India in a Globalizing World Some Policy Dilemmas

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India in a Globalizing WorldSome Policy Dilemmas

• Distinguished Speaker Series
• Cornell University
• Ithaca, New York
• August 28, 2012
• Dr. Duvvuri Subbarao
• Governor
• Reserve Bank of India

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India Macroeconomic Situation

• Cause for Concern?

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India - Macroeconomic SituationLong Term Trends
in Growth Rate
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India Growth Story

• What drove Indias growth in the pre-crisis
  period?

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India Growth Story

• Started fraying, beginning with the global
  financial crisis of 2008/09

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From One Crisis to Another

• Just as we were recovering from 2008/09 crisis,
  the eurozone crisis hit us.
• Policy space to respond to the crisis is much
  less now than in 2008/09.

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IndiaCurrent Macroeconomic Situation

• Growth has moderated
• Inflation is high and persistent
• Balance of Payments under stress
• Twin deficits (fiscal deficit, current account
  deficit)
• Investment has decelerated
• No policy space for stimulus

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Three Policy Dilemmas

• How do we manage the growth-inflation dynamics?
• External Sector - how do we manage the short-term
  trade-offs without compromising long-term
  sustainability?
• Fiscal Consolidation - how to manage the
  political economy constraints?

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Dilemma - 1

• How do we manage the growth-inflation dynamics?

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Why has growth slowed?
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What is the inflation story?
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What is driving Inflation?

• Food (cyclical structural)
• Global commodity prices depreciation
• Fiscal deficit
• Demand pressures

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Inflation and RBI

• What has RBI done to control inflation?
• Has RBI succeeded in controlling inflation?

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Growth - Inflation Risks

• Global Uncertainty
• Commodity Prices
• Fiscal Deficit
• Monsoon Performance
• Supply Response

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Dilemma - 1

• How do we manage the growth-inflation dynamics?

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Dilemma - 2

• External Sector - how do we manage the short-term
  trade-offs without compromising long term
  sustainability?

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What is the external sector problem?

• Large current account deficit (CAD)
• Financing the CAD with stable flows

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External Sector Problem

• Why has current account deficit (CAD) increased?
• Why have capital flows thinned?
• What has been the result of this?

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How much has the rupee depreciated and why?
Nominal Exchange Rate
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Rupee Depreciation?

• What is the impact of rupee depreciation?

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What has RBI done to contain volatility in the
exchange rate?
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What is the Capital Flows problem?

• We want capital flows just equal to CAD
• But they are invariably either too much or too
  little
• And they are volatile

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Capital Flows - How volatile?Quickly Reversing
Trends

• Pre-Crisis (2005/08) - Great Moderation -
  Volatile Inflows
• Crisis (2008/09) - Safe Haven - Outflows -
  Sudden exit
• Post-Crisis (2010/11) - Volatile inflows -
  Currency Wars
• Eurozone Crisis (2011) - Confidence Effect -
  Outflows

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Managing Capital Flows

• Change in world view on capital controls from
  pre-crisis to post-crisis

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Managing Capital Flows

• Two options
• Capital Controls
• Exchange Rate Management
• No option is totally benign

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Managing Capital FlowsNo Benign Options

• Capital inflows
• Do not intervene Currency appreciation
• Intervene but Inflationary
  pressure but do not sterilize
• Intervene and Upward pressure on sterilize
  interest rates

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What is RBIs policy - on capital account? -
on exchange rate?
External Sector Management
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External Sector Management

• Sustainable Solution
• Reducing CAD in the medium term
• Financing CAD in the short-term

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Policy Dilemma - 3

• How to manage the political economy of fiscal
  consolidation?

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Why is fiscal deficit a problem?
Fiscal Deficit
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Indias Fiscal Deficit

• What is Indias fiscal deficit problem?
• What are the challenges in fiscal consolidation?

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Why 2012 is not 1991?
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• India and China

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Is the India Growth Story still credible?
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