Archive for February 18th, 2013

Questioning that India’s recent growth has been inclusive..

February 18, 2013

Sripad Motiram and Karthikeya Naraparaju of IGIDR question the inclusive growth in India.

They actually find the growth in both rural and urban as anti-poor:

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Making a strategy to get an “A” despite scoring a zero in the exam..(insights from Game Theory)

February 18, 2013

Good friend Niranjan  Rajadhyaksha pointed this  super post by Catherine Rampell (on NYT Economix Blog).

She points how  computer science students (not economics) at Johns Hopkins University gamed the grading system. They managed to secure an A despite all scoring zero:

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India’s widening Current Account Deficit: Do We Need to Worry?

February 18, 2013

India’s widening Current Account Deficit (CAD) has become the latest indicator of worry and pessimism. RBI pointed it as a serious issue and many questioned RBI raising policy rates despite widening CAD.

There is huge interest in fin markets on how much CAD is likely to be. As CAD numbers come with a lag of 3-months (Q1 data released at the end of Q2). So there is huge interest in the monthly trade data numbers released by Commerce Ministry. I was amused to see how this unfashionable data has become so much in demand. Yes, there are differences in RBI data and Commerce Ministry data but it still gives one some ideas over trade deficit and gives some ideas..

EPW’s recent edition  (16-Feb-13) has a paper (another version here) by Dr C. Rangarajan and Prachi Misra.

They model the sustainable level of CAD in India (it is around 2.32% of GDP) given the macro conditions.

The deterioration in India’s current account has led to a series of debates in the policy arena relating to sustainability, the importance of exchange rates in influencing the trade balance, and the role of high and rising inflation. Against this background, this article takes a step back and analyses the performance of the external sector in India since 1990. It estimates the sustainable current deficit to GDP ratio to be 2.3%.

Importantly, even to sustain a 2.3% CAD, India would need net capital inflows of the order of at least $50-70 billion annually over the next five years. Given the uncertainty around both the push factors (e g, rising global risk aversion) as well as the pull factors (slower growth in India) that determine capital flows, attracting such magnitudes of flows could very well be an uphill task.

RBI econ Rajan Goyal also released a paper on similar grounds. their acceptable level was a little higher at 2.4-2.8% of GDP with many conditions).
They prescribe ways to lower CAD:
Short Term: In the short term, boosting investor confidence remains the key to attracting capital  flows. Fiscal consolidation, reducing inflation, and further “careful” liberalisation of capital inflows could all contribute towards creating an environment conducive to domestic and foreign investors. The recent decisions to allow 51% FDI in multi-brand retail, 49% FDI in aviation by foreign airlines and the increase in the limit on foreign investment in government securities to $20 billion are welcome steps in this regard.It is important that foreign investors  perceive the economy’s fundamentals to  be strong and continue to be willing to demand Indian fi nancial assets. We need to be proactive in attracting capital flows. That is indeed the short-term solution because curtailing current account defi cit  in the short run is going to be tough.  Even the Twelfth Plan assumes that in  the next fi ve years CAD will on average  be around 3% of GDP
Medium Term: In regard to pushing our exports the framework should comprise various elements. Further diversifi cation of exports along the product space and across markets can help boost exports; e g, we can think about strategies to increase our exports to Asia, Africa and Latin America. In terms of products, we can consider exporting value added textiles in the Chinese markets. Further, investment in Africa can help build up a trade with African countries. Speeding up the trade agreements with EU and Canada can also potentially boost exports. Finally, we need  to move beyond the role of the exchange rate in thinking about strategies to increase competitiveness of our exporters.  In this regard, measures to improve the domestic infrastructure in ports and airports and to reduce barriers to domestic  movement of goods are essential.
On the import side, reducing our dependence on oil imports remains a perennial  challenge. Oil imports constitute about 30% of overall imports. Raising fuel prices  can potentially decrease consumption,  increase fuel efficiency and reduce our  dependence on imports. Increasing incentives for oil and gas exploration (e g,  through reducing uncertainty and creating an efficient revenue-sharing arrangement) could also serve to reduce our dependence on imports of oil. Also, as mentioned earlier, controlling inflation will   have an impact on gold imports. Increasing domestic production as in the case of  coal will again help to contain imports. 
What a big mess we have moved into…I mean the bigger warning is not to take India’s growth story as granted…It is amazing how we have moved into this vicious cycle despite having the best econs on board.

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