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7 March 2014

Business Environment and Policy

Dr. V L RaoGITAM Chair Professor of International Trade

and Finance

Dr. Radha Raghuramapatruni Associate Professor

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Development Strategy1950 to 1990 Inward looking Import-substituting License-permit Raj1991

Crisis Liberalization and Reforms Opening up1991 2008 Improved growth rate Dynamic private sector2008 20102011-2013

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Rangarajan (plus current information)

Economic Growth (Growth of Real GDP) %1950-1980 3.71981-82 to 1990-91 5.61992-93 to 1999-2000 6.8*

Source: RangarajanNote: * Post-reform period

Q. Why called Real GDP?

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Recent Years %

2005-06 9.5

2006-07 9.72007-08 9.02008-09 6.72009-10 8.62010-11 9.32011-12 6.22012-13 5.0

Q . Why did it fall in 2008-09?

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Growth Rates FYPs April-March Av.%

9 th (1997-2002) 5.510 th (2002-2007) 7.511 th (2007-2012) 7.9 (T:9)12 th (2012-2017) 8.0 (T)

Source: Planning Commission

Q . Which country had > 10% growth?

Q . Last year what was its growth?

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Chinas Growth, %

2010 10.42011 9.32012 7.72013 7.6* (T: 7.5)

Source: 2010 and 2011: BL, 19 January 2013, quoting National Bureau ofStatistics; 2012 and 2913: WSJ, 26 December 2013.

Note: * Estimate of National Development and Reform Commission

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1991 LandmarkPre-1991 Permit-control Raj

Reduced competition within the country Protection through high tariffs

Reduced competition from outsidePost-1991

Barriers to entry and restrictions on growth of firmsremoved Private sector given more prominence. Role of state

redefined; not necessarily reduced. Trade policy for more open economy Productivity and efficiency improved

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Sectoral Shares and Growth Rates Agriculture, Industry, ServicesQ . 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 18.9Services 65.2 66.3 67.4

_______________________________________(* Mining, manufacturing and electricity. Current share of

manufacturing 16%of GDP. National ManufacturingPolicy target: 25% by 2020).

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% Change2010-11 2011-12 2012-13

Agriculture# 7.9* 3.6 1.9Industry 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 Industryand too high a share of Services is a weak point.

Note: Frequ ent ly co m m it ted e r ror : con fus ing be tweenshares and grow th ra tes .

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Twin DeficitsFiscal Defici t

Fiscal deficit / GDP, % (T:3%)2003-04 to 2007-08 (Av.) 3.6

2008-09 6.02009-10 6.5

2010-11 4.82011-12 5.72012-13 5.22013-14 ?

(Source: RBI AR, Appendix Table 1)Q . Why was it high in 2008-09 and 2009-10?

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Current Acc ou nt Defic i t (CAD)(Difference between export and import of goods, i.e. visible

trade and invisibles, e.g. tourism, shipping)

$ billion As % of GDP2009-10 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%

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FX Reserves (Foreign currency assets + gold + SDRs +

Reserve Tranche Position in IMF )

End-March US $ billion1991 5.8*2000 38.02007 199.22008 314.6 (end-May)2009 252.02010 279.12011 304.82012# 289.72013# 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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Inflation2009-10 2012-13

WPI (All Commodities)* 3.8 7.4WPI (Food Articles) 15.3 9.9

CPI 12.4 10.4(Source: Appendix Table 1, RBI AR)*Acceptable level of inflation for RBI: 4 to 5%

Poverty Ratio (%)1993-94 45.32004-05 37.22011-12 21.9 13

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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 CapitaConsumption Expenditure. Since the line based onTendulkar methodology is too low, an Expert Panel withC Rangarajan has been set up.

Social IndicatorsHDI

Life expectancy component: life expectancy rate atbirth

Educational component: mean years of schooling andexpected years of schooling Wealth component: GNI per capita (GNI = GDP + netincome from abroad, e.g. remittances andinternational aid)

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HDI Rankings2011 2012

Norway 1 Norway 1

Australia 2 Australia 2Netherlands 3 USA 3USA 4 Netherlands 4New Zealand 5 Germany 5China 101 China 101India 134 India 136

Source: UNDP, HDR

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Sustained GrowthPotential: 9% possible since savings and investment rates

are high. (scaled down to 8% in 12 th Plan )

Savings rate: Gross savings / GDPInvestment rate: Gross Capital Formation / GDP

% of GDPGross Savings Gross Capital FormationIndia China India China

1991 22 40 22 362011 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

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The Econom is t , 29 June 2013

End-March Rs. / USD1991 19.61992 31.22001 46.62004 43.42008 40.0

2009 51.02010 45.12011 44.62012 51.2

2013 54.4(Source: RBI Handbook of Statistics)

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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 committeeaccounts 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 GDPgrowth, better business environment will reduce poverty.

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Sen-Dreze want more focus on heath and education

Public Health

(Expenditure per person per year)USD % of GDPIndia 39 1.2 (Global average 6.5%)China 203Brazil 483

Survey of State Schools In 7 big northern states No teaching in half of themSuggestion

Indian bureaucrats need to be properly led and heldaccountable Success in Himachal Pradesh and Chhattisgarh.

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Raghuram RajanMood swings

2008 financial crisis M and F stimulus in emerging markets (also in

developed countries)

Avoided Great Depression (but resulted in GreatRecession)Q. Difference between depression and recession?

Large projects stalled: Labour and environmental laws Corruption scandals

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Fiscal deficit StimulusCAD

Imports of coal and scrap iron (stalled mining projects) Imports of goldPositives 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

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Demographic DividendMedian Age in 2020

India 28China 37USA 38Western Europe 45Japan 49

(The Economist , 9 Oct.2010)

Working-age population (15 64 years )Increase by 2020

India 136 mChina 23 m

(The Economist , 2 Oct. 2010)

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Dependency Ratio(Population aged 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) Arvin d Subramanian

Uphill flow of FDI25

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Skill-intensive manufacturing which needs skilledmanpower.

Skil l 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 Mindsstudy)

McKinsey Repor tQ. Are graduates adequately prepared?Yes answer, %

Education Employers

ProvidersUS 87 49India 83 51

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Doing Business 2014(World Bank and IFC, www.doingbusiness.org )

189 economies10 topics included in the index for Ease of Doing Business: Starting a business, dealing with construction permits, getting

electricity, registering property, getting credit, protectinginvestors, 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

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http://www.doingbusiness.org/http://www.doingbusiness.org/

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Doing Bu s iness Repor t s

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 withconnections

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Ease of Doing Business Rankings 2014

Country Rank Singapore 1Hong Kong, SAR, China 2New Zealand 3

USA 4Denmark 5Sri Lanka 85China 96

Bangladesh 130India 134

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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

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Monetary PolicyStakeholders RBI and MoF Commercial banks and other FIs Borrowers (retail and corporate) Objectives Maintain adequate liquidity for credit needs and support

investmentExamples of liquidity: Bonuses, advance tax

Balancing inflation and growthHeadline inflation (y-o-y inflation), core inflation, m-o-minflation, WPI and CPI, inflationary expectations, andasset-price inflation

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Monitor exchange rate and BoP

ER: depreciated to Rs.62 per $.

Q . Appreciation hurts _______ (exporters / importers) anddepreciation hurts _______ (exporters / importers).Intervention in FX markets by RBI - different fromsterilization. (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 keypo l icy ra te 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 thearticles. References at the end of articles, however, canbe used because they cant be altered.

Q . Which rate would be higher? Why?

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Marginal Standing Facility (effective 9 May 2011)

SCBs allowed to borrow overnight up to 1% of respectivenet 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 WPI (annual average)

2008-09 6.7 8.12009-10 8.6 3.82010-11 9.3 9.62011-12 6.2 8.9

2012-13 ? 7.4

Repo Rate Raised 11 times during April 2010 and March 2012

(Table 4.13)

Q. In RBIs view which was more important controllinginflation or promoting growth?

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Cash Reserve Ratio (CRR)

Percentage of total DTL of banks to be maintained withthe RBI

No interest paidQ . Hike___ (absorbs / injects) liquidityQ . Difference between Repo and CRR?

24 Apr. 2010 6.0024 Jan. 2012 5.5010 Mar. 2012 4.75

22 Sep. 2012 4.5003 Nov. 2012 4.2509 Feb. 2013 4.00

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SLR (Statutory Liquidity Ratio)% of net demand and time liabilities (NDTL) to bemaintained in India by scheduled commercial banks(SCBs) in the form of:

Cash, or gold, or SLR securities (TBs, i.e. 91-, 182-, and364-day promissory notes issued by the Government, ata discount; dated securities < two years; and otherinstruments notified by RBI)

Q . Lowering of SLR _______ (injects / absorbs) liquidity.%

2004 7 Nov. 2008 25

w.e.f. 7 Nov. 2008 24w.e.f. 7 Nov. 2009 25Since 18 Dec. 2010 24Since 11 Aug. 2012 23

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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 bythe Government, at a discount

Operated by RBI for the Government . Funds kept withRBI

Only sale up to a limit; no repurchase by Government.Only redemption at maturity.

Q . What is the difference between sterilization andintervention?

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Open Market Operations Sale and purchase of government securities Operated by RBI

Interest RatesCall rate

Rate at which banks borrow overnight from eachother

Wide fluctuation: 1% to 30%Recent years : 3% to 8%

Q : 3% rate reflects _____ (easy / tight) liquidity

Bank rateRate charged by RBI on medium-term lending tocommercial banks

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Note: Frequ ent ly co m m it ted e r ror : con fus ing be tween

bank ra te, saving s b ank d eposi t ra te , saving s ra te

Call Rate and Repo RateCall rate Repo

Determined by: S&D RBIRate Fluctuates FixedQuantity traded No limits Discretion of RBICollateral Nil Sale of securities

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Agribusiness(IFPRI, 2012)

1990 2010

Number of new seed cultivars formaize, wheat and rice DoubledNumber of cotton cultivars Tripled

Private investment in agricultural researchUS$mn

1994/95 542008/09 250

Table 3.3: Indian firms > MNCs except in Animal Health

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PoultryVenkateshwara Group Adapted US and European breeds

Only place outside the US and Europe to develop hybridpoultry varieties

Contract Research Organization (CRO)

Originally for pharmaceuticals, but now for agribusinessalso E.g. GVK Biosciences worked with Dow Chemicals:

To identify new pesticidesICRISAT Development of seed and plant biotech industries

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Gl b li i f I di A ib i

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Globalization of Indian AgribusinessTata 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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M f t i

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ManufacturingNMP 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 ofthe East.

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R&DProfessionals per million population

India 190

China 1,100Germany 5,000

Ind us tr ia l Relat ion s

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 highdue to economic conditions)

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Fiscal Policy

Receipts and expenditure: Interest payments, direct andindirect 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 receiptsExpenditure: 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 borrowingsQ . Why borrowings excluded?

FRBMA targetsBy March 2009 Revenue deficit / GDP 0%

Fiscal deficit / GDP 3%

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Share of GDP %

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Share of GDP, %

Fiscal Deficit Revenue Deficit

2007-08 2.5 1.12008-09 6.0 4.52009-10 6.5 5.22010-11 4.8 3.2

2011-12 5.7 4.32012-13 5.1 (BE)5.3 (RE) 5.2 (Latest)

2013-14 4.82016-17 3.0(GoI, Economic Survey )

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M & F PoliciesGrowth WPI CPI FD/GDP,%

2007-08 2.52008-09 6.7 8.1 6.02009-10 8.4 3.8 6.52010-11 8.4 9.6 4.8

2011-12 6.5 8.9 5.72012-13 5.5 5.1 (BE) 5.3(RE) 5.2 (Final)

2013-14 6.1 4.8 (BE)

to 6.7RR,%: 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

Recent Trends

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Recent TrendsWPI CPI Food Inflation

(or Retail) WPI CPI

2012January 7.23 7.65 6.55 4.11December 7.18 10.79

2013January 6.62 10.79 11.88 13.36

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

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Country RatingsRating Outlook

S&P BBB- NegativeFitch BBB- NegativeMoodys 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 isRs.9.28 per litre.

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17 January 2013 OMCs allowed to raise prices by 45

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17 January 2013 OMCs allowed to raise prices by 45to 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 10Russia 37Brazil 36China 21(Source: BL, 29 January 2013)

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T E i T A id

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Tax Evasion vs. Tax AvoidanceHigher 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 Premji10% surcharge on incomes above Rs.1 crore Only 42,800 reported incomes above Rs. 1 crore Need to widen the tax net

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T H

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Tax Havens

Delaware: 945,000 companies (population: 917,000)London: no better than Cayman Islands in controls against

money laundering.Corporate Tax Revenue

% of GDPUSA 2.0Britain 2.7India 4.0

(Sources: The Economist , 16 February 2013 andGoI, Economic Survey 2011-12)

Mauritius Route 42% of FDI and 40% of FII into India come through

Mauritius.55

Sources of Tax Revenue

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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 52.4Indirect taxes 51.0 44.0 46.8Notes: * (P); ** (BE); # Corporate tax accounts for 40%

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MAT in Budget 2011-12 : Raised from 18 to 18.5% of book profits Extended to SEZsQ . 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

compliance57

DTC Bill (expected to be introduced in the current budget

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DTC Bill (expected to be introduced in the current budgetsession)

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 stockmarket volatility due to FII

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Ind irect TaxesExcise 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 taxVAT 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)

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Goods and Services Tax (GST)

Widening tax base and lowering tax ratesCanada 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 andCustoms says: if a computer goes out of order

even for half day at customs, there ispandemonium)

Compensation 60

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Balance of Payments

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Balance of Payments

Receipts and Payments in $ in the past year (cf. Receiptsand Expenditure in FP in Rs. for coming year)

Receipts Payments NetCurrent Account

Merchandise(Exports and Imports of

Goods)Invisibles (e.g. tourism)

Capital Account(e.g. FII)

Overall BalanceReserves

61

Q Did we have a surplus in trade balance?

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Q. Did we have a surplus in trade balance?

InvisiblesNon-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 FXCapital a/c: owner can take back

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Q To which a/c each of the following belong?

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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

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Q . What is the difference between FDI and FII and

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which one is better for India?

Trade Balance (Merchandise balance)Goods and Services Balance:

Merchandise + Non-factor ServicesCurrent 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

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Resilient items: Software and Workers Remittances($ billion)

Software* Workers Remittances 2009-10 49.7 51.82010-11 55.5 53.12011-12 62.2 63.5* Accounts for 44% of total services exports

Major Imports ($bn)2011-12

Crude oil 115.6Gold 61.5

Capital goods 50.0(incl. project imports)

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CAD / GDP (%)

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CAD / GDP (%)2005-06 1.22006-07 1.0

2007-08 1.32008-09 2.32009-10 2.82010-11 2.8

2011-12 4.2 (RBI: Sustainable level:2.5%)July-Sept. 2012 5.4Oct.-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)

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g p p 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. ButDirectorate of Revenue Intelligence seized 53 kg of

jewelry with only 3% value addition.

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Openness of Economy

(Merchandise Exports +Imports) / GDP, %

1965-66 7.71973-74 7.81990-91 14.6

1999-00 20.62011-12 43.8(Source: RBI, Deepak Mohanty , Perspectives on Indias Balance ofPayments, Speech at KIIT University, Bhubaneswar, 7 December2012)

69

ER Management

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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 50.95End March 2010 45.1531 Dec. 2010 44.81July 2011 43.85November 2011 52

Appreciation and depreciation: one main reason is FIIflows

RBI intervention 2011-12: $20.1bn70

FDI and FII (net) , $ bn

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( ) ,FDI FII*

2007-08 15.8 27.4

2008-09 22.4 -14.02009-10 18.0 32.42010-11 11.8 30.32011-12 22.1 17.2

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

Reaso ns fo r reverse trend in ER after Ju ly 2011 Euro zone crisis deepened. Demand for $ increased for

investing in US Treasuries Indias fundamentals were perceived to be weakening:

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Fiscal deficit / GDP ratio > 4%

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Fiscal deficit / GDP ratio > 4% CAD / GDP ratio > 3% Inflation stubborn at 9%

When the rate was $1 = Rs. 47, further depreciation wasanticipated. So exporters were unwilling to part with $ Importers were anxious to buy $ So Re depreciated

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Exchange Rate

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Exchange Rate2012 Rs. /$

March 50.3 April 51.8May 54.5June 56.0July 55.5

August 55.6Sept. 54.6Oct. 53.0

Nov. 54.8Dec. 54.6

RBI intervention, April-Dec. 2012: $3.1bn73

External Debt

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External Debt1900-91 2009-10 2010-11

Total External Debt/ GDP, % 28.7 18.3 17.8

Short-term debt/ FX reserves, % 146.5 18.8 21.3

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

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Impossible Trinity or Trilemma ( ADBI handout)

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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 nothave an independent MP

External debt1990 $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 bubbles75

When bubble burst and capital was leaving

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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 investorslost confidence

Q . Page 2, para 2: what is the wrong paradigm that ismentioned, 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 governmentsecurities (currently $10bn) and corporate bonds (currently

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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

Similar i t ies in Ind ia Re appreciated due to FII inflow. Industries like garments and

leather goods suffered

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