7 March 2014

Business Environment and Policy

Dr. V L Rao GITAM Chair Professor of International Trade and Finance Dr. Radha Raghuramapatruni Associate Professor

Development Strategy 1950 to 1990 Inward looking Import-substituting License-permit Raj 1991 Crisis Liberalization and Reforms Opening up 1991 2008 Improved growth rate Dynamic private sector 2008 2010 2011-2013

Rangarajan (plus current information)

Economic Growth (Growth of Real GDP) %

1950-1980 1981-82 to 1990-91 1992-93 to 1999-2000

Source: Rangarajan Note: * Post-reform period

3.7 5.6 6.8*

Q. Why called Real GDP?

Recent Years 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

% 9.5 9.7 9.0 6.7 8.6 9.3 6.2 5.0

Q. Why did it fall in 2008-09?

Growth Rates FYPs April-March

9th (1997-2002) 10th (2002-2007) 11th (2007-2012) 12th (2012-2017)
Source: Planning Commission

Av.% 5.5 7.5 7.9 (T:9) 8.0 (T)

Q. Which country had > 10% growth? Q. Last year what was its growth?

Chinas Growth, %
2010 2011 2012 2013 10.4 9.3 7.7 7.6* (T: 7.5)

Source: 2010 and 2011:BL, 19 January 2013, quoting National Bureau of Statistics; 2012 and 2913: WSJ, 26 December 2013. Note: * Estimate of National Development and Reform Commission

1991 Landmark Pre-1991 Permit-control Raj Reduced competition within the country Protection through high tariffs Reduced competition from outside Post-1991 Barriers to entry and restrictions on growth of firms removed Private sector given more prominence. Role of state redefined; not necessarily reduced. Trade policy for more open economy Productivity and efficiency improved 7

Sectoral Shares and Growth Rates Agriculture, Industry, Services Q. Whose share is highest? (Appendix Table 1 RBI AR) Share in GDP (%) 2010-11 2011-12 2012-13 Agriculture 14.5 14.1 13.7 Industry* 20.3 19.6 18.9 Services 65.2 66.3 67.4 _______________________________________ (* Mining, manufacturing and electricity. Current share of manufacturing 16%of GDP. National Manufacturing Policy target: 25% by 2020). 8

2010-11

% Change 2011-12 2012-13

Agriculture# 7.9* 3.6 1.9 Industry 8.7 2.7 1.2 Mfg 9.7 2.7 1.0 Services 9.8 7.9 6.8 ________________________________________ # T: 4% * Due to good monsoon. Low shares and growth rates of Agriculture and Industry and too high a share of Services is a weak point. Note: Frequently committed error: confusing between shares and growth rates. 9

Twin Deficits Fiscal Deficit Fiscal deficit / GDP, % (T:3%) 2003-04 to 2007-08 (Av.) 3.6 2008-09 6.0 2009-10 6.5 2010-11 4.8 2011-12 5.7 2012-13 5.2 2013-14 ? (Source: RBI AR, Appendix Table 1) Q. Why was it high in 2008-09 and 2009-10? 10

Current Account Deficit (CAD) (Difference between export and import of goods, i.e. visible trade and invisibles, e.g. tourism, shipping) $ billion As % of GDP 2009-10 38.4 ? 2010-11 48.1 ? 2011-12 78.2 ? 2012-13 88.2 ? (Source: Appendix Table 1, RBI AR) Q. Why was there a negative sign in Appendix Table 1 and omitted above? Sustainable CAD / GDP Ratio: 2.5% 11

FX Reserves (Foreign currency assets + gold + SDRs + Reserve Tranche Position in IMF)
End-March 1991 2000 2007 2008 2009 2010 2011 2012# 2013# US $ billion 5.8* 38.0 199.2 314.6 (end-May) 252.0 279.1 304.8 289.7 282.5**

Sources: up to 2011- Economic Survey 2011-12, p.138; 2012 and 2013 RBI Annual Report.

# End-June * FCA in June 1991: $1.1 ** FCA: 254.37, Gold: 21.55, SDRs:4.34, Reserve position with IMF: 2.19

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Inflation
2009-10 2012-13

WPI (All Commodities)* WPI (Food Articles) CPI

3.8 15.3 12.4

7.4 9.9 10.4

(Source: Appendix Table 1, RBI AR) *Acceptable level of inflation for RBI: 4 to 5%

Poverty Ratio (%) 1993-94 45.3 2004-05 37.2 2011-12 21.9

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Source: Government of India, Planning Commission (2013), Press Note on Poverty Estimates, 2011-12 ,July. Note: Estimates based on Tendulkar Committees poverty line expressed in terms of Monthly Per Capita Consumption Expenditure. Since the line based on Tendulkar methodology is too low, an Expert Panel with C Rangarajan has been set up.
Social Indicators HDI Life expectancy component: life expectancy rate at birth Educational component: mean years of schooling and expected years of schooling Wealth component: GNI per capita (GNI = GDP + net income from abroad, e.g. remittances and international aid) 14

HDI Rankings

2011 Norway 1 Australia 2 Netherlands 3 USA 4 New Zealand 5 China 101 India 134
Source: UNDP, HDR

2012 Norway 1 Australia 2 USA 3 Netherlands 4 Germany 5 China 101 India 136

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Sustained Growth Potential: 9% possible since savings and investment rates are high. (scaled down to 8% in 12th Plan ) Savings rate: Gross savings / GDP Investment rate: Gross Capital Formation / GDP % of GDP Gross Savings Gross Capital Formation India China India China 1991 22 40 22 36 2011 35 50 35 48 2012 31 51 36 49 (Source: World Bank, World Development Indicators) Q. In Int. Tr. WTO and TPI course, in which context were the savings and investment rates mentioned? 16

The Economist, 29 June 2013 End-March Rs. / USD 1991 19.6 1992 31.2 2001 46.6 2004 43.4 2008 40.0 2009 51.0 2010 45.1 2011 44.6 2012 51.2 2013 54.4 (Source: RBI Handbook of Statistics) 17

US Tapering of QE Announced May 2013 Result: rupee went down to 61 per $ in June 2013
National Food Security Act 2013 Will add 0.2 of a percentage point to fiscal deficit

Manufacturing 25 % depreciation of the rupee since 2011 may help Indias competitiveness Hence the long-awaited boom in mfg. But that makes Godot seem punctual.
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S and I Rates Reasonably high But half of the total savings directed to buy physical assets like gold Half of total investment is by households mainly on construction Investment by private firms was 14% of GDP in 2007-08, but below 10% in June 2013. Retail Multi-brand retail now allowed No investment yet.

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Project Approvals A Committee headed by the PM set up in December 2012 But fresh capital invested sanctioned by the committee accounts for only 0.4% of GDP. Sen and Dreze book review 43% of Indian children go hungry (twice of Africa) 600,000 fetuses aborted each year because they are female Bhagwati-Panagariya argument: more liberal reforms notably in labour laws and land ownership, higher GDP growth, better business environment will reduce poverty. 20

Sen-Dreze want more focus on heath and education Public Health (Expenditure per person per year) USD % of GDP India 39 1.2 (Global average 6.5%) China 203 Brazil 483 Survey of State Schools In 7 big northern states No teaching in half of them Suggestion Indian bureaucrats need to be properly led and held accountable Success in Himachal Pradesh and Chhattisgarh.
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Raghuram Rajan Mood swings 2008 financial crisis M and F stimulus in emerging markets (also in developed countries) Avoided Great Depression (but resulted in Great Recession) Q. Difference between depression and recession? Large projects stalled: Labour and environmental laws Corruption scandals 22

Fiscal deficit Stimulus CAD Imports of coal and scrap iron (stalled mining projects) Imports of gold Positives 2012-13 FD 4.9% of GDP (cf. 5.3% originally announced) 2013-14 CAD projected to be 3.7% of GDP (cf. 4.8% in 2012-13 Overall public debt / GDP fell from 73.2% in 2006-07 to 66% in 2012-13 External debt / GDP only 21.2% in 2012-13 Delhi-Mumbai Industrial Corridor (Japanese collaboration) US$ 90 bn. 23

Demographic Dividend Median Age in 2020 India 28 China 37 USA 38 Western Europe 45 Japan 49 (The Economist, 9 Oct.2010) Working-age population (15 64 years) Increase by 2020 India 136 m China 23 m (The Economist, 2 Oct. 2010) 24

Dependency Ratio (Population aged <15 and >64 / Total population) India 1995 69% 2010 56% (The Economist, 2 Oct. 2010) KW 9 January 2013 Working-age population / total population (India): 61% in 2011 Demographic dividend can add 2 percentage points to Indias per capita GDP growth (IMF study) Arvind Subramanian Uphill flow of FDI 25

 Skill-intensive manufacturing which needs skilled manpower. Skill Gap Only 25% of IT graduates are employable (NASSCOM). Out of 500,000 engineers produced annually, only 2.68% meet the skill requirements of IT sector (Aspiring Minds study) McKinsey Report Q. Are graduates adequately prepared? Yes answer, % Education Employers Providers US 87 49 India 83 51 26

Doing Business 2014 (World Bank and IFC, www.doingbusiness.org) 189 economies 10 topics included in the index for Ease of Doing Business: Starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency. Limitation Does not tell the whole story of business environment. The report does not deal, e.g. with: Quality of infrastructure services Macroeconomic conditions Workforce skills 27

Doing Business Reports

Regulations DB is not about less regulation but better regulation. All regulations are not bad: e.g. Efficient and transparent regulation gives equal opportunities to all, not just only for those with connections

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Ease of Doing Business Rankings 2014 Country Singapore Hong Kong, SAR, China New Zealand USA Denmark Sri Lanka China Bangladesh India Rank 1 2 3 4 5 85 96 130 134 29

Ranking 2013 Topic-wise (Figure 1.3) India doing relatively well in Getting credit (28); Protecting investors (34); Registering property (92). Distance to Frontier (Figure 1.4) How far is the economy from best performance achieved by any economy since 2005 to 2013. Largest improvement in Getting Credit (which was also the best performing see above) Improvement in average of 9 indicators: 40 to 50. Summary (Table 1.1) Better than some comparator economies: Time for starting a business On par: Number of procedures for starting a business, and dealing with construction permits. 30

Monetary Policy
Stakeholders RBI and MoF Commercial banks and other FIs Borrowers (retail and corporate) Objectives Maintain adequate liquidity for credit needs and support investment Examples of liquidity: Bonuses, advance tax Balancing inflation and growth Headline inflation (y-o-y inflation), core inflation, m-o-m inflation, WPI and CPI, inflationary expectations, and asset-price inflation 31

 Monitor exchange rate and BoP ER: depreciated to Rs.62 per $. Q. Appreciation hurts _______ (exporters / importers) and depreciation hurts _______ (exporters / importers). Intervention in FX markets by RBI - different from sterilization. (See under MSS below on sterilization) BoP: will be discussed later under BoP Maintain stability of the financial system (cf. 1997 East Asian crisis)
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LAF (on a daily basis to assist day-to-day mismatches) Repo: banks borrow from RBI via sale of securities but agree to repurchase at a future date. This is the key policy rate Reverse repo: bids invited, but accepted, as decided by RBI for deposit of surplus funds with RBI. Wikipedia: Some time back continued with old definition (reverse of the present one). Anyone can edit the articles. References at the end of articles, however, can be used because they cant be altered. Q. Which rate would be higher? Why? 33

Marginal Standing Facility (effective 9 May 2011)

SCBs allowed to borrow overnight up to 1% of respective net demand and time liabilities (NDTL) Q. Liabilities refer to the banks _______ (deposits / advances) 100 bps above repo rate RR rate 100 bps below repo rate

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Growth, and Inflation, % Growth 2008-09 2009-10 2010-11 2011-12 2012-13 6.7 8.6 9.3 6.2 ?

WPI (annual average)

8.1 3.8 9.6 8.9 7.4

Repo Rate Raised 11 times during April 2010 and March 2012 (Table 4.13) Q. In RBIs view which was more important controlling inflation or promoting growth? 35

Cash Reserve Ratio (CRR)

Percentage of total DTL of banks to be maintained with the RBI No interest paid Q. Hike___ (absorbs / injects) liquidity Q. Difference between Repo and CRR?

24 Apr. 2010 24 Jan. 2012 10 Mar. 2012

22 Sep. 2012

6.00 5.50 4.75

4.50

03 Nov. 2012 09 Feb. 2013

4.25 4.00
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SLR (Statutory Liquidity Ratio) % of net demand and time liabilities (NDTL) to be maintained in India by scheduled commercial banks (SCBs) in the form of: Cash, or gold, or SLR securities (TBs, i.e. 91-, 182-, and 364-day promissory notes issued by the Government, at a discount; dated securities < two years; and other instruments notified by RBI)

Q. Lowering of SLR _______ (injects / absorbs) liquidity. % 2004 7 Nov. 2008 25 w.e.f. 7 Nov. 2008 24 w.e.f. 7 Nov. 2009 25 Since 18 Dec. 2010 24 Since 11 Aug. 2012 23 37

Q. Why was it reduced in 2008? Market Stabilization Scheme (MSS) since 2004 Capital inflow release of rupees sterilized by MSS Issue of Treasury Bills (TBs), and dated securities (< two years) : 91-, 182-, and 364-day promissory notes issued by the Government, at a discount Operated by RBI for the Government . Funds kept with RBI Only sale up to a limit; no repurchase by Government. Only redemption at maturity. Q. What is the difference between sterilization and intervention? 38

Open Market Operations Sale and purchase of government securities Operated by RBI Interest Rates Call rate Rate at which banks borrow overnight from each other Wide fluctuation: 1% to 30% Recent years : 3% to 8% Q: 3% rate reflects _____ (easy / tight) liquidity Bank rate Rate charged by RBI on medium-term lending to commercial banks 39

Note: Frequently committed error: confusing between bank rate, savings bank deposit rate, savings rate

Call Rate and Repo Rate Determined by: Rate Quantity traded Collateral Call rate S&D Fluctuates No limits Nil Repo RBI Fixed Discretion of RBI Sale of securities

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Agribusiness

(IFPRI, 2012)
1990 2010 Number of new seed cultivars for maize, wheat and rice Number of cotton cultivars Doubled Tripled

Private investment in agricultural research US$mn 1994/95 54 2008/09 250 Table 3.3: Indian firms > MNCs except in Animal Health
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Poultry Venkateshwara Group Adapted US and European breeds Only place outside the US and Europe to develop hybrid poultry varieties Contract Research Organization (CRO) Originally for pharmaceuticals, but now for agribusiness also E.g. GVK Biosciences worked with Dow Chemicals: To identify new pesticides ICRISAT Development of seed and plant biotech industries 42

Globalization of Indian Agribusiness Tata Tea Bought Tetley of UK (becoming worlds biggest tea company) Mahindra Expanded in small tractor market in the US Majority ownership of the third biggest tractor manufacturer in China

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Manufacturing

NMP Share of GDP by 2022: 25% (cf. 16% now) 100 m additional jobs by 2022. 60% of population in working age group [15 to 64 yrs]
CII (2012) Wage inflation in China: 4 times that of India since 2009. CMD of Godrej and Boyce: The aspiration for India should be to not become Factory to the West, but Germany of the East. 44

R&D India China Germany Professionals per million population 190 1,100 5,000

Industrial Relations CII western regions pilot project on a good model CII (2013) Mfg. / GDP: 15% Rupee depreciation double-edged sword Infrastructure constraints Total Shareholder Return (TSR) manager pay linked to performance of managers (not to profits that may be high due to economic conditions) 45

Fiscal Policy Receipts and expenditure: Interest payments, direct and indirect taxes, roads and bridges, PSU disinvestment, subsidies, salaries and pensions, defence, borrowings (excl. MSS), space research Q. Why exclude MSS from borrowings?

Receipts: revenue receipts and capital receipts Expenditure: revenue expenditure and capital expenditure

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Rough distinction: revenue - regular; capital not regular, but need-based

Revenue Receipts

Revenue Expenditure

Capital Receipts

Capital Expenditure

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Revenue deficit = revenue expenditure revenue receipts

Fiscal deficit = total expenditure total revenue (revenue receipts + capital receipts), except borrowings

Q. Why borrowings excluded?

FRBMA targets By March 2009

Revenue deficit / GDP Fiscal deficit / GDP

0% 3%

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Share of GDP, % Fiscal Deficit 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 Revenue Deficit

2.5 1.1 6.0 4.5 6.5 5.2 4.8 3.2 5.7 4.3 5.1 (BE) 5.3 (RE) 5.2 (Latest) 2013-14 4.8 2016-17 3.0 (GoI, Economic Survey)

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M & F Policies Growth WPI 2007-08 2008-09 6.7 8.1 2009-10 8.4 3.8 2010-11 8.4 9.6 2011-12 6.5 8.9 2012-13 5.5 2013-14

CPI

6.1 to 6.7 RR,%: 26 April 2008: 7.75, 30 August 2008: 9, 21 April 2009: 4.75, 21 April 2010: 6, 3 May 2011: 7.5, 25 Oct. 2011: 8.5

FD/GDP,% 2.5 6.0 6.5 4.8 5.7 5.1 (BE) 5.3(RE) 5.2 (Final) 4.8 (BE)

Recent Trends WPI 2012 January December 2013 January

CPI (or Retail)

7.65 10.79

Food Inflation WPI CPI

6.55 4.11

7.23 7.18

6.62

10.79

11.88 13.36

RR,%: April 2012: 8, 29 Jan. 2013: 7.75

Country Ratings
Rating Outlook S&P BBBNegative Fitch BBBNegative Moodys Baa3 Stable Note: all three ratings: lowest investment grade

Subsidies (BS, 28 December 2012, 14 February 2013) Target: < 2% of GDP. Diesel Prices: (petrol prices decontrolled in June 2010) 12 September 2012 increased by about Rs.5 to Rs. 47.15 per litre (Delhi). Even with this, price loss is Rs.9.28 per litre. 52

 17 January 2013 OMCs allowed to raise prices by 45 to 50 paise / liter in monthly instalments Diesel under recovery est. Rs. 160,000 crore for 2012-13. Current price rise reduces it by Rs.2,700 crore. Tax / GDP % India 10 Russia 37 Brazil 36 China 21
(Source: BL, 29 January 2013)

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Tax Evasion vs. Tax Avoidance Higher Marginal Tax on Super Rich Warren Buffet: higher tax on dividends and capital gains not a deterrent to investors - no negative impact of 39.9% capital gains tax in 1976-77 Germany and France Azim Premji 10% surcharge on incomes above Rs.1 crore Only 42,800 reported incomes above Rs. 1 crore Need to widen the tax net 54

Tax Havens Delaware: 945,000 companies (population: 917,000) London: no better than Cayman Islands in controls against money laundering. Corporate Tax Revenue % of GDP USA 2.0 Britain 2.7 India 4.0
(Sources: The Economist, 16 February 2013 and GoI, Economic Survey 2011-12)

Mauritius Route 42% of FDI and 40% of FII into India come through Mauritius.
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Sources of Tax Revenue (Economic Survey, Table 3.3) Q. Excise duty, customs duty, corporate tax direct or indirect tax? Share in Tax Revenue,% 2006-07 2011-12* 2012-13** Direct taxes# 46.4 54.9 52.4 Indirect taxes 51.0 44.0 46.8 Notes: * (P); ** (BE); # Corporate tax accounts for 40% 56

MAT in Budget 2011-12: Raised from 18 to 18.5% of book profits Extended to SEZs Q. Customs revenue / gross tax revenue fell. Why? Tax Policy Direct Taxes Moderate levels and few rates Widening tax base Use of IT (e.g. e-filing of returns) Less intrusive system to encourage voluntary compliance 57

DTC Bill (expected to be introduced in the current budget session)

Standing Committee on Finance (March 2012): Raise I-T exemption limit from Rs. 1.8 lakhs to Rs.3 lakhs.

Peg wealth tax limit at Rs.5 crore. Abolish Securities Transactions Tax This is a tax on transactions, not profits Abolition helps domestic investors stabilize stock market volatility due to FII

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Indirect Taxes Excise duty Reduced from 16% to 12% in December 2008 Reduced further to 10% in February 2009 (why?) Continues at 10%, but number of exempt items reduced
Sales Tax, VAT, GST Sales tax: double taxation or cascading tax VAT avoids this introduced by all States Drawbacks of VAT: States can levy VAT on goods but not on services Large number of central and state taxes leading to disputes Too many exemptions
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Goods and Services Tax (GST) Widening tax base and lowering tax rates Canada 7%, Australia 10% India: rates under discussion Removal of inter-state trade barriers Constitution Amendment Bill required CGST and SGST Original proposal: uniform GST for all states. Now, a floor rate and a band paper work and legal complications. Opt out: States can opt out any time. whole trade will come to a standstill (e.g. Former member of Central Excise and Customs says: if a computer goes out of order even for half day at customs, there is pandemonium) Compensation
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Balance of Payments Receipts and Payments in $ in the past year (cf. Receipts and Expenditure in FP in Rs. for coming year) Receipts Current Account Merchandise (Exports and Imports of Goods) Invisibles (e.g. tourism) Capital Account (e.g. FII) Overall Balance Reserves 61 Payments Net

Q. Did we have a surplus in trade balance? Invisibles Non-factor Services* (e.g. tourism) Income (e.g. interest on NRI deposits) Transfers (e.g. workers remittances) Q. *Why called non-factor? Current a/c: recipient country keeps the FX Capital a/c: owner can take back

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Q. To which a/c each of the following belong? FDI Exports of Garments Shipping NRI deposits ECB FII Software Tourism Workers remittances External assistance Import of oil Interest on ECB Interest on NRI deposits 63

Q. What is the difference between FDI and FII and which one is better for India? Trade Balance (Merchandise balance) Goods and Services Balance: Merchandise + Non-factor Services Current Account Balance: Merchandise + Invisibles

Q.

To which a/c the following belong and why? NRI deposits Interest on NRI deposits Workers remittances

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Invisibles Resilient items: Software and Workers Remittances ($ billion) Software* Workers Remittances 2009-10 49.7 51.8 2010-11 55.5 53.1 2011-12 62.2 63.5 * Accounts for 44% of total services exports Major Imports

Crude oil Gold Capital goods (incl. project imports)

($bn) 2011-12 115.6 61.5 50.0

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CAD / GDP (%) 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

1.2 1.0 1.3 2.3 2.8 2.8 4.2 (RBI: Sustainable level: 2.5%) July-Sept. 2012 5.4 Oct.-Dec. 2012 6.7 (Gold accounts for 75% of CAD)

Gold India: largest importer in the world (25% share) Import duty raised from 4 to 6% (21 January 2013)
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 RBI Working Group Proposals (BS, 11 February 2013) Export obligation a certain % of imports Current rule: PAN compulsory for purchases over Rs.5 lakhs, but flouted FTA with Thailand (BS, 18 January 2013) Import duty on gold jewelry imports from Thailand 1% (10% for others) Est: 50% of total jewelry imports are from Thailand. Converted to normal gold. 20% value addition requirement for imports. But Directorate of Revenue Intelligence seized 53 kg of jewelry with only 3% value addition. 67

Import Cover June 1991: 2 weeks 2007-08 14 months 2011-12 ? FX reserves: $296 bn Imports: $500 bn Av. monthly import expenditure: $500 bn / 12 = $41.6 No. of months of imports that $296 bn can finance: 296/41.6 = 7.1

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Openness of Economy (Merchandise Exports +Imports) / GDP, %

1965-66 1973-74 1990-91 1999-00 2011-12

7.7 7.8 14.6 20.6 43.8

(Source: RBI, Deepak Mohanty, Perspectives on Indias Balance of Payments, Speech at KIIT University, Bhubaneswar, 7 December 2012)

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ER Management Reducing excess volatility Preventing speculative activities Maintaining adequate levels of reserves Developing an orderly FX market Rs. / US $ 31 March 2009 50.95 End March 2010 45.15 31 Dec. 2010 44.81 July 2011 43.85 November 2011 52 Appreciation and depreciation: one main reason is FII flows RBI intervention 2011-12: $20.1bn 70

FDI and FII (net), $ bn FDI 2007-08 15.8 2008-09 22.4 2009-10 18.0 2010-11 11.8 2011-12 22.1

FII* 27.4 -14.0 32.4 30.3 17.2

(Source: GoI, Economic Survey 2012-13, p.132 * Portfolio Investment)

Reasons for reverse trend in ER after July 2011 Euro zone crisis deepened. Demand for $ increased for investing in US Treasuries Indias fundamentals were perceived to be weakening: 71

 Fiscal deficit / GDP ratio > 4% CAD / GDP ratio > 3% Inflation stubborn at 9% When the rate was $1 = Rs. 47, further depreciation was anticipated. So exporters were unwilling to part with $ Importers were anxious to buy $ So Re depreciated

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Exchange Rate 2012 Rs. /$ March 50.3 April 51.8 May 54.5 June 56.0 July 55.5 August 55.6 Sept. 54.6 Oct. 53.0 Nov. 54.8 Dec. 54.6 RBI intervention, April-Dec. 2012: $3.1bn 73

External Debt 1900-91 Total External Debt / GDP, % Short-term debt / FX reserves, % 2009-10 2010-11

28.7
146.5

18.3
18.8

17.8
21.3

(Source: GoI, Economic Survey 2011-12, p.148)

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Impossible Trinity or Trilemma (ADBI handout) Thailand 1997 Example of East Asian Economic Miracle Liberalized capital flows (followed full capital a/c convertibility), maintained fixed ER and so could not have an independent MP External debt 1990 $29 bn (34% of GDP) 1997 $108.7 bn (59% of GDP) Short-term debt end-1996: $47.7 bn > FX reserves $38.7 bn (more than 100%) Crony capitalism and asset price bubbles 75

 When bubble burst and capital was leaving Depreciation of currency was not an option since its ER was fixed Thailand tried by increasing interest rates to attract capital back, but did not succeed, because investors lost confidence Q. Page 2, para 2: what is the wrong paradigm that is mentioned, between current a/c and capital a/c? Paradigm Compulsion in India
(Economic Survey 2011-12, p.142)

ECB (3 to 5 yrs): ceiling raised from Libor + 300bps to Libor + 350 bps.

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 FII: limits raised by $5bn for investment in government securities (currently $10bn) and corporate bonds (currently $15bn) NRI Deposits: interest rates raised. Dutch Disease Discovery of North Sea oil Huge FX inflow Currency appreciated Traditional Dutch export industries suffered Similarities in India Re appreciated due to FII inflow. Industries like garments and leather goods suffered

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