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CHALLENGES IN INDIAN ECONOMY: DYNAMICS OF CURRENCY FLUCTATIONS AND CURRENT ACCOUNT DEFICITS PRANAB BANERJI PROFESSOR, INDIAN INSTITUTE OF PUBLIC ADMINSITRATION.

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Presentation on theme: "CHALLENGES IN INDIAN ECONOMY: DYNAMICS OF CURRENCY FLUCTATIONS AND CURRENT ACCOUNT DEFICITS PRANAB BANERJI PROFESSOR, INDIAN INSTITUTE OF PUBLIC ADMINSITRATION."— Presentation transcript:

1 CHALLENGES IN INDIAN ECONOMY: DYNAMICS OF CURRENCY FLUCTATIONS AND CURRENT ACCOUNT DEFICITS PRANAB BANERJI PROFESSOR, INDIAN INSTITUTE OF PUBLIC ADMINSITRATION

2 CURRENT UNCERTAINITY Is the current economic situation bleak enough for comparison with ? Between , 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’.

3 GROWTH TRENDS World Recession 2008 onwards. India maintains high growth upto Huge stimulus package ( ` 1.86 trillion). Monetary easing (Mo:21.5percent ). Growth rates fall from 9.3 percent ( ) to about 5 percent ( ). Declining trend possible current fiscal

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5 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 to 31 percent in ).

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8 STIMULUS PHASE Growth rates maintained, but a cost. Fiscal Deficit : Actual double of target (3%) :6.5 percent. M3 growth : about 20%/yr. Export Growth: 29, 13.6 and -3.5 ( ). Current A/c Balance: -1.3, -2.3 and -2.8 ( ). Inflation (CPI): 6.2, 9.1 and 12.4 ( ).

9 THEREAFTER Fiscal Deficit: 5.7 and 5 ( ) (Lower than budget estimate) Central Govt expenditure: 15.8 percent of GDP ( ) to 13.1 percent ( ). M3 growth rates: 15.6 and 11.2 ( ). Mo growth rates: 21.5 ( ) to 4.3 (Q3 growth ). GDP growth rates: 6.2 and 5 percent.

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11 EMERGING PARADOXES Despite Demand Compression, current account deficit widens. In 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 ( ). Inflation persists: 8.4 and 10 ( ).

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14 POLICY PARADOX In , all elements constituting aggregate demand slackened. PFCE growth halved: 8 percent to 4.1 percent. Exports growth: 21.3 ( ) to -4.9 ( ). 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.

15 MANAGING CAD Stagnancy in capital account inflows After a peak in of $ 106.6b, inflows reduced to $ 7.2 b the next year. Thereafter, it crossed $ 60b since Reserve have fallen from peak $ 305b ( ) 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)

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17 THANK YOU !

18 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.

19 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-

20 “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).

21 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 ( ) or 60 percent of revenue account deficit. Gold as safe inflation-hedge.


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