Opinion - Editorials   

Concerns over global imbalances

India might be better prepared than most emerging market economies to face the growing global macroeconomic imbalances but given that the inevitable adjustment will inflict pain there is no room for complacency. The global imbalance has been primarily caused by the propensity of countries with very high savings rate such as China, Japan, and South Korea to park their savings in the United States, often at low yields. With many Asian central banks simultaneously investing their foreign currency reserves in U.S. government securities, the U.S. has been able to finance its very large current account as well as fiscal deficits at relatively low costs. Clearly this arrangement is unsustainable. Already there is a strong clamour in the U.S. to trim its deficits. The asymmetry between savings and investment has been accentuated recently by the huge surpluses of the oil producers.

There is a widespread fear that measures to counteract the resurgent global inflation will be the tipping points for the global macroeconomic imbalances to unravel. Countries such as India with a good macroeconomic performance and a tradition of reforms will be able to withstand better the onslaught of sudden and unexpected changes in global interest rates and exchange rates. Any shift in investors' preferences in the global financial markets will have a far less deleterious impact on countries such as India, which are not dependent on external sources for their fiscal needs. Yet, there is no doubt that the pain of adjustment will be felt in India too. A sharp jump in global interest rates will push up the domestic interest rates, affecting not only the real sector but also banks with huge investments in securities. In a globalising world, India cannot avoid the pain but is certainly better equipped to minimise it.

Printer friendly page  
Send this article to Friends by E-Mail

Stories in this Section

Behind Chennai's music season
Concerns over global imbalances
Anger and red faces in Europe over CIA flights
Russia raises stakes in Iran standoff
Cameron promises a different kind of politics
Ancient legends warn of modern disasters
Mission to save planet is `failing'
Why Uzbekistan and the U.S. fell out
Volcker issue
Rain in Tamil Nadu
Deal with dissidence
Crisis in Vidharbha
Science & God
Interlinking rivers
Misplaced focus

Copyright © 2005, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu