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

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 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 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 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?