CHALLENGES IN INDIAN ECONOMY:

DYNAMICS OF CURRENCY FLUCTATIONS AND

CURRENT ACCOUNT DEFICITS
PRANAB BANERJI
PROFESSOR, INDIAN INSTITUTE OF
PUBLIC ADMINSITRATION

CURRENT UNCERTAINITY
Is the current economic situation bleak
enough for comparison with 1990-91?
Between 2003-08, Indian economy grew at 810 percent, prompting prognostications of
Indias emergence as an economic super
power.
From India Unbound to The Caged Phoenix.

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

GDP gr rate

12

10

9.5

9.6
9.3

9.3
8.6

8.1
8
7
6.7
6.2
6

GDP gr rate

5.5
5
4.4

4.3
4
4

0
2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014Q1

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).

Sectoral Gr Rates
IND

AGR

12.7

10.7

10.3

10

9.5
8.2
7.9

9.9

7.7

7.1
6.5
5.5

5.5
4.6

4.7

4.6

3.6
3.5
2.7

2.7
1.5

1.1
0.4

0.3
2001

2.1
1.9

2002

2003

-4.9

2004

2005

2006

2007

2008

2009

0.2
2010

2011

2012

2013

2014Q1

services

10

5
services
4

0
1

3
2011-12

3
2012-13

1
2013-14

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 (200710).
Inflation (CPI): 6.2, 9.1 and 12.4 (2007-10).

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.

25

20

15

M3
Gross Fiscal Deficit

10

0
1

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).

DEFICITS
Current account$b

Trade balance

14.1
6.3

3.4
-2.71
-12.5

2
-11.6

3
-10.7

-2.55

-13.7

6
-9.9

7
-9.6

10

11

12

13

-15.7
-27.9

-33.7

-38.2
-45.9

-51.9
-61.8

-78.2
-91.5

-119.5

-118.2
-130.6

-183.8

-191

Current account%
3

0
1

10

11

12

13

-1

-2

-3

-4

-5

-6

Current account%

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.

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)

50

40

30

20

FDI
FPI
LOANS
10

-10

-20

10

11

12

THANK YOU !

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.

EXCHANGE RATE POLICY

EFFECTIVENESS
Indis 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-

-contd Estimatesshow that changes in both overall

trade balance as also in the non-oil trade
balance are statistically insignificant to REER
movements. (RBI, 2012).

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 Moodys, fuel subsidies ` 1.6 lakh
crore (2012-13) or 60 percent of revenue account
deficit.
Gold as safe inflation-hedge.