Can India successfully chase New Money through the reform measures?

All of a sudden, the confrontationist atmosphere between the reformists and anti-reformists in the country has been activated; thanks to the cloud burst type reform measures introduced by the UPA government during the last one month.

            The political and economic environment suddenly looks like that of 1991. Prime Minister Dr Manmohan Singh has launched a counter attack on the opponents when he remarked that the anti- reformists have not succeeded then (1991) and they will not succeed now.

            It seems that the UPA, especially the Congress has completely concentrating on the economic agenda by sidelining its political fallout. There is no question that we are witnessing the most reformist phase in Indian economy after 1991.

            The logic of the present reform measures should be evaluated in the context of the present international economic environment. Over the last one month, the advanced countries declared plans to inject around one trillion dollar into their economic systems, to revive their shrinking or debt ridden economies. In Europe, the ECB is administering the injection of nearly $ 700 billion fund into the financial system to overcome the debt crisis. Similarly, Bernanke’s quantitative easing (QE) 3 will add $40 into the American banking system. Japan has also declared easy monetary policies. The world economy hence is going to be abundant with new money in the coming months. Gold price is already getting near to the historically high figure of $1800 per ounce, after the flooding of new money in the advanced regions.

            The net result is that the world economy may witness another period of excess liquidity. History tells us that this excess liquidity in the advanced countries may not be converted into loans there because of dampened economic activities domestically. Rather, they may be converted as capital flows into emerging market economies like India, in the form of foreign investment. This is what happened in the capital inflow episode period of 2002 -07. So, this is a windfall opportunity for countries like India which are seeking foreign capital to boost the domestic economy.

            Recently launched reform measures are hence timely attempts trying to attract foreign investment to revive the slowing Indian economy. The timing of the measures is good.  Whether the country can attract the ‘new money’ is the most credible question, rather than the political aspect of the reform measures.