East-Asian crisis and the trying times of the late 1990s

In his memoir An Economist at Home and Abroad, Dr. Shankar Acharya reflects on his personal and professional journey, especially as the longest serving chief economic adviser to the Government of India. While much of the significant reforms had already been set in motion by the time he took over as the economic adviser in 1993, India’s most challenging and transformative years were yet to unfold. Dr. Acharya gives us a glimpse into those years, especially when the East Asian financial crisis was on the verge of upending the global market and even the hard-won successes of India’s liberalization. To know, what went down, read the excerpts below.

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Good things do not last. In 1996, Congress was voted out of office and the motley United Front government assumed power for two years, the first with H.D. Deve Gowda as PM and the second with Inder Kumar Gujral. It was really a period of marking time. The best that can be said is that the reforms implemented in the previous five years were not reversed. Credit must also go to the finance minister, P. Chidambaram, for ensuring that there was no serious backsliding in reforms already undertaken. He was a very clever and articulate lawyer, often charming and sometimes arrogant. His so-called 'dream Budget' of 1997, which cut income tax rates, was predictably popular with the media and the well-off segments of society, but also contributed to a stalling in fiscal consolidation.

The bigger test came with the east Asian financial crisis, which began with the collapse of the Thai baht in July 1997 and spread quickly to the rest of south-east Asia and Korea. It was the world’s first multi-nation capital account BoP (balance of payment) crisis, which set back the impacted economies by several years. By September, the gales of contagion had reached the shores of India. Our BoP came under significant pressure, with some flight of footloose capital and pressure on the exchange rate. Fortunately, thanks to our own painful experience with the 1991 BoP crisis, we had well-prepared defences. These included: Deliberate reduction of short-term external debt levels; maintenance of a competitive real exchange rate; keeping the current account deficit to moderate levels; explicit reluctance to deploy massive amounts of forex reserves in defence of any particular level of the exchange rate; a reasonably strong financial sector with little exposure to speculative markets such as stocks and real estate; and a willingness to tighten monetary policy as and when necessary.

Despite our favourable starting point, coping with the contagion was not easy. The RBI (Reserve Bank of India), in close consultation with us in the MoF (Ministry of Finance) intervened actively in both spot and forward currency markets for the rupee, allowing some depreciation but with 'brakes on'. Monetary policy was substantially tightened from November onwards, culminating in a 2 per centage point increase in the Bank Rate and higher cash reserve requirements in January 1998. I recall helping to finalize this difficult decision with Bimal (recently appointed governor of RBI) and Montek in a long discussion in the former's Lodi Estate bungalow before he moved to the governor's mansion in Mumbai.

Dr Shankar Acharya with his colleagues in the Ministry of Finance, Mr NK Singh and Finance Secretary Mr Montek Singh Ahluwalia. 

In those difficult autumn months of 1997, I was in almost daily telephonic touch with Governor Rangarajan, who described his role in that period as that of a 'desk officer' on India's exchange rate. Our long conversations did not reflect advice from the MoF to RBI. Ranga knew better than any of us what to try and what to do. He just needed someone to talk to, often and at length. So, my role resembled that of a psychoanalyst, listening to his problems as he thought through the possible solutions. When his term ended at the year's end and Bimal Jalan took over, my job as a personal ‘shrink' to the governor ended. Bimal was more self-contained and preferred to play his cards closer to his chest. Fortunately, I continued my close communications with his deputy governor, and my old friend, Venu Reddy.

For India, there was one clear side benefit from the east Asian crisis. Between 1995 and 1996, the US Treasury had mounted increasing pressure on all countries to support an amendment to the IMF Articles of Agreement, which would make full capital account convertibility a desirable goal for all member nations, which the IMF would then chivvy them into fulfilling. We, and several other developing nations, were strongly opposed to this, as we felt it would make our economies vulnerable to massive volatility, stemming from the whims and developments in the huge international capital markets. Larry Summers, the US Treasury assistant-secretary, was the articulate point man for the American view in all official multi-nation meetings on finance. These pressures abated swiftly after the east Asian crisis!

This crisis also gave birth to a new international formation, the annual G-20 finance ministers’ meeting. Following the Interim and Development Committee meetings in spring 1998 in Washington, the US Treasury convened a meeting of twenty-two finance ministers and central bank governors, representing about per cent of global GDP, in the Willard Hotel, to strengthen the international financial architecture. FM (Finance Minister) Yashwant Sinha and Governor Jalan represented India, with Vijay Kelkar, Deputy Governor Reddy and I also present. US President Clinton gave a rousing speech in favour of stronger international financial cooperation. By the following year, this had become the G-20, with Canada's finance minister, Paul Martin, as the first chairman. The first meeting of the G-20 was held in Montreal in autumn 1999. Much of the agenda focused on moving towards common standards and codes in the international finance and capital markets, with the Bank for International Settlements (BIS) the principal locus of the analytical background work. The FM and Bimal represented India, with Venu and myself supporting. The same cast attended the next meeting in Berlin, in late 2000. While some progress was made, over time, these meetings lost momentum as the east Asian crisis receded into memory, degenerating into just another international talk shop. Perhaps the key advance for us was India's routine inclusion in such a group. A decade later, following the global financial crisis, the G-20 mechanism would be upgraded to a summit-level conclave.

Published with the permission of the author. The book is available here.