CHALLENGES IN INDIAN ECONOMY: DYNAMICS OF CURRENCY FLUCTATIONS AND CURRENT ACCOUNT DEFICITS PRANAB...
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Transcript of CHALLENGES IN INDIAN ECONOMY: DYNAMICS OF CURRENCY FLUCTATIONS AND CURRENT ACCOUNT DEFICITS PRANAB...
CHALLENGES IN INDIAN ECONOMY: DYNAMICS OF CURRENCY FLUCTATIONS AND
CURRENT ACCOUNT DEFICITS
PRANAB BANERJIPROFESSOR, INDIAN INSTITUTE OF
PUBLIC ADMINSITRATION
CURRENT UNCERTAINITY
• Is the current economic situation bleak enough for comparison with 1990-91?
• Between 2003-08, Indian economy grew at 8-10 percent, prompting prognostications of India’s emergence as an economic super power.
• From ‘India Unbound’ to ‘The Caged Phoenix’.
GROWTH TRENDS
• World Recession 2008 onwards.• India maintains high growth upto 2011.• Huge stimulus package (`1.86 trillion).• Monetary easing (Mo:21.5percent 2010-11).• Growth rates fall from 9.3 percent (2010-11)
to about 5 percent (2012-13).• Declining trend possible current fiscal
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Q10
2
4
6
8
10
12
4.3
5.5
4
8.1
7
9.5 9.69.3
6.7
8.6
9.3
6.2
5
4.4
GDP gr rate
GDP gr rate
SECTORAL GROWTH
• Recent slowdown across sectors• Industrial slowdown• Even services sector shows decline: an
unprecedented development?• Decline in Domestic Saving Rate (from approx
37 in 2007-08 to 31 percent in 2011-12).
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Q1
6.5
2.7
7.1
7.9
1010.7
12.7
10.3
4.7
9.59.9
3.5
2.1
0.20.3
5.5
-4.9
8.2
1.1
4.6 4.6
5.5
0.4
1.5
7.7
3.6
1.9
2.7
Sectoral Gr RatesIND AGR
1 2 3 4 1 2 3 4 12011-12 2012-13 2013-14
0
1
2
3
4
5
6
7
8
9
10
services
services
STIMULUS PHASE
• Growth rates maintained, but a cost.• Fiscal Deficit 2008-09: Actual double of target
(3%) 2009-10:6.5 percent.• M3 growth 2007-09: about 20%/yr.• Export Growth: 29, 13.6 and -3.5 (2007-10).• Current A/c Balance: -1.3, -2.3 and -2.8 (2007-
10).• Inflation (CPI): 6.2, 9.1 and 12.4 (2007-10).
THEREAFTER
• Fiscal Deficit: 5.7 and 5 (2011-13) (Lower than budget estimate)
• Central Govt expenditure: 15.8 percent of GDP (2009-10) to 13.1 percent (2012-13).
• M3 growth rates: 15.6 and 11.2 (2011-13).• Mo growth rates: 21.5 (2010-11) to 4.3 (Q3
growth 2012-13).• GDP growth rates: 6.2 and 5 percent.
1 2 3 4 5 60
5
10
15
20
25
M3Gross Fiscal Deficit
EMERGING PARADOXES
• Despite Demand Compression, current account deficit widens.
• In 2011-12 exports also grow by 21.3 percent, growth slows to 6.2 percent, yet CAD is -4.2 percent.
• Rises to -4.8 percent and the Trade Balance crosses 10 percent (2011-13).
• Inflation persists: 8.4 and 10 (2011-13).
1 2 3 4 5 6 7 8 9 10 11 12-2.7
3.4 6.314.1
-2.5-9.9 -9.6
-15.7
-27.9-38.2
-45.9
-78.2
-12.5 -11.6 -10.7 -13.7
-33.7
-51.9-61.8
-91.5
-119.5 -118.2
-130.6
-183.8-191
DEFICITSCurrent account$b Trade balance
1 2 3 4 5 6 7 8 9 10 11 12 13
-6
-5
-4
-3
-2
-1
0
1
2
3
Current account%
Current account%
POLICY PARADOX
• In 2012-13, all elements constituting aggregate demand slackened.
• PFCE growth halved: 8 percent to 4.1 percent.• Exports growth: 21.3 (2011-12) to -4.9 (2012-13).• Gross Fixed Capital Formation: 4.4 to 1.7 percent growth
during the years.• Government Final Consumption Expenditure: 8.6 to 3.9• When Aggregate Demand was slackening why was policy
not counter-cyclical?• Revenue Receipts Stagnant: effect accentuates.
MANAGING CAD
• Stagnancy in capital account inflows• After a peak in 2007-08 of $ 106.6b, inflows reduced
to $ 7.2 b the next year.• Thereafter, it crossed $ 60b since 2010-11.• Reserve have fallen from peak $ 305b (2010-11) to $
296 b (Dec. 2012), $ 275b (Sept. 2013).• Sustainable CAD- 2.3% GDP (Rangarajan & Mishra).
Assumes Net Capital Inflows $ 50-70b annually over next 5 yrs.
• Should be reduced to -2 percent ( R & M)
1 2 3 4 5 6 7 8 9 10 11 12
-20
-10
0
10
20
30
40
50
FDIFPILOANS
THANK YOU !
Exchange Rate
• Sharp Rupee (vs $) depreciation: ` 44.2 (July, 2011), ` 55.8 (July, 2012) ` 68 (Aug. 2013).
• NEER depreciation less.• REER depreciation even less, if at all.• Volatility has sharply increased.• RBI monetary policy occasionally secondary to
exchange-rate policy.
EXCHANGE RATE POLICY EFFECTIVENESS
• Indi’s Exchange Rate Policy: Reduced Volatility and checking REER appreciation.
• Limits to the policy: sharp nominal exchange rate fluctuations, inflation, persistent and increasing CAD.
• Responsiveness of Exports to Exchange Rate:(-) 0.66 (Aziz & Chenoy 2012, insignificant)(-) 0.2 (L), -0.1 (s) (IMF, 2012).(-) 0.5 (Rangarajan & Patra 2013, insignificant)
• Responsiveness of Imports to Exchange Rate:0.47 (Datta, 2004)0.1 for net POL imports, insignificant for non-POL (RBI, 2012)
-contd-
-contd-
• “Estimates…show that changes in both overall trade balance as also in the non-oil trade balance are statistically insignificant to REER movements”. (RBI, 2012).
REASONS FOR PERSISTENT CAD
• Forty percent of imports: Energy & Fertilizers• Over ten percent: Gold & Silver• POL & Fertilizers import bill together almost equal
the trade deficit.• Price elasticity of imports low.• Exchange rate pass through imperfect.• According to Moody’s, fuel subsidies ` 1.6 lakh crore
(2012-13) or 60 percent of revenue account deficit.• Gold as safe inflation-hedge.