Transcript Document

The Budget and the Macroeconomy
Suman Bery
March 7, 2007
India Habitat Centre
About NCAER
•
Golden Jubilee Year
•
Joint work with Shashanka Bhide who
coordinates QRE, Macrotrack
•
Views personal
Overview
• Budget affects growth, equity through multiple
micro (supply-side) channels: incentive effects;
provision of public goods, income transfers.
Discussed by other speakers.
• But Budget also drives the macro framework:
mix of fiscal, monetary, debt and exchange rate
policies which boosts growth by providing a
stable investment climate.
• Latter is focus of my remarks.
Key Questions
• Is the economy “overheated”?
• If so, is there a “correct” mix of fiscal,
monetary and exchange rate policies to
sustain high growth?
• Does the budget move us in the right
direction?
Analytic Framework
• India increasingly open both on trade and
financial side.
• Changes the way we need to think about
assignment of instruments to targets.
• Particularly important as we move to
“fuller” capital account convertibility.
Analytic Framework
• Useful frameworks: “impossible trinity”
and “real exchange rate”.
• Impossible trinity: open capital account,
stable exchange rate, independent
monetary policy.
• “Real exchange rate”: internal price of
non-tradables to tradables.
Analytic Framework
• Useful frameworks: “impossible trinity”;
“monetary approach to the balance of
payments”; “real exchange rate”.
• Impossible trinity: open capital account, stable
exchange rate, independent monetary policy.
• “Monetary approach”; with open capital
account, agents will respond to domestic
tightening through capital inflow.
• “Real exchange rate”: internal price of tradables
to non-tradables (See Lal-Bery-Pant 2003).
Analytic Framework
• Like much of developing Asia, India trying
to operate an “intermediate” currency
regime; the question is at what risk and
cost.
• Lesson from Latin America: sterilised
intervention of capital inflows ineffective,
fiscally costly. LBP argue there is also a
growth cost.
Sticking to FRBM Targets
Items
Units
200506
200607
200708*
Central Government Finances
Revenue deficit/ GDP
%
2.6
2
1.5
Fiscal deficit/ GDP
%
4.1
3.7
3.3
Gross Tax/ GDP
%
10.3
11.4
12.0
Expenditure/ GDP
%
14.2
14.1
14.0**
Debt/ GDP
%
65.1
64.4
58.6
*From Budget proposals ** SBI share transfer excluded
Sticking to FRBM (continued)
• Growth has led to revenue buoyancy
• Revenue growth has made higher expenditure
on social sectors feasible
• The Eleventh FYP had, however, looked at the
potential need for some relaxation of FRBM to
enable higher spending
• If anything this year’s budget shows that
revenue growth may be under-estimated
Sticking to FRBM has aided in
achieving good results
Item
Unit
200506
2006-07
FDI + FII
$ bill
17.2
19.3 (est)
CAB
$ bill
9.2
12.0 (est)
Forex reserves
$ bill
145
180
23.4
36.3 (AprDec)
Exports growth ($ Goods) % YOY
Sticking to FRBM (continued)
• However:
• FRBM alone can not guarantee there are
no off-budget spending
• FRBM can not guarantee that there will
be no inflationary tendencies
• More is required from the Budget and
from other Policies
Fighting Inflation
• Budget has observed FRBM framework
• Budget has reduced duties and taxes in
some key input sectors
• RBI has tightened excess liquidity: higher
interest rate, higher CRR
Fiscal Monetary Interface
(% Change YOY)
Item
Unit
200506
200607
M3
%
17.0
21.1
Reserve Money
%
17.2
20.0
Forex Assets of RBI
% (Year end)
9.8
28.1
Interest rate (91-day T-bill)
% (end Jan)
6.1
7.6
NEER (10 country)
%
3.8
-4.6
REER (10 country)
%
3.9
-3.6
Current Context
• Given continued strong autonomous (and induced) capital
inflows, for both cyclical and secular reasons the real
exchange rate (the relative price of non-tradables) in India
will tend to appreciate.
• This happens through appreciation of the nominal
exchange rate (against a basket) or through domestic
inflation.
• A widening current account deficit is an essential element
of the adjustment/anti-inflationary process.
• Aggregate fiscal adjustment can help mitigate the real
exchange rate appreciation; sterilisation on the other hand
complicates both the fiscal and the exchange rate problem.
Policy Assignment
• The current goals of an open capital account
and autonomous monetary policy should entail
freedom for the nominal exchange rate. In this
case exchange market intervention should be
abandoned (Korea, Thailand, Brazil).
• Alternatively, RBI could intervene and not
sterilise.
• In all cases fiscal policy could play a useful
counter-cyclical role.
Fiscal Monetary Interface
•
•
•
•
•
High growth
Capital inflows and build up of reserves
Inflation
High interest rates
Exchange rate depreciation
• Should there not be a different policy
response?
Another Reform in the Fiscal- Monetary
Interface
• Separation of debt management from
monetary policy body: The DMO
Thank You