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CHALLENGES IN INDIAN ECONOMY:
DYNAMICS OF CURRENCY FLUCTATIONS AND
CURRENT ACCOUNT DEFICITS
PRANAB BANERJI
PROFESSOR, 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 810 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
GDP gr rate
12
10
9.5
9.6
9.3
9.3
8.6
8.1
8
7
6.7
6.2
6
GDP gr rate
5.5
5
4.4
4.3
4
4
2
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014Q1
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).
Sectoral Gr Rates
IND
AGR
12.7
10.7
10.3
10
9.5
8.2
7.9
9.9
7.7
7.1
6.5
5.5
5.5
4.6
4.7
4.6
3.6
3.5
2.7
2.7
1.5
1.1
0.4
0.3
2001
2.1
1.9
2002
2003
-4.9
2004
2005
2006
2007
2008
2009
0.2
2010
2011
2012
2013
2014Q1
services
10
9
8
7
6
5
services
4
3
2
1
0
1
2
3
2011-12
4
1
2
3
2012-13
4
1
2013-14
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 (200710).
• 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.
25
20
15
M3
Gross Fiscal Deficit
10
5
0
1
2
3
4
5
6
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).
DEFICITS
Current account$b
Trade balance
14.1
6.3
3.4
-2.71
-12.5
2
-11.6
3
-10.7
4
-2.55
-13.7
6
-9.9
7
-9.6
8
9
10
11
12
13
-15.7
-27.9
-33.7
-38.2
-45.9
-51.9
-61.8
-78.2
-91.5
-119.5
-118.2
-130.6
-183.8
-191
Current account%
3
2
1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
-1
-2
-3
-4
-5
-6
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)
50
40
30
20
FDI
FPI
LOANS
10
0
-10
-20
1
2
3
4
5
6
7
8
9
10
11
12
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.