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 1990-91? Between 2003-08, 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 2011. Huge stimulus package ( ` 1.86 trillion). Monetary easing (Mo:21.5percent 2010-11). Growth rates fall from 9.3 percent (2010-11) to about 5 percent (2012-13). Declining trend possible current fiscal

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 2007-08 to 31 percent in 2011-12).

8. STIMULUS PHASE Growth rates maintained, but a cost. Fiscal Deficit 2008-09: Actual double of target (3%) 2009-10:6.5 percent. M3 growth 2007-09: about 20%/yr. Export Growth: 29, 13.6 and -3.5 (2007-10). Current A/c Balance: -1.3, -2.3 and -2.8 (2007- 10). Inflation (CPI): 6.2, 9.1 and 12.4 (2007-10).

9. THEREAFTER Fiscal Deficit: 5.7 and 5 (2011-13) (Lower than budget estimate) Central Govt expenditure: 15.8 percent of GDP (2009-10) to 13.1 percent (2012-13). M3 growth rates: 15.6 and 11.2 (2011-13). Mo growth rates: 21.5 (2010-11) to 4.3 (Q3 growth 2012-13). GDP growth rates: 6.2 and 5 percent.

11. EMERGING PARADOXES Despite Demand Compression, current account deficit widens. In 2011-12 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 (2011-13). Inflation persists: 8.4 and 10 (2011-13).

14. POLICY PARADOX In 2012-13, all elements constituting aggregate demand slackened. PFCE growth halved: 8 percent to 4.1 percent. Exports growth: 21.3 (2011-12) to -4.9 (2012-13). 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 2007-08 of $ 106.6b, inflows reduced to $ 7.2 b the next year. Thereafter, it crossed $ 60b since 2010-11. Reserve have fallen from peak $ 305b (2010-11) 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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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 (2012-13) or 60 percent of revenue account deficit. Gold as safe inflation-hedge.