Of Paper Tigers And Real Ones

It is seldom that bad times come to an end
abruptly. Just when the Indian Finance minister had forecast a revival of the economy from
June onward and the quick estimates of the finance ministry had indicated a not-so-torrid
November ”97 and beyond, comes the Asian Tigers crisis. Long regarded as the epitome of
industrial prowess and exemplified worldover for their meteoric rise, the current monetary
crisis, ranging from Indonesia to Korea, has indeed rattled the confidence of financial
players worldwide. In that sense, the insularity of the Indian Rupee stands as a
vindication of our policies and the pace of reforms that has been criticized by several
western worthies in the past as too slow, and too unsure.

However, the notion that Indian Rupee is
completely insular is also wrong. As the Rupee”s not being convertible on the capital
account doesn”t any way decrease the vulnerability of the currency. RBI”s actions went a
long way in cooling off the free fall of the Rupee. However, its actions will have wider
ramifications. For one, the glee on the face of the software exporters seems to have been
stifled. Second, with the cut in liquidity and increase in SLR and the consequent increase
in PLR, inflation is likely to rise, perhaps sharply. This will be clearly reflected in
the prices of consumer and white goods, and products such as PCs.

As it is, there are rumblings that many of
the MNC brands are under pressure to raise prices. By making the market illiquid, the
pressure on prices will only escalate, and it is possible that some brands might actually
witness an increase in prices during this period.

Another by-product of this action is that
corporate buying, which was not very active in the first six months, will once again
nosedive. With the prices rising for home market PCs and the corporates shying away from
buying, the current fiscal may turn out to be the swansong for many a retail operations.
In any case, what is abundantly clear is that there will be little hope for reprieve in
the next three months and the sooner we accept the rules of the game the better off we
will be.

L Subramanyan

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