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Macroeconomic Policy
Challenges for India
By
Dr. Shankar Acharya
Macroeconomic Policy Challenges for India
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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
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Event: $12 billion (4% of GDP) added to foreign
exchange reserve between sept.1993 and oct. 1994.
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3 Major Policy Issues
1.
Should nominal exchanges rate be allowed to appreciate
(text book)?
How to transform “problem” of capital surge into
opportunities for liberalizing external trade and payments.
If reserves were going up sharply, what could authorities
do to limit impact on inflation?
2.
3.
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Policy Choices Mode
1.
Build-up RBI’s reserves and prevent nominal appreciation
of rupee
Undertake number of payments liberalization measures
Undertake partial “Sterilization” of foreign asset
accumulation.
2.
3.
Asian Financial Crisis (1)
Lessons
1.
2.
3.
4.
5.
6.
7.
Avoid high levels of short-term external debt
Avoid sustained and substantial appreciation of
country’s real effective exchange rate (REER)
Avoid massive drawdown of foreign exchange
reserves in vain attempt to defend unrealistic
exchange rate
Strengthen domestic financial sector, especially
banks (capital adequacy, prudential norms, etc)
Prudential limit for exposure of banks to
speculative markets (stocks, real estates).
Keep current account deficit of BOP at
manageable levels.
Cautious approach to Capital Account
Convertibility.
Asian Financial Crisis (2)
What India Did
1.
2.
3.
4.
5.
6.
7.
8.
Short–term debt under tight control after 1991
crisis.
Market determined exchange rate managed
judiciously in 1993-97. Rupee allowed to
depreciate by 16% in “stress period” AugustDecember 1997.
Some use of foreign exchange reserves to put
brakes on depreciation,
Substantial banking reforms in period 1992-97.
Bank exposure to stock and real estate markets
limited by norms.
Current account deficit contained after 1991
crisis.
Cautions approach to Capital Account
Convertibility.
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