Macroeconomic Vulnerability Index

India has emerged as a strong and stable economy and presents a favourable investment destination to the world. It has withstood many financial upheavals since the 2013 US tapering scare. Indian economy had to deal with huge Current Account Deficit and inflation. On top of it, the US taper announcements placed it among the Fragile Five Group (India, Brazil, Indonesia, South Africa, Turkey).

What is Macroeconomic Vulnerability Index?

Macroeconomic Vulnerability Index which adds up rate of inflation, current account deficit and fiscal deficit of a country is quite helpful in comparing countries across years. In developing countries the MVI is determined by various structural conditions which expose an economy to financial shocks. There are broadly two approaches to understand Macroeconomic vulnerability of a country. One is in context of global financial crisis. Most of the emerging economies are interlinked in international trade and have an increasing dependence on exports. This leads to a higher incidence of commodity price and trade-shocks which can trickle down to domestic levels and trigger debt or banking crisis and hamper economic growth. The other approach is to study various factors of financial sector (like highly volatile and deregulated markets) and international capital flows (like volatile FDI and FPI) which have the capacity to start financial crisis. It will be the resilience and exposure of the economy to such outside shocks which will determine macroeconomic vulnerability of an economy. In addition, other factors which aids in studying macroeconomic vulnerability are the credibility of Government policies and Economic robustness. Countercyclical monetary and fiscal policies, foreign exchange interventions, regulation of capital flows etc. help to minimise vulnerability.

Indian Scenario

Amongst emerging economies, India in 2013 had a very high MVI value of 22.4 with inflation pegged at double-digit figure of 10.2%, budget deficit of 7.5% and a high Current Account Deficit of 4.7% of GDP. India in 2015 is much better placed with controlled inflation and CAD. Indian economy which showed an average of 9% growth decelerated for the last 12 quarters and dived below 5% in the last 2 quarters of 2014. However, the decline has bottomed out and now the economy is again on a growth path. The rebound has been made possible due to several decisions by the Central Government like:

  • Deregulating diesel prices
  • Raising FDI cap in defence from 49-100 percent
  • Replacing cooking gas subsidy by direct transfers on a national scale
  • Reforms in coal sector by encouraging entry of private players via auctions.
  • Doing away with quantitative restrictions on gold.
  • Creating an investor friendly environment by granting speedy clearances and reducing procedural bottlenecks.
  • Undertaking disinvestments

Indian government has taken timely steps to ensure smooth growth in a climate of frequent economic shocks. Economic vulnerability can be addressed by comprehensively assessing future risks and build resilience accordingly.