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Mexico had to face a severe economic crisis in recent years due to its huge external current account deficit, was of the order of 8 per cent of GDP which made it vulnerable to changing international investment. Moreover, Mexico had its economic boom from pure borrowings and not through national savings which went on the decline.
Now relevance of Mexico-type crisis in India is not a decided one rather it is a controversial issue.
Although structural adjustment of the economy through economic reforms has yielded certain good results and has been able to clear the early clouds of economic crisis from which the economy of the country was suffering, but resurgence of double-digit inflation and growing external current account deficit are creating apprehensions among the economists about the relevance of Mexico-type economic crisis in India.
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While analysing the Union Budget, 1995-96, the noted economist Prof. PR. Brahmanand recently observed that the Union Budget (1995-96) had a potential for fueling about 8.8 per cent inflation and expressed apprehension that the economy may get into a Mexican-type of economic crisis due to uncertainty in policies and persistent inflation.
Mr. R.K. Mohan Menon, an economist of Nehru Institute of Economic Planning and Research recently warns of Mexico-type economic crisis for the nation if the inflow of foreign exchange into the economy is left unchecked. Caution should be exercised by keeping a close watch on the external current accounts deficit.
A higher external current account should be accompanied by a rapid rate of growth of the economy which is not feasible now for an economy like India which is slowly and steadily registering economic growth through economic reforms package.
If the economy is to be healthy, large scale borrowing should not be resorted to and inflationary pressures should be kept under check through strict monetary policy extending the status of all independent authority to the RBI.
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On foreign investment, it is prudent to go in for long-term loans rather than for short term ones for it would serve the purpose for which it has been earmarked. According to K. Mohan Menon, on the inflation front, the Government has failed in arresting the spiraling prices of essential items.
It is but appropriate to adopt a fiscal policy rather monetary policy to control and keep under check the inflationary pressures in the economy. But still looking at the overall economic scene, there are not enough mechanisms to control inflation in the economy.
Anything done in the short run or in a piecemeal way to control inflation through monetary policy will only lead to higher interest rates. Mr. Menon further observes that the area which deserves predominant emphasis and attention is the agricultural sector. Price decontrol, right input prices, removal of subsidy and export controls should be the top most items of priority in the economic agenda of the nation.
The Asian Development Bank (ADB) in its annual report noted that the Indian economy is on the threshold of a take-off. ADB, in its report, further elaborated that the developing countries of Asia (including India) will continue to grow faster than that of any other region in the world. ADB has totally rejected the view that the emerging markets of Asian countries are likely to fall into the similar financial trap as Mexico.
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The report further observes that the situations are not as such because various fundamental differences were existing between economic management in Mexico and that of emerging markets of Asia. Most of the Asian developing countries have attained high rates of economic growth during 1980s and they are continuing to build up this growth in the 1990s.
On the order hand, Mexico was a debt ridden country and it had experienced a poor growth in output during the same period. Moreover, the Asian economies had been maintaining a good track record of economic management.
In spite of that, ADB has warned the Asian countries to learn lessons from the worst Mexican episode. Here the most important issue to be noted was that it was really difficult to finance large account deficits for prolonged periods.
However, some economists have raised their voice of dissent against the policies incorporated in the economic reforms in India. Well known economist Prof. P.R. Dubashi has categorically criticised the policies adopted by Rao Government when it neglected public investments in social sectors, in agriculture and in rural development as it was very much pre-occupied with liberalisation policy.
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He also subsequently warned that time has come for New Delhi to rise above the euphoria of liberalisation and also to acquire a human face. It must pay due attention to the example of Mexico as the common man has been hit badly.
Again a group of 13 eminent economists have criticised the Rao Government on the ground of adopting unproductive policies. They also accused the Government on the ground of “abdicating its rule in the belief that market knows best.”
On the other hand, famous economist Dr. Jagadish N. Bhagwati and some other economists have simply commended the new policies adopted by India under the present regime of reforms.
They argued that past policy of capturing the commanding heights as formulated by Nehru did not provide benefit to the people. Prof. Bhagawati argued, “Instead, we lost out on both technical inflow and growth. The reforms correctly aim at reaping these rewards which we could have started earning three decades ago.”
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Thus, under this policy trend and controversies thereupon, it can be safely argued that we have still many miles to go as we have still 50 millions of people unemployed and many more underemployed. The liberalisation programme adopted in India pays no heed to landless poor, agricultural labourers, unorganised workers, policy of land reforms etc. Rather it is pre-occupied too much with industry.
Therefore, liberalisation fails to make much headway in the more important agricultural and services sector. The programme on rural development should adopt a productive attitude instead of repeating the trend of reckless spending, when money and assets fail to reach the target groups identified under such programme.
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