NEW DELHI: Mr. Gopi Arora, executive director of the International Monetary Fund (IMF), left posthaste for Washington to explore the possibility of IMF granting an immediate short-term loan to India to help the country meet its balance of payment (BOP) situation till a bigger loan is negotiated.

Mr. Arora has gone literally for a day to assess the IMFs reaction. He had a two-hour meeting with the Prime Minister Mr. P.V. Narasimha Rao, to brief them about the implications and progress of the on-going negotiations with the IMF.

The need for a short-term loan has arisen in view of the fast deterioration in the BOP situation. The foreign exchange reserves in mid-June slumped to a little over R.s 2500 crore despite the release of Japanese aid to the tune of $300 million (R.s 630 crore). It is clear that India will have to take some other measures to replenish its foreign currency reserves. It cannot wait for the credit from the IMF which is likely to be available towards the end of August or mid-September. The situation is far too serious.

DIFFERENT PLANS: If the IMF agrees to grant a short-term loan, it can be adjusted against the standby credit of $2 billion India is trying to, get. Alternatively, there need ben. standby credit itself and the short term loan will be part of a bigger loan of $5 to $7 billion which India is seeking to meet its medium-term BOP requirements.

The issue is thus no longer whether to seek an IMF loan, but rather how quickly to get it. Negotiations for the standby credit or “upper tranche” credit of $2 billion which was initiated by Mr. Yashwant Sinha, finance minister during the Chandra Shekhar regime, still continue though they have not been smooth. Following the postponement of the presentation of the regular budget and further widening of the fiscal deficit, the international financing agencies have doubts over the government’s ability to stick to its commitments.

Mr. Sinha had assured the IMF that he would bring down the fiscal deficit to 6.5% of the gross domestic product (GDP). The presentation of the vote-on-account by Mr. Sinha and the political instability that followed gave wrong signals to the IMF and the World Bank as also to India’s major donors about the political leadership’s seriousness in carrying out structural reforms.

The present “hung” Parliament and the minority Congress government have not helped to improve the situation. India will have to carry out Structural changes including dilution of FERA, to encourage foreign investment. It will have to contain fiscal deficit to 6.5% of GDP to begin with and undertake liberalization of trading systems, deregulation and privatization of the public sector and financial institutions as also induction of private capital in the public sector units.

DOUBTS REMAIN: Although, the new finance minister, Dr. Manmohan Singh has hinted at the government’s readiness to bring about all these changes, the international financing agencies have doubts as to how far the minority government will be actually able to implement them. There may be a slip between intentions and implementations.

Difficulties have been compounded by the fact that the IMF cannot make an exception in the case of India by granting it a short term loan without waiting for actual implementation of the structural reforms.

The Narasimha Rao government will therefore have to take really “hard decisions” to convince India’s funding agencies that it means business. Only after this, the nurse Strings of the IMF and foreign banks are likely to be loosened.

Article extracted from this publication >> July 5, 1991