India in the Global Economy Speech by : Raghuram Rajan Presentation by : Palwin Kohli

India in Global Economy Raghu talks about India’s engagement with Global economy and to manage it in these turbulent times The global economy is finding it hard to restore pre-Great Recession growth rates. Financial boom preceding the Great Recession has left industrial countries with a debt overhang and this debt on government, households and banks is holding back growth. Structural reforms that increase competition, foster innovation and drive institutional changes are the way to raise potential growth. But these reforms hurt protected constituencies that have become accustomed to the rents they get from the status quo.

What should India do? Given the depressive behavior of international investors and uncertain global growth, we should make sure that our domestic environment promotes strong, sustainable and stable growth. This requires a firm platform of macroeconomic stability. Below are 2 key steps that India needs to take to ensure such framework: Inflation-focused Monetary policy framework. Clean up stressed assets in banking sector.

International Trade For the first time in decades, global trade has grown slowly than global outputs. As industrial countries become more competitive, and as China moves up the value chain, more of the inputs going into final products are being sourced from inside a country rather than from outside the country Figure 1 – Indian exports of goods and services broadly mirrors that of emerging markets.

Figure 3 - At the same time, the growth of Indian service exports seems to be doing somewhat better, perhaps because countries like the United States that we export services to are recovering more strongly. Figure 2 - Indian goods exports seem to be doing worse recently than goods exports from emerging markets

The goldilocks rate A Goldilocks economy is an economy that is not so hot that it causes inflation and not so cold that it causes a recession. Goldilocks rate is essentially the appropriate exchange rate. Should RBI aim for a strong rupee or a weak rupee? Non-economists advocate strong rupee – they are consumer focused. Economists on the other hand a majorly producer focused and prefer weak rupee. Typically, market forces get you to the Goldilocks rate. An artificially low exchange rate turns out to be uncompetitive when the exchange rate normalizes.

Ideas and Analysis To maintain orderly movement of rupee vs other currencies, we need 2 ingredients: Good policies that ensure macroeconomic stability and convinces investors their money is safe over medium term. Focus on attracting stable capital flows that will stay for the long run. Also, in order to increase our exports, we must: Improve human capital with better schools Improve productivity by building out infrastructure Simplify business regulation and taxation Improve access to finance

India’s GDP Growth Rate

What is Demonetization? Act of stripping a currency unit of its status as legal tender. It occurs whenever there is a change of national currency. The current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins. Sometimes, a country completely replaces the old currency with new currency.

Demonetization in India On November 8th, 2016, Indian Prime minister Narendra Modi declared that all 500 and 1000 rupee notes would cease to be a legal tender. The announcement was made at 8pm in an unscheduled live televised addressing with demonetization becoming effective past midnight. Nearly 87% of the notes in circulation was of the denominations of 500 and 1000’s. 1.3 billion people were given a 50-day window to either deposit the old currency into their bank accounts or exchange them for newly designed and minted notes.

Immediate Consequences The Objectives Immediate Consequences Flush out black money Eliminate fake currency notes Curb terrorism Expand tax base Give boost to digitalization of payments Severe cash crunch which had detrimental effects on several small businesses, agriculture and transportation. Long lines outside the banks and ATMs. Hospitals and other important institutions stopped accepting cash. Indian stock market crashes.

Flaws in the PLAN Banks other than the Central Bank were not aware of this move which resulted in operational issues such as the capacity to print currency, the pace of ATM recalibration etc. Hospitals, pharmacies, gas stations and other critical institutions should have been exempted from this. Religious temples, political parties and all the bureaucrats were exempted from the income tax scanner.

The Good Expand Tax Base According to government reports the income tax payers saw a record increase in the post demonetization era. 9.1 million New taxpayers were added to the slab which was an 80% rise over the typical yearly rise. 2. Give boost to digitalization of payments Digital transactions have surged, too. The hands-down winners are the mobile wallet players such as Paytm. People turned towards digital transactions for everything from buying groceries from a road side vendor to paying utility bills during the time of demonetization 

The Bad Black Money Of the $240 billion USD worth of the notes removed from circulation, banks received around $237 billion USD, or 99% of the money. The statistics revealed that either the hoarders found a way to legitimize their black money or did not hold them in the form of cash. Terror Funding Terrorist organization were known to use fake Indian currency notes for funding their projects. The Income Tax department seized Rs. 4.7 billion in new and old currency from November 9, 2016 to January 4, 2017 (the demonetization period). However, there are no reports if the money seized had any association with terror funding. 

The Ugly On Gross Domestic Product (GDP): The Indian economy is a cash-driven economy. The GDP growth rate of 8.01% in 2015-2016 fell to 7.11% in 2016-2017 after demonetization. On Daily Wage Workers:  A major portion of the Indian workforce is a part of the informal economy. Approximately 1.5 million jobs were lost during the final quarter of the financial year 2016-17. On Small Scale Industries: Businesses like the textile industry, salons, restaurants, and seasonal businesses are low capital enterprises and work on the basis of liquidity preference. Demonetization gravely impacted their revenue collection and threatened their existence to an extent.