borrow.

If we had an international
External Account credit line, there would have been no
need to pledge the gold (or even hold it
A Role for International Credit Lines
all in the first place). It is true that a
credit line was not available then, but
today it is. So the authorities can con-
GURBACHAN SINGH sider this (and not buy so much socially
unproductive gold).
While sharing the concerns It is true that credit lines are not per-
sed about India's external ac- fect substitutes for cash reserves (Aizen-
regarding the current account
We count sed share aboutcount
by the S India'sby
L concerns
S Shetty external (6 expres-(6Octo-Octo-
L Shetty ac- man et al 2010; Huang 2009). In other
deficit and lower foreign
ber 2012). There are, indeed, "distinctwords, the proverbial glass is half empty
exchange reserves voiced by
signs of discomfort on the horizon". even after taking credit lines. However,
S L Shetty ("External Account: in the context of international credit
However, our diagnosis and policy pre-
scriptions
Distinct Signs of Discomfort on differ. We will provide lines
a for macroeconomic stability in
broader perspective on the issues in- India, the glass is close to being com-
the Horizon", epw, 6 October
volved. Shetty considers two aspects: pletely empty; this is because we do not
2012), this comment suggests that
the gold import burden and the relativehave credit lines from imf (there is only
India should seriously debate the of reserves. We will focus ona very small arrangement with Japan).
stagnation
the latter. So we first need to fill the glass and then
purchase of a credit line from the
Shetty writes: worry whether or not it can get full.
International Monetary Fund and
The increasing discomfort about the exter-
intervene in the foreign exchange
nal sector arises from the relative stagnation
IMF Credit Lines

market more actively. or depletion of foreign exchange reserves The early views against free capital mo-
after attaining the peak of $316.2 billion at bility in the aftermath of the east Asian
the end of October 2011... (p 85).
crisis came in influential writings such
This is, indeed, an uncomfortable situa- as Bhagwati (1998) and Rodrik (1998).
tion. But what is the solution? Though both these writings had consid-
erable food for thought neither consid-
Flexible Credit Lines ered international credit lines as safe-
There is a need to do some fresh think- guards. There has, however, been some
ing and make use of new facilities that rethinking of late, imf now offers credit
are now available and can be used to re- lines; some have even suggested that
duce the (costly) reserves of the Reserve imf acts as a clearing house or as a
Bank of India (rbi). (This can in turn mediator between central banks in inter-
reduce the demand for gold by the rbi.) national credit line arrangements (Cord-
Public authorities can buy a credit line elia and Yeyati 2010; Obstfeld 2009;
(more specifically, flexible credit lineSingh 2012b, Chapter 12).
(fcl)) from the International Monetary It seems that there is an apprehension
Fund (imf) as three other countries have about the conditionality imposed by the
done already. A credit line is an optionimf in extending such credit lines; if so,
but not an obligation to borrow in a dif-there is indeed a point against such
ficult time. The three countries are credit lines. However, since rbi reports
Poland, Colombia and Mexico; they aredo not give any account of why such
entitled to borrow up to $47, 20.3 and
credit lines are not being considered se-
10.4 billion, respectively (in the first
riously, it is important to bring this out
round of contracting in 2009; these con-
in the public domain.
There has been considerable resent-
tracts have been renewed subsequently).
A credit line enables the authorities toment against imf after the east Asian
borrow in the midst of a balance of pay-
crisis in 1997-98, perhaps rightly so (Ito
ments crisis at a time when usual credit 2012). However, there is a need to for-
in the international markets completely give and forget after almost a decade
Gurbachan Singh ( gurbachan.arti@gmail.com )
dries up. In the early 1990s, India got and a half. This is particularly the case
is an independent researcher.
into a crisis and had to pledge its gold to now that imf has changed its position on

140 DECEMBER 29, 2012 vol XLVii no 52 B3Ö Economic & Political WEEKLY

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Table: Some Information Related to the Flexible Credit Line (FCL) Extended by the IMF to Mexico, However, we suggest that India should
Colombia and Poland
look beyond reserves (and capital con-
trols). Public authorities should seriously
1 Date of approval

2 Maximum amountthatcan be borrowed ($ billions)

debate the purchase of a credit line from
3 FCL as a percentage of the country's quota with the IMF 1,000 1,000 900 the imf and intervene in the foreign ex-
4 Interest rate under the FCL in % 2.7 2.7 2.7 change market more actively.
5 Length of the FCL (in months) 12 12 12
[Related research of the author can be accessed
6 Upfront fee (basis points) 24-27 24-27 24-27
at https://sites.google.com/site/gurbachans-
7 Real GDP (annual % change, 2008) 1.3 4.8 2.5
inghói]
8 Gross international reserves (end year 2008, $ billions) 95.3 NA 23.7
9 Fiscal deficit as % of GDP 2.0 3.9 0.1
(General governmentreferences

balance)
Aizenman, Joshua, Yothin Jinjarak and D
10 Public sector debt as % of GDP Park (2010): "International Reserves an
11 Current account deficit in billionsof $ 16.0 20.10 6.765 Lines: Substitutes or Complements?
Working Paper No 15804, July.
12 Current account deficit as a percentage of GDP 0.1 2.3 3.6
Bhagwati, Jagdish (1998): "The Capital My
13 Consumer Price Index % change 6.5 4.0 7.7 Difference between Trade in Widgets an
14 Rating (foreign currency) (Standard and Poor) lars", Foreign Affairs, 77(3), May/June, 7
• Long term BBB A- BB+ Cordella, Tito and Eduardo Levy Yeya
• Outlook/Watch Stable Stable Stable "Global Safety Nets: The IMF as a Swap
ing House", 18 April, http://www.vox
• Date article/global-safety-nets-imf-swap-cle
Source: Singh (2012a). house
Huang, Rocco (2009): "How Committed A
capital controls However, thissignificantly
is not the complete pic- Lines of(Ostry
Credit? Evidenceetfrom the Su
al
Mortgage Crisis", http://web-docs.ste
2oio). This is ture; this
not depreciationtooccurredsay
after that emerging
edu/salomon/docs/Huang.pdf
economies can leave caution behind. stability or even appreciation of the ex- Ito, Takatoshi (2012): "Can Asia Overcom
Stigma?", American Economic Review
John F Kennedy said: "Let us neverternal
ne- value of the rupee in the preced- and Proceedings, 102(3), PP 198-202.
gotiate out of fear. But let us never ing period. The "good phase" of the ru-
fear Obstfeld, Maurice (2009): "Lenders of La
in a Globalized World", IMES Discussio
to negotiate." pee in an earlier period was going on
Series 2009-E-18, August.
There is wisdom there. So India can even as the Indian economy was experi- Ostry, J D, A R Ghosh, K Habermeier, M
encing significant inflation; so the de-
consider credit lines. In any case, coun- M S Qureshi and DBS Reinhardt (2010)
tal Inflows: The Role of Controls", IMF S
tries like India need not negotiate frompreciation
a was inevitable. In fact, the sition Note 10/04 (Washington: Inter
sharp depreciation from October 2011 to
position of weakness at this stage. It may Monetary Fund).
Rodrik, Dani (1998): "Who Needs Capita
August 2012 may be viewed as a direct
be felt that the eligibility conditions for Convertibility?" in Should the IMF Purs
result of hardly any depreciation in the
FCL would be very strong; however, this tal-Account Convertibility? Essays in In
tional Finance No 207, International F
does not seem to be the case. The accom- earlier period. It is natural that the more Section, Department of Economics, Pr
panying table shows the macroeconomic delayed the warranted depreciation, the University, May, 55-65.

conditions in the three countries that Shetty, S L (2012): "External Account

sharper the actual depreciation would Signs of Discomfort on the Horizon", E
have opted for fcl from imf. This tableeventually turn out to be. & Political Weekly, 6 October, Vol XLVII
PP 84-85.
does not suggest very strong eligibility What is the significance of all this?
Singh, Gurbachan (2012a): "Financial Stability Re-
conditions. So India should be eligibleWhile the market failed in causing the ports (FSR) of the Reserve Bank of India (RBI),
March and December, 2010: A Critical Review
rupee to depreciate even as there was
for such a credit line, if she chooses to.
with a Long-term Perspective", Margin - The
high inflation in the economy in the pe- Journal of Applied Economic Research, 6:1, 27-46.
Money Depreciation riod prior to October 2011, the rbi could - (2012b): Banking Crises, Liquidity, and Credit
Lines - A Macroeconomic Perspective (Abing-
Apart from adding credit lines to re-have corrected this market failure. It don, UK: Routledge).
serves, there is also a need to makecould have bought foreign currencies
more effective use of reserves and and sold rupees in the market. This
EPW Index
could
nudge the exchange rate in the right di- have led to some gradual deprecia-
thatof the rupee in the months before An author-title index for EPW has been
rection and at the right pace, given tion
October 2011, and this, in turn, could prepared for the years from 1968 to 2010.
we have a managed float. This nudged
The PDFs of the Index have been uploaded,
have avoided the sharp depreciation of
or managed float, however, does not year-wise, on the EPW web site. Visitors can
the rupee in the months after October download the Index for all the years from the
seem to be always the case in practice.
Shetty writes, 2011. This policy would have also helped site. (The Index for a few years is yet to be
increase or at least reverse the depletion prepared and will be uploaded when ready.)
[T]he rupee has depreciated by over 18% in
nominal terms or by about 9% in real terms of foreign exchange reserves that Shetty EPW would like to acknowledge the help of
as per the six-currency index between Octo- observed in his article. the staff of the library of the Indira Gandhi

ber 2011 and August 2012 (p 85).
It is true that the rupee has depre-
ciated considerably in less than a year.
Institute for Development Research, Mumbai,
Summing up, we share the concerns
in preparing the index under a project
in Shetty (2012) regarding the current
supported by the RD Tata Trust.
account deficit and the lower reserves.

Economic & Political weekly 0EZS3 December 29, 2012 vol xlvii no 52 141

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