1. Comments on: “What Explains India’s Real appreciation?” Sisira Jayasuriya

2. 2 Contributions Application of the tradables/nontradables (Swan-Salter or “Australian”) model to analyse RER issues In India Construction of a T/NT relative price series based on ratio of exports in total output: widening inflation differentials observed Estimation of average labour productivity growth differentials Analysis of RER movements, using a model with productivity growth differentials (BS effects) plus demand side variables (per capita income growth, government consumption, import/export price changes) Conclusions: BS effects, fiscal deficits and falling import prices main causes of RER appreciation Policy implications: more flexible ER policy, reduce fiscal deficit, continue liberalisation

3. 3 Theory Balssa-Samuelson link between RER and productivity: based on competitive internal factor/product markets and “Law of One Price” globally for tradables –Law of One Price widely violated NT in domestically consumed foreign T (imports) Trade srestrictions –Competitive domestic markets??? –Imperfect/weak transmission of international prices to domestic prices –NT does not use T-inputs Recent theoretical models incorporate imperfectly competitive markets, imperfect substitution between home and foreign produced tradables, NT incorporating tradables, costly intersectoral capital mobility etc. –BS effects much modified, sometimes reversed

4. 4 Some measurement issues T/NT disaggregation: –5% export ratio –All agriculture excluded from T –Data problems related to productivity growth in NT: transportation and communication services treated as a single NT sector Productivity measure: labour productivity, not TFP –“…this distinction is anything but inconsequential….. When TFP is used..the positive association between productivity and the RER disappears..” (Lee and Tang, 2007, Review of International Economics: study of 12 OECD countries)

5. 5 Results: How Robust? What Implications? Government expenditure: consumption only or total (including investment)? Role of capital inflows, oil price shock etc? Import price falls an important cause of changes in domestic T/NT relative price: –fall in import prices to country or fall in internal import prices due to trade liberalisation? Fiscal Policy, particularly in recent year: quite minor role Policy implications?