In an interview here, the vice president of Indonesia characterized higher interest rates and a weakened currency as the “new normal.” Boediono, the country’s vice president, who uses only one name, said that Indonesia would face a tougher international financial environment in the coming months and should give greater emphasis to a stable currency, stable prices and a stable trade balance and not just pursue economic growth.
“We have been addicted, so to speak, with an easy-money environment for four years,” said Mr. Boediono, the main architect of Indonesian economic policy since the Asian financial crisis in 1997 and 1998. “We know that we have to make some adjustments, and maybe by next year, we have to really, fully adjust to a new normal, so to speak, where easy money is no longer” available.
But in Mumbai, the new governor of the Reserve Bank of India suggested that India faced less of an international threat after the Federal Reserve decided on Wednesday to continue its economic stimulus, at least temporarily. The governor, Raghuram Rajan, lowered a key interest rate on Friday by three-quarters of a percent, although he raised another less important rate by a quarter of a percent.
India pushed interest rates up sharply over the summer to make financial investments there more attractive and slow the fall of the rupee. Reversing part of that increase now “will provide a boost to growth, reduce the financing distortions that are emerging in the market, and reduce the strain on corporate and bank balance sheets,” Raghuram Rajan, the new governor, said Friday at his first news conference on monetary policy.
In monetary terms, India is zigging while Indonesia is zagging, despite the many common challenges that have pummeled their currencies and stock markets in recent weeks. Both must balance a need to preserve economic growth for large, heavily poor populations, while at the same time preventing a buildup of inflation that might discourage longer-term investments — a tricky balancing act that has bedeviled policy makers in the United States and other affluent countries over the years.
India, with a population of about 1.2 billion, and Indonesia, population 250 million, are both struggling to modernize their infrastructure while stuck with complex land ownership laws that make it hard to redevelop cities rapidly. Both are wrestling with costly but politically popular fuel subsidies that are driving up government budget deficits, and both have indignant publics demanding an end to endemic corruption.
Economically, both have sizable current-account deficits compared to their economic output, together with nearly double-digit inflation in consumer prices.
Perhaps most important, both face national elections next year that limit their ability to make politically unappetizing economic decisions: India will elect a new Parliament by the end of May, while Indonesia will elect a new legislature in April and a new president in July.
The different policies outlined on Friday in Jakarta and Mumbai reflect differences in the seriousness of their predicaments, however, with India appearing to be in considerably worse shape.
While Indonesia’s ports and highways still have shortcomings, as does the country’s bureaucracy, they are good enough that the country has emerged as one destination for the many companies shifting operations away from China in response to surging blue-collar wages there. India’s bureaucracy remains stifling, and the potholes and traffic on the country’s roads are so bad that vehicles scarcely move faster than walking speed in some areas; in other areas, sometime gruesome crashes are a regular occurrence.
Neha Thirani Bagri contributed reporting from Mumbai.
Article source: http://www.nytimes.com/2013/09/21/business/global/indonesia-needs-to-wean-itself-from-easy-money-leader-says.html?partner=rss&emc=rss