India Makes Bernanke's Job at Fed Look Easy: William Pesek Jr.
quote.bloomberg.com
Jan. 25 (Bloomberg) -- Y.V. Reddy hasn't admitted he risks losing control of India's economy. Nor does the central bank governor need to; markets are doing it for him.
India's bonds had their biggest plunge in seven months yesterday after Reddy unexpectedly raised short-term rates. It isn't additional rate hikes that traders fear -- it's that rapid growth will fuel inflation.
The Reserve Bank of India was right to raise its overnight borrowing rate to a three-year high of 5.5 percent from 5.25 percent. Its fourth increase in 15 months proved two things. One, Reddy isn't in the pocket of politicians hoping he'd stop boosting rates. Two, inflation is a bigger threat than many in the markets appreciate.
Investors need not panic. By raising its growth forecast for the fiscal year ending March 31 to 8 percent from 7.5 percent, the central bank effectively admitted its rate increases aren't working. Reddy remains on the case, though. In a region in which many central banks are holding borrowing costs too low, India is throwing down the gauntlet.
Reddy's balancing act is a particularly dicey one that makes the U.S. Federal Reserve's job seem like a breeze.
Bernanke Gets Off Easy
Neither Ben Bernanke -- who succeeds Alan Greenspan as Fed chairman on Jan. 31 -- nor Jean-Claude Trichet at the European Central Bank, is juggling crushing poverty, wholesale-price inflation rising about 4.25 percent, high levels of foreign- currency debt and credit-rating companies constantly looking over policy makers' shoulders.
Central banks are there to promote price stability, and India's is no exception. The trouble is, the aggressive rate increases monetary hawks might advise amid high crude-oil costs could destabilize an economy with a public debt-to-revenue ratio of 435 percent. That kind of debt load led to financial crises in places like Argentina and Turkey.
The U.S. is free to ignore a budget deficit that's expected to widen to more than $400 billion this fiscal year. Ditto for its massive current-account imbalance. As risky as that is, the U.S. prints the world's reserve currency and, so far, has avoided the dollar crisis pundits have expected.
Too Much Debt
India's developing economy doesn't have that luxury. And besides, Reddy's rate increases are shifting the onus to the government.
Like the U.S., India has avoided the debt crisis many economists have been predicting for years. The focus now isn't just on the sustainability of India's debt load, but also on its effect on growth.
Politicians being politicians, it's a safe bet the central bank will be criticized for putting India's boom at risk with higher borrowing costs. It's Politics 101, especially in a democracy. If politicians want lower rates, the ball is firmly in their court.
The release of next month's budget will come with the rote, hollow pledges of fiscal responsibility. For example, Finance Minister P. Chidambaram says India will cut its budget deficit to less than 3 percent of gross domestic product by 2009, reducing government borrowings. It's targeted to come in at 4.3 percent of GDP in the current financial year.
India's Opportunity
The risks are clear enough. A wider budget deficit may lead to higher borrowing, driving up bond yields. Low interest rates will attract investments and stabilize an economy that needs to grow faster than 7 percent to create new jobs and improve the lives of the third of the country's 1.1 billion people who live on less than $1 a day.
It's vitally important that India succeeds this time. Rapid growth fueled a 42 percent increase in stocks in local-currency terms in 2005. Investors also are realizing that Asia isn't home to one rising superpower, but two -- China and India.
The excitement coursing through India's markets is predicated on the government making the most of today's good times. If officials in New Delhi fail to reduce debt and rein in a bureaucracy that undermines growth, capital entering India may not stay very long.
Onus on Politicians
Here in the world's second-most-populous nation, there's much about which to be optimistic. Rising incomes are boosting consumer and business spending. Investors also are realizing that among Asian economies, India's domestic-growth story is perhaps the most persuasive.
Salaries in Asia's No. 4 economy may rise by 7.3 percentage points more than inflation in 2006, the biggest increase forecast among 70 countries, including the U.S., U.K. and Japan, according to Mercer Investment Consulting Inc. That's great news for India's emerging middle class.
A central banker's job, it's often said, is to take away the punchbowl just as the party really gets going. Governor Reddy is doing just that. Political leaders worrying he will overdo it should be looking in the mirror. They're the ones issuing more debt than developing economies should.
In the age of globalization, it's often left to central bankers to maintain calm in markets. In India, reduced government debt would do more than anything to boost growth and cheer investors. If New Delhi doesn't do its part, bond traders will let politicians know they aren't doing their jobs. |
