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India’s Overseas Debt Plan May Leave it Vulnerable to Future Shocks 

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One key lesson to be drawn from the financial crises of the 20th and 21st centuries is how economies, despite being aware of the cyclical nature of crisis-causing factors, continue to go from one problem to the other without learning from their own histories.

Argentina’s own financial history, over the last 30-40 years, tells us how its economy struggled to avoid getting trapped in a debt spiral again and again.

Added to this is that most countries believe that economic crises probably happen to ‘other’ economies and not them.

All of this should be kept in mind when examining the finance minister’s recent budget announcement that India would start borrowing externally in foreign currencies to meet requirements for domestic capital needs. The decision to use borrowed capital to meet the growing needs of domestic public borrowing requirements can expose India’s less-than-pristine macroeconomic fundamentals to a highly-levered, liquidity-crunched global debt market.

A critical question to ask here is: how, or in what form, will one see the next global financial recession appear? And how well prepared are we?

The short, and direct answer to the second question is: We aren’t.

For the first question, a closer look at the highly volatile nature of US equity and global commodity markets today, amidst America’s rising trade tensions with China, India and countries like Iran, where a full-blown political escalation from Trump could trigger an oil shock situation in the US and crash the dollar’s value. Each of these issues indicates high degrees of financial vulnerability for each of the economies that are either borrowing excessively in dollar-pegged bonds or in other foreign currency-based assets as a short-term fix for tackling their own ‘liquidity concerns’.

The dollar’s value has remained quite volatile in recent quarters and this is likely to be the case for some time ahead, seeing how the Federal Reserve, under Jeremy Powell – a supporter of Trump’s hyper-nationalism – is likely to steer the US monetary policy.........

© The Wire