macroeconomic policy challenges for india by dr. shankar acharya
TRANSCRIPT
Macroeconomic Policy Challenges for IndiaBy
Dr. Shankar Acharya
Macroeconomic Policy Challenges for India
• Foreign Capital Surge of 1993/94• Asian Financial Crisis of 1997/98• Fifth Pay Commission• The Employment Challenge• Economic Growth: Past, Present
and Future.
Foreign Capital Surge of 1993/94
• Event: $12 billion (4% of GDP) added to foreign exchange reserve between sept.1993 and oct. 1994.
• 3 Major Policy Issues1. Should nominal exchanges rate be allowed to
appreciate (text book)?2. How to transform “problem” of capital surge into
opportunities for liberalizing external trade and payments.
3. If reserves were going up sharply, what could authorities do to limit impact on inflation?
• Policy Choices Mode1. Build-up RBI’s reserves and prevent nominal
appreciation of rupee2. Undertake number of payments liberalization
measures3. Undertake partial “Sterilization” of foreign asset
accumulation.
Asian Financial Crisis (1)
Lessons1. Avoid high levels of short-term external
debt2. Avoid sustained and substantial
appreciation of country’s real effective exchange rate (REER)
3. Avoid massive drawdown of foreign exchange reserves in vain attempt to defend unrealistic exchange rate
4. Strengthen domestic financial sector, especially banks (capital adequacy, prudential norms, etc)
5. Prudential limit for exposure of banks to speculative markets (stocks, real estates).
6. Keep current account deficit of BOP at manageable levels.
7. Cautious approach to Capital Account Convertibility.
Asian Financial Crisis (2)
What India Did
1. Short–term debt under tight control after 1991 crisis.
2. Market determined exchange rate managed judiciously in 1993-97. Rupee allowed to depreciate by 16% in “stress period” August-December 1997.
3. Some use of foreign exchange reserves to put brakes on depreciation,
4. Substantial banking reforms in period 1992-97.
5. Bank exposure to stock and real estate markets limited by norms.
6. Current account deficit contained after 1991 crisis.
7. Cautions approach to Capital Account Convertibility.
8. Monetary policy tightened in January 1998.
Fifth Pay Commission
Pay and Pensions of Employees of Central and State Governments 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/2000
Rs. Crores
Pay and Pensions 48323 54111 63710 73432 89748 111891 133381
(of which pensions) (8445) (9789) (12090) (14921) (18480) (26223) (36581)
As Percent of GDP
Pay and Pensions 5.6 5.3 5.4 5.4 5.9 6.4 6.9
(of which pensions) (1.0) (1.0) (1.0) (1.1) (1.2) (1.5) (1.9)
Revenue Deficit 4.3 3.7 3.2 3.6 4.1 6.3 6.3
Fiscal Deficit 8.3 7.1 6.5 6.4 7.3 8.9 9.5
Sources: Budget documents, CSO and RBI
Employment Challenges
Income, Growth and Population: Major States
Income, Growth and Population: Major States
(Contd………………)
Economic Growth: Past, Present and Future
Growth rate of GDP and Major Sectors 1951/52-1980/81 1981/82-1990/91 1992/93-1996/97 1997/98-2000/1 2001/2-2005/6
GDP 3.6 5.6 6.7 5.5 6.7
Agriculture 2.5 3.6 4.7 1.0 2.5
Industry 5.3 7.1 7.6 4.8 7.0
Services 4.5 6.7 7.6 8.5 8.5
Source: CSO; data for 1951/52 to 1999/2000 are at 1993/94 prices and for 2000/01 to 2005/06 at 1999/2000 prices
Growth: Recent and Outlook(%per annum)
Crystal Ball Gazing: A Possible Scenario