to cover just six months of imports. Foreign investors were pulling out of debt investments. The outflow was huge.

The balance of payments position was precariously close to the 1991 situation. There was talk of an IMF loan, but it was stoutly denied. “Where is the need…There is no question,” a report in The Economic Times had quoted one official as saying.

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For beginners, IMF loans come with strict conditions and hence there is a stigma attached to them. For the UPA, already under fire for the scams that happened during its rule, going to the IMF with a bowl would have meant a complete loss of face. Hence the spirited denial.

A government official has, for the first time, finally admitted that the situation was touch and go.

According to a report in The Economic Times today (14 January), Petroleum Secretary Vivek Rae has said the high oil prices have pushed India to the brink of an energy crisis and the country may be close to the situation where only an IMF loan can save it.

The country’s yearly oil import bill is pegged at about $100 billion. Software exports and NRI remittances bring in about $120 billion, which balances the outflow on account of oil now, Rae has said.

“…We are lucky and fortunate that the shale gas revolution has helped to stabilise to some extent international oil prices,” he has been quoted as saying in the report.

Had the US not taken to shale gas as much, India’s oil import bill could have risen by another 50 percent. In such a situation, only an IMF loan could have been able to save the country, he has said. The rupee could easily hit 80-90 against the dollar.

In short, good luck - and some timely cutbacks - helped the government avoid going to the IMF.

Moreover, Raghuram Rajan, as soon as he took over as the RBI governor, announced a three-year dollar swap facility at cheaper rate with banks. This encouraged banks to raise about $34 billion through foreign currency deposits from NRIs. This facility, in effect, served the purpose of an IMF loan.

Things have changed in the economy over the last few months. Trade deficit has been restricted to $10 billion in December. The narrowing trade deficit will also have a positive on the CAD, which is now seen somewhere above 2 percent of GDP for the entire year.

But does this mean the economic concerns are addressed? Not really. The fall in CAD is majorly because of a restriction on gold imports. The decline in imports of other non-oil items, as witnessed in December, also means that domestic growth is slowing.

The fiscal deficit, which in November reached 94 percent of the Budget target, is now turning out to be a bigger threat. The government can rein this in only by carrying forward fuel subsidies - i.e. not paying this year’s bill till next year.

This is the reason why Rae has warned that there is no room to be complacent. The developments from June show that we are close to the tipping point, he has said.

India may not have gone to the IMF yet, but the country is close to it.