Competitive Exams: Current Affairs 2011: External economy

External economy always challenging Economy

Management of the external economy has been a bright spot in the overall macroeconomic scenario at least since the beginning of economic reform (early 1990s).

Liberalisation and the consequent opening up of the domestic economy necessitated a higher order of economic management. After the severe balance of payments crisis in 1991, there was a paradigm shift in the management of the external economy.

The sweeping changes introduced then covering foreign trade, foreign investment, exchange rate and reserves have served the country well.

Particularly noteworthy is the fact that deft external sector management enabled the country to get past major economic and financial crises relatively unscathed. After the recent financial sector led global economic crisis, India's prudential policies covering banks and external sector issues such as capital account convertibility have won high praise and commended for emulation by other countries.

The calibrated approach to capital account convertibility and controls over capital flows were criticised as being too conservative.

Today it has become mainstream. Even institutions such as the IMF advocate capital controls under certain special circumstances.

A focus on the external economy is also warranted because it can give valuable clues to the burning issue of the day, namely, inflation.

Besides, as a general rule it is naive to think that any economic issue however serious and politically sensitive which inflation certainly is can be examined and countered in isolation. For example, high global commodity prices, including those of petroleum are driving up inflation.

All economic forecasters, RBI included, have based their guidance on growth and inflation after taking into account the trends in global commodity prices.

Courtesy: The Hindu and Times of India