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Revised: July CLOSEDTO OPEN ECONOMYMACROECONOMICS: THE REAL EXCHANGERATE AND CAPITAL INFLOWS INDIA 1981-1994 FROM bY Deepak La1 University of California, Los Angeles and D.K. Joshi NCAER, New Delhi of Economics UCLA Dept. Working Paper #715 July 1994 Address for correspondence: 2 Erskine Hill London NW11 6HB, ENGLAND Tel/Fax: 081-458-3713 NCAER Parisila Bhawan ll-I.P. Estate New Delhi-110 002, INDIA Tel: 331-7860 Fax: 91-ll332-7164 1994 INTRODUCTION With Manmohan ent the opening of Singh reforms, macroeconomic analytical framework framework that Pohit e.g., integrates the framework (see apply has real and variables Salter, since relevant 1991, see a large but monetary explain identify the macroeconomic increase in capital framework in to to useful aspects to India discussions for a small (Ch. the key balance in is India the (see so-called economy which equilibrium This paper attempts of major economic evolution policy "structuralist" general 17)). Rao- in a differ- open a simple La1 Narasimha economy policy model Harberger, the to be examined closed very Corden, and in determining needs characterized payments framework following essentially A simple of economy policy the hitherto balance this Indian from and Bhide). "Australian" to the instruments in an economy which which are is likely to inflows. I. The Australian presents simple a geometric algebraic traded prices is set "small" and traded are Pan) and nontraded these in model, India, so Fig. whilst aggregates (NT). 1 and its Appendix III into two effect demand It is useful those Assuming two tradable goods, former assumed terms (supply) the (X). -- its in between commodities The prices changes prices. commodities for cannot Excess equivalent exportables the model international and hence international of the by subsidies. through outline known, (T) are may be unfamiliar note contains a formulation. As is well -- model of for trade to which are trade these and fixed -- at, tariff domestic country and any trade is amongst currency the and CM) mediated group those prices cum subsidy taxes constant ex hvpothesi, importables foreign groups as the commodities differentiate constant whose to be given account are goods large (p rates of which *x (t,s), and they can be aggregated domestic the currency domestic currency price of rate commodity the of and the that one good composite nontradable, but goods by prohibitive price of the This (l-b): exchange to rate traded tradable goods good the key (er), real Economic Survey), nominal the composite in the which composite not have been only tradable converted are into nontraded The domestic currency the Australian model of the domestic in which goods demand ratio cum (1) by domestic as the foreign tariff be set price (e- - e*p*T(l+t) comprises will rate the (pN) N = P /[e*p rate *T to (usually (ep> which exchange price needs and supply. -- prices the real of nontraded is based rate levels (pd, f or Pan). price (pd) of nontraded goods (pN) be with (7-j distinguished in on purchasing (e) The domestic level (l+t>l reported *T (l-a), currency), quotas. d ep -P/~.P of exchange import defined exchange rate foreign nominal whose (T), goods: exchange the tradables or binding relative er = pN/pT This and + (l-b)p*m(l+t)] tariffs yields (P*T) importables good nontraded foreign exportables nontraded also of of PT = e[b.p*x(l+s) The labelled by the unit share of good determined composite So if b, is value (t). is a composite (PT) currency price subsidy into the from official power difference the real effective publications parity e.g., the (PPP) and corrects between the domestic and so: (3) is a weighted a weight say of average of "a" , and of the domestic traded goods prices (pT) hence: Pd - a 0 pN + (l-a)pT (4) 4 From (1) to (4) we therefore have, ep = (l+t)[aeer+(l-a)] The PPP real effective real exchange "law of will changes exchange rate the changes with respect therefore the in real the to d = (l+t); in tariffs (6) will the PPP real for movements will the index (WPI). series is series which series are It the real the ence given in nontraded good final that the and the (t=O). Nor be surrogates for differentiation of (5) of in consumption real the rate Appendix the 1 for I. nominal official rate (er from (2) a cut but from > O), rate (ep < 0). therefore be taken the real exchange series Movements in to be proxies The and period real exchange on the expenditure data rate from on these Fig. price exchange rate exchange rate The three 2. some important services, exclusion National other our 1993-94. indices, the India, wholesale effective to include for real in 1981-82 this the resulting and miscellaneous To see if rate from statistics the WPI does not composite. grafting cannot Thus rate. housing computed with logarithmic exchange rate from Table transport, our no tariffs necessarily exchange exchange with available viz., to done along be noted experimented private are effective a real is real available to derive charted the exchange are This are k = er[aoer+(l-a)]. exchange should services of is rate (a=O) goods to (6) raise PPP real As no estimates task there For (l/x)(dx/dn); effective first if be equal d (d < 0) in only yields: x'= lower and rate. thus no nontraded exchange exchange ep=koer+ where are holds, will (ep> there effective real time rate if (er> , one price" in (5) nontraded which makes based on Income nontraded are part much differthe WPI, accounts goods we for (ONT). 5 This was done as follows. these three nontraded Table l(A). This give us share in our goods composite final the included these goods NT, in consumption that ONT and share and the of would in (l-a 2 series for with these also the the a2, the other have (NTS) and of the nontraded goods the "s" , this the series follows. other NTS series (NT) nontraded is the the and "s" I WPI if by is to goods weights be given in Given data in for ONT series respective WPI would From as the as accounts been deflator goods national "corrected" /l+s)T. implicit nontraded series WPI is from the and is shown goods data T series (s/l+s)ONT, combined nontraded goods assuming the was constructed, was then of nontraded the First it had of the (a2/l+s)NT, readily obtained as: NTS = [(a,/s)/(a,/s) The value WPI (see following s from the Appendix) is 0.74 till weights for national 1991-92, combining the + 0.29 From 1992-93: NTS = 0.68NT + 0.320NT. labelled ers. l(A), and 2(A). As is Hence our derivation be fairly it is Its charted apparent computed index, along there of the from this thereafter. This NTS and the changes in with er (based not much real a2 from the gives the ONT and is and for NT and ONT series. NTS = 0.71NT rate is 0.3, and 0.64 1991-91: exchange + [(s/l+s)/(a2/s)+(s/l+s)]ONT accounts Till The real is of + (s/l+s)]NT exchange its values solely difference rate traded are based given on the between on the good WPI) the two WPI is series in in Table Fig. series. likely to robust. II. The equilibrium of the economic system value which of the real is determined exchange rate by real is an endogenous economic fundamentals, variable like 6 the pattern of growth, this the tions from fiscal policy cannot persist, as they return the to (see Edwards). is this initially in in PP. At will its the internal and the and domestic OEOT in terms of slope of the increased common their expenditure have to point shift vertical inflow goods being the goods must have to right between to the capital will have and the necessarilv capital been model in at A, equal A. capital the rise, where not will changed the production highest possibility and nontraded exchange rate output of is goods (OYOT = given by the as expand. As part of the the and demand the the trade deficit, way the transfer resulting deficit are of the increased There and production The The production the In this on nontraded deficit. new equilibrium, absorption BC. be spent a trade Moreover trade the they The economy expenditure as the effectuated. accompany 1. domestic will through two comprising accompanying Fig. but which have traded inflow and above inflow. the possible in the vertically -- and erl. appreciation, of to The real met be in balance lie the makes on traded exchange of both monetary effects fundamentals to Devia- misalignment the for is a sustainable must equal must A, price distance appreciation, at relative exactly They tangent domestic if and supply good). by inflows. countervailing balance is capital rate tangential output this to will external is tradable there be a real nontraded point the expenditure goods, depiction demand caused exchange level curve and net be in motion equilibrium balance, Now suppose real set consider A can labelled indifference curve of demand level usually rate attainable is equilibrium -- To see pattern consumption supply equilibrium capital for new consumption point, real will with which of the exchange the will be foreign rate phenomenon. inflow. But suppose domestic than that a further the "excess" price will this leads of at supply of nontraded ables which will equal to the excess (both measured equal inflow cured exchange to as before are capital C production the what fundamentals balance. depreciate (and monetary in vertical and/or is It deficit In slope difference the slope C, and demand demand for which is and trad- exactly output OYT expendi- because the to the to unlimited (BE) will the process, level have be real to 2' a point the on the the inflow to the er between capital that the the access of of relative corresponds misaligned by the equals at sustainable not. part and excess Without its is domestic deficit lead PP consump- (and hence enable us to BC. rate an open hence from CE, over GTE+). the of exchange extent trade given just is policy. drawn) where deficit) OE$ trade ETE+ = BE expenditure point real of this by excess of (BC - YT ET> this is is will given and hence deficit expenditure of C, that Assume Production There a trade it, excess 1. rate so that whose equilibrium. exchange Fig. and monetary ((not trade in inflow finance and real goods, run above Part er* will the in into fiscal to A a new short The excess loose rate. on nontraded vertically over the exchange spent lines goods it. real be of domestic level equilibrium the of to and countervailing For have tion the demand rate between to excess the curve judge This reducing equilibrium Using inflow. is tradables). reserves by capital which in from foreign by the ET EN spill finances injection an amount establishment E, demand 'by to establish and aggregate output will YT YN expands domestic expenditure the addition than of to rise in greater appreciation to consumption is allowed have the ture government expenditure larger to the are as a diagnostic economy, unavoidable) fiscal policy its tool, movements will represent or misalignment corrections). thus changes (which require in 8 Secondly, depend to the constant, trade taxes the in the II a II are As we have by seen effects of the changes in taxes (t> * excess demand the real trade of the For, is (t). tradables rate can nominal from (4) without the in cannot in control from in the there pressures requisite crucial er. er nominal monetary It domestic exchange rate in net and/or the relative growth nontraded goods Fig. 1 production -- outputs that the of induce. effects the changes of (for profitability prices of is static producing Given will the and fiscal exchange determinant are come about rate and assuming can however on the is an increase (t' < 0), monetary real Thirdly, in taxes any undue (P*T) that (7) change suppose trade from +b+t fiscal capital rate changes the (or the real shifts case) the unavoidable trade with We know from the are exchange in on the -- two which and/or inflows, From, rate level Thus (Pd) (7) (e'< will policy no Fig. unless 0) or go up, even reactions to unavoidable will be a process. levels the also expansion. inflationary in price level (e) policy. domestic neutralize price 1, that the real exchange rate must appreciate (er > 0 ). there is an equivalent appreciation of the nominal exchange reduction with For exchange (2 ) and will followed taxes exchange goods, of them. policy This we have: changes Thus and prices of nontraded required countervailing process. on what (e) currency price inflationary above rate government the (2) foreign constant .d P = Br the and or some combination and the (1) exchange requisite changes influence from that the through *T also nominal assuming (21, will as can be seen respect P it the changes be unavoidable. static production through goods rate the these in the will case) determine the of and traded possibility relative curve changes changes in their real exchange in PP the relative rate, these III. We next seek to 1981-84 in terms of version of the model model's central supported explain the the Australian in Appendix assumption by econometric changes in model. Attempts III that were money analyses the real foiled because prices Indian rate to estimate determines of past exchange data the the algebraic monetary does (see between not e.g., sub- seem to be Balakrishnan; Nag & Upadhyay). So instead we represented by Fig. the in the 1, it is to net in changes Fig. related evident that (M-X) = YTET, trade deficit - K. Normalizing then the share percentage that both data for the 1990, (and (M-X) capital of "excess" the the real standard national the data any net capital deficit and the inflows in GDP in GDP variables would given BC. by the inflow exchange have positive expenditure as the is > and with signs. is deficit between that (er) it trade the ED = (M-X) as ratios (DED = A(ED/Y) model identities) rate A(V) explain be positively difference (K) , model simple domestic But the could will accounting capital (DKY - it From the "excess" inflow real of see if (er> income (ED) in to 1981-94. ED = EB = YIE+demand version exchange and changes demand the between W-1 trade estimated and it to inflows and simplified of GDP, we by changes changes the in in the expectation Table 2 gives the variables. correct 1991, that excess the of Inspection the rate and that to explain significant, data. 1, we have these fit exchange apparent independent Whilst had real K = BC, sought to 1 econometrically capital From Fig. (ED). sought equation signs on the the overall of the data was anomalous. for the whole independent variables, regression revealed Estimating of the the represented that for the sample the 1981-94, coefficients a very three relationship period bad "crisis" without were not to the fit years 1989, these years 10 yielded the following kr [RI1 regression = 0.02 (0.008) obs = 9; (figures The results using [R21 the + equation: 3.07 (1.35) DKY + 2.08 (2.25) DED R2 = 0.39 in brackets ; R2 adj - 0.19; are t ratios). ers for series the real DWS = 1.75; exchange rate RHO = 0.53 series were: 6rs = (834 + (?:t6jDy + &i8)DED obs - 9; There is not exchange much rate R = 0.39; difference from the WPI R adj = 0.19; the results. between (er) as our DWS - 1.75; RHO = 0.075 So we shall "correct" er in use the the rest real of the paper. Fig. exchange points 3, charts rate (er). fairly at robustness through in From changes the in observed The well. significant outlined the estimated Moreover the 5% level an indirect Appendix the predicted equation though seems the (whereas to on on DED based in pick-up coefficient that derivation ,changes is>, the is not check its of the (A.12) we can the exchange rate derive the and various following model parameters relationship between (see Appendix III for derivation). Br - pn = [(a3.Y/N)/(nd+nS(l-a2)]d(K/Y) where real turning DKY we can on the parameters the III. equation real and a3 - proportion N/Y - Nd/Y of foreign - NS/Y = share capital of (A12b) inflow nontraded spent goods in output. nd - elasticity of demand for nontraded goods. ns = elasticity of supply for nontraded goods. on nontraded domestic goods. consumption/ 11 = marginal a2 From an propensity estimated coefficient to consume equation import in GDP is 0.10. nontraded for the The estimated goods. period equation 1981-94, was, with the import I (imports) and Y (GDP): I = -3507 Assuming that yields (2.04) 0.10 (19.5) foreign capital for a guesstimate for The marginal equal to 1992-93 the share is 1991-92, d the goods) but two we have lower and from lies composite substitutes the of of nothing between 0.5 the coefficient in the nontraded from the for WPI. RHO = 0.059 is higher, goods, a2 Till values nothing say 0.25, is taken 1991-92 to be a2 = 0.74; to these d to 1992-93, of to Y/N goods goods) a2 (the go on to them in total output, = l/O.64 will so till - 1.56. be given x elasticity by of substitution goods. argues n goods nontraded traded is estimates, We have Applying goods commodities these 1992-93 on traded of nontraded and between of spend demand Harberger large good of have substitution. to - 1.35; nontraded We already DWS - 1.597; propensity 0.75. of in expenditure between this of share = l/O.74 = (l-share - 0.989; a2 - 0.64. The elasticity n R2 inflows of nontraded also Y/N Y a3 propensity and after a2 + share estimate the that the elasticity such as traded likely yields to elasticity substitution nontraded between before of nontraded requisite of and lie a value in expenditure 0.5 between goods and 1991-92 of of 1.0. without Taking nd = 0.13, - 0.18. go on to provide an estimate of ns. We assume it range of estimates 1. values (g) in of (A12b), DKY, we get as the the following determinant of changes in the real 12 exchange rate: er = g l Values of n Till 1992-93 have the 2.2 on our is equivalent the It ratio to of the Table PSBR to (M-X) relationship to improving years Rajiv Gandhi with the rade deficit. real exchange were steady in the this reduced range, form ran for and we estimate of had any whole becomes beginning of there the is thence changes economy growing on the sample in and undertakings. changes ratio in of the the trade was no significant was a steadily after 1988) after we find budget deficit, between the level. the outlays there what price borrowing total sector we seek period, up of link sector there opening the deficit between Whilst significant So essentially of and the the gap between and public 1981-94. deficit public regressions and the the of the as the We then fiscal termed governments (which opening Hence within The measure is U.K. obtained two for government. rate, the is 4. the the lies government's demand. GDP (DPSBR) relationship These "excess" GDP (DMXY) between RI of the and state in in applicability whether This central reported deficit the of what the estimated India. of (PSBR). of is DKY for measure requirement receipts of we examined effect =1 3.3 model Finally, n s 2.6 some support Australian when 3.9 The coefficient thus g = 0.5 S 1991-92 After DKY the economy (see Table spills budget deficit 1985-86. under 5) over is the that into a and the 13 IV. We can now briefly model for the relevant of three fiscal and monetary of of accompanying the to In give a small devaluation currency prices nontraded our 1993-94, of exchange only flowing real rate required about exchange It goods was offset from rate of in Rl, 9%. should major way of preventing have However, in be noted the large by by nearly still substantial exchange continuing but rate 6% (the rise in had to result the occurred of foreign reduction adjustment the 14%, inflows, and a large capital rate their the capital required this in net with a rise which given exchange rate positive in the foreign rise currency a rise implicit appreciation inflows, a real reduction Given required that the was required. by only in by a substantial rise so that rose the rate increase would appreciation about by real of 9%. appreciation. the goods exchange but in net so the exchange offset over 4.5%. a modest largely traded was a large estimate appreciation nominal prices there elasticity the real decline inflows offset rose depreciation demand, of traded rate the both, Given prices of effects in was partially goods our the net a decline by a smaller small "excess" requisite goods exchange the from values are was entailed. which rise the from was rate traded to prices of the taxes, real in there emerges variables demand rate, was a further as the of 1991-92 which 6 gives (exogenous) exchange small Table "excess" had story reforms. exchange prices increase But real in trade there taxes), the In nominal the 1992-93 appreciate. macroeconomic overall the goods a substantial In the reduction and so nontraded amount since policy. depreciation devaluation the The two independent capital and small in years variables. foreign trade outline in impact "excess" in nontraded deflation of the real real which goods the goods in the demand, traded values, on 1993-94, exchange prices requisite prices of was the rate that 14 would otherwise transfer of foreign embodied effects? governed by weather, the in exchange real the terms we have recent (and sectors expect the would of tradable has in thinking absorbing Indian that of the economy. of the capital the the should be the large full rise of from in goods sectors, but 1992-93 the data would (as it in (Table Table of 1993-94 divided As we would 7. would depress goods sectors should the the tradables roughly in and As into nontraded is) industrial Survey goods shown, 1991-92, manufac- sectors. we have as shown relative traded Economic category), changes in and capital and deflation rate reflected the output price industrial many of relative of changes various converted depreciation agricultural of nontraded However, April-Ott growth of growth the basic the that a classification tradable be reflect- demand be expected boost of to be higher goods. hopefully been about open, effects appreciation goods Enough deployment of nontraded increasingly was Assuming and nontradable exchange for have rates in exchange than of has By contrast, that rates growth into Tradable latter on those real of preventing counterpart movements categories. also 1992-93. model these growth boom. the or we do not of real rates rate liberalization possibly these form the outputs data trade was a means whose output in 6.4) effect reserves. Unfortunately output the inflows, the in tures. in relative movements ing capital the of still the This exchange What is occurred. to both the model foreign may variables purported wall of past inflows. to show macroeconomic policy In the said to utility policy trade also the in of usefully maintain economy which is It is with respect to money the economy absorbed This rose to employed to macroeconomic foreign about which Australian an and capital. be the is balance seeking less than 2%, in consider a home l/2% the the whilst in the of GDP in the mid-1980s. In 15 1993-94, the inflows double over fiscal policy is absorb these inflows whether this prices that or and in e) and/or the requires those in exports, relative tariffs on importables, of net through traded of trade of this For of also increase will The an the well and appreciation (2) makes in nontraded to clear as is clear rate economy seeking nominal is goods exchange (fall to exchange this end. However, be reduced by the could monetary latter nominal taxes. can rate a rise the tradables and do, as goods. in achieving price they choice an appreciation may seem to be counterproductive the about They GDP. exchange The only an appreciation reduction clear, If real comes in 4% of future. unavoidable. a fall of be about a substantial is growth to near appreciation (7) the in neutral, through (2) estimated level real from promote are rate as (1) reducing relative makes import profitability of exporting. Moreover, India tradables through exports. Nearly QR's and requisite fall in exchange then equations) done inflows over consumer goods goods by prices maintaining the materialize. last of are average exchange months The required relative induced capital inflows, with is the of baggage required goods the the required nominal into traded (a,, and multiplier rate by an unchanged nontraded on nontraded of By removing the as these reducing to on them even price profitability close by the at present. tariff tariff goods a3 effect of in any rate. a relatively few the can be obtained thereby reducing non-tradable expenditure real painlessly improving by converting fall, on the way a uniform movements domestic will say the Furthermore inflow However, whilst exchange of other route reducing rate. our one them tradable proportion has all real the capital this replacing (100%) I and has constant will real not nominal be viable exchange rate exchange if the appreciation rate as India large capital will fuel 16 inflation in nontraded policy remain therefore likely is to foreign a vital receive. banks is better than risk, as with direct be easily investment implicit or be crisis nominal exchange rate making currency risks moreover by choke depreciating if government until has to have should floating their investments. in turn etc., equity given an can suffer a By contrast, if it both the can mediate the these investment A fully and floating and prevent bullish which are then by appreciating, sentiments will the attained a fully effects which floating) of investment latter, country averse. share inflows market investors investors with these If turn form holding. the the factories relied likely some of the past equity actual then on direct the most most rate divestments or bearish about is reformed, the prospects. However, the foreign of guarantee, is relied in unlike lending. (ideally regime India foreign bears of sentiments is flexible of However, as bank rate the form lender have which rates, consists exchange that which countries as the market associated will country's if the Singapore the and monetary future. inflows interest as it of fiscal nominal capital investment. exchange exchange by and borrowing stance the American as volatile explicit of to be in foreign the for type likely bank foreign flows the liquidated, can matter China is if an appropriate at variable inflow This cannot of or many Latin from capital by Unlike investment, foreign even policy accentuated on borrowing prices, The choice neutral. becomes This goods exchange In price accompany a reserve rate. in rate. domestic necessarily consider financial a balance floating on the domestic target the system public that case, level of large ((say finances, it as a second the capital a year real inflows, of maybe best, exchange to the in the imprudent rate perhaps imports) and mitigate changes government managing its 17 Finally, exogenous, though they interest rate investments). fully policy, managing integrated likely this paper, to be determined (as Once financial liberalization the rate macroeconomy. global policy well as economy, will inflows capital differentials into interest the are in become have by domestic the rates is completed, an with taken and international different along been and the exchange important of policy rate as real return on economy is and fiscal variable in BIBLIOGRAPHY Balakrishnan, P.: Pricinp and Inflation in India, Oxford University Press, 1991. Corden, W.M.: Press, Inflation, Oxford, Edwards, S.: Theory Harberger, and Monetary Evidence Economics, vo1.29, A.C.: Lal, D.: D. in a World "The Real Lal: Edward A.K. of Elgar, Aldershot, : Simple in K. Change, 25, Rate, Economy, Economy, Clarendon in the Rate Journal of Brunner 1970s: and A. Crisis, Behavior: Development Capital Inflows Archiv, vol. (eds.), 121, Economic 1982. and of Stabilization, Meltzer North-Holland, Economists Framework April Reserve Exchange Inflation: no.4, the Sri 1985; 20th Lanka reprinted Century in Series, 1993. for of India Various Policies," reprinted "Estimating Bank Analyzing Adjustment 1989; and G. Upadhyay: Approach," of Real Amsterdam: and Structural vol. World Countries," Economy Exchange Repressed "A the 311-41. Chilean The Studies, pp. Weltwirtschaftliches Stabilization Nag, 1988, Developing Reform," 1970-1982." and Determinants From "The Liberalization, Policy Rates 1977. "Real and Exchange in Lal: Real Journal Aspects of The Repressed Money Demand Function: Occasional Papers, of Develoument Economy. A Co-integration Vol. 14, No. 1, March 1993. Pohit, Macro Indian Salter, S. and S. Bhide: model for India," Econometric W.E.G.: Expenditure "Implications Society, "Internal Effects," mimeo, of Structuralist paper University and Economic External Record, for 30th of Mysore, Balance: vol. 35, Features Annual Aug. the NCAER's Conference May l-3, The in of the 1994. Role of Price 1959, pp. 226-38. and 19 TABLE 1 Comparison of REER, NEER and eR NEER REER eR NEER REER eR Year 1981-82 = 100 1981-82 1982-83 1983-84 100.0 101.2 101.7 1984-85 1985-86 1986-87 1987-88 98.0 100.0 96.8 99.8 96.5 95.1 82.9 78.4 73.0 69.7 64.9 50.7 48.3 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1981-82 - 100 100.0 91.9 86.4 1.18 0.49 -3.61 -3.17 3.05 -3.26 94.1 86.4 81.7 77.0 75.1 72.3 91.3 90.3 89.2 83.9 84.7 83.2 -2.93 -12.83 -5.46 -6.90 -4.51 -6.87 -2.55 -8.18 -5.39 -5.79 -2.48 -3.62 61.4 63.4 83.2 86.4 87.8 -21.88 15.08 3.18 96.4 -4.78 -3.61 -4.66 -6.00 5.71 -1.07 -1.24 -5.92 0.95 -1.79 -0.05 3.88 1.60 SOURCE:RBI NEER : NOMINAL EFFECTIVE EXCHANGERATE REER : REAL EFFECTIVE EXCHANGERATE eR : REAL EXCHANGERATE (DERIVED AS A RATIO OF WPI IN NONTRADEDTO TRADED GOODS) 20 TABLE 1A Inflation and Real Exchange Rate (eRs) in Traded and Nontraded Goods WPI Real Exchange Rate(eRs) % Change INDEX YEAR (1) TRADED 1981-82 100.00 1982-83 1983-84 1984-85 1985-86 1986-87 107.37 118.95 131.30 132.70 141.26 1987-88 153.92 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 171.29 182.62 203.57 231.93 246.40 264.93 (2) NTS (3) ONT (4) 100.00 105.39 112.70 118.81 126.16 100.00 133.49 TRADED (5) 109.39 118.60 126.54 134.88 143.71 7.37 10.79 10.38 1.07 6.45 NTS (6) 5.39 6.93 5.43 6.18 ONT (7) 6-5 (8) (9) 9.49 8.42 6.69 6.60 6.54 -1.98 -3.85 -4.96 5.12 -0.65 100.00 98.02 94.25 89.57 94.16 93.55 3.10 -2.60 -4.26 91.12 87.24 1.82 -1.40 -1.08 3.83 1.76 88.83 87.58 86.64 89.96 91.54 141.98 151.95 164.77 181.37 204.68 225.30 148.16 8.96 5.81 6.36 162.07 179.43 197.96 218.99 241.53 11.29 6.61 11.47 13.93 6.24 7.03 8.43 10.07 12.86 10.07 9.39 10.71 10.33 10.62 10.29 246.20 265.69 7.52 9.28 10.00 NTS = WPI IN NONTRADEDGOODS(INCLUDING SERVICES) eRS = REAL EXCHANGERATE (AFTER INCORPORATINGSERVICES IN NONTRADEDGOODS) 21 TABLE 2 Data For Estimating Excess Demand RS CRORES M-X 1982-83 1983-84 1984-85 1985-86 5490.0 6060.0 5390.0 8763.0 159395 186723 208533 233799 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 7644.0 6570.0 8003.0 7670.0 10645.0 3810.0 260030 294851 353517 405827 472660 541888 1992-93 1993-94 9687.0 -511.5 627913 706402 M-X : IMPORTS-EXPORTS Y : GDP (AT CURRENTPRICES) K : NET CAPITAL INFLOW ED : EXCESS DEMAND- (M-X-K)/Y eR : REAL EXCHANGERATE K AED 837.6 2220.5 3441.9 -0.78 -0.86 -1.12 0.69 0.1767 0.6637 0.4613 0.4748 7607.7 11650.6 11611.7 12895.3 12061.3 12642.5 -0.99 -0.99 -0.68 0.06 0.50 -1.05 1.05 0.1780 0.2769 0.7155 -0.4344 -0.1330 -0.5024 4.93 -0.98 -1.12 -5.28 0.80 -1.51 -0.04 -0.2124 3.23 25120.0 -3.16 1.5426 1.38 4968.9 5989.3 x 100 K/Y eR -3.61 -4.49 -5.51 22 TABLE 3 Inflation In Traded and Nontraded Goods INFLATION Year Traded Nontraded Overall 1982-83 7.37 3.76 4.9 1983-84 10.79 6.29 7.5 1084-85 10.38 4.87 6.5 1985-86 1.07 6.00 4.4 1986-87 6.45 5.47 5.8 1987-88 8.96 7.84 8.2 1988-89 11.29 6.00 7.5 1989-90 6.61 7.41 7.4 1990-91 11.47 9.96 10.3 1991-92 13.93 13.89 13.7 1992-93 6.24 9.46 10.2 1993-94 7.52 8.90 8.4 23 TABLE 4 TITLE??? Year (1) A(X-M)/Y (2) 40 (3) (2-3) AED (4) 1980-81 -0.41 0.18 0.66 0.46 -0.31 -0.78 -0.86 -1.12 0.47 0.18 0.28 0.72 -0.43 0.69 -0.99 -0.99 -0.68 0.06 12282 13313 16952 19840 25728 27188 35967 38684 44334 54992 -1.55 -0.13 -0.50 0.50 -1.05 0.84 -1.62 -0.21 1.54 1.05 -3.16 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 -0.72 -0.61 -0.20 -0.66 1.16 -0.81 -0.71 0.04 -0.37 0.36 1991-92 1992-93 1993-94 PSBR (5) Current GDP (6) _IPSBR/GDPl (7) 122427 143216 159395 186723 208533 0.1003 0.0930 0.1064 0.1063 0.1234 0.1163 65941 65536 233799 260030 294851 353517 405827 472660 541888 0.1395 0.1209 76529 79519 627913 706402 0.1219 0.1126 PSBR = TOTAL OUTLAY-CURRENTREVENUE (OF CENTER, STATE GOVERNMENTS AND UNION TERRITORIES) 0.1383 0.1312 0.1254 0.1355 A(PSBR) (8) -0.74 1.34 -0.01 1.71 -0.71 2.20 -0.71 -0.58 1.01 0.40 -1.86 0.09 -0.93 24 TABLE 5 Results of Regression of APSBN/Y On A(M-X)/Y And A(M-X-K)/Y Sample Period = (1981-1982 to 1993-1994) Data Beginning Denendent Variable Constant PSBR 1981-82 1982-83 1983-84 1984-85 1985-86 S S S S S 1986-87 S 1987-88 1988-89 1989-90 S S S (M-X)/Y R-Sqr Dependent Variable (M-X-K)/Y Constant PSBR R-Sqr NS NS NS NS NS NS 0.52 0.55 0.60 0.58 0.46 0.67 S S S S S S NS NS NS NS NS NS 0.37 0.36 0.39 0.45 0.41 0.40 S 0.97 0.96 NS NS NS 0.63 S S 0.94 NS NS NOTE: S STANDS FOR SIGNIFICANT NS STANDS FOR NOT SIGNIFICANT The best equation is for the period 1987-88 to 1993-94 A(m-X)/Y t-ratios R2 - 0.97, = -0.22 (-5.37) + 0.29 APBSR/Y (4.37) DWS- 2.9; RHO - -0.6 NS 0.75 0.81 25 TABLE 6 .a P .N P .T P .*Tb P tC -1.05 13.7 13.89 13.93 4.6 -12.6 -0.21 1.05 10.2 9.46 6.24 9.3 -7.6 1.54 -3.16 8.4 8.90 7.52 n.a. n.a. et P--P----- (->ka 1991-92 -0.04 -21.9 -0.50 12.6-93 3.23 -4.7 1993-94 1.38 0.0 aA fall in increase b This LThis the nominal exchange in "e" our has been exports, less is DRY in estimated the from from in the .T P =e+i, rate index equations change estimated DED *T the the in the change a devaluation, and hence text. in nominal accounting implies the exchange rupee unit value rate. equation: +t TABLE 7 Growth Rates of Industrial Sectors April-October Classification Basic Goods Capital Goods Intermediate Consumer TData Tradable; from Goods Goods 1992-93 1993-94 T 3.7 2.9 T 9.0 -8.8 N 4.0 10.4 N 0.0 1.4 N = Nontradable Table 6.4, Economic Survey 1993-1994 index for an 26 FIGURE 1 ET . . NON TRADED GOOD 27 NOTE TO FIG.l. PP is the composite commodities indifference at to the domestic there is also equal. will lead lead a rise in of by er2. have to be cut, real exchange in internal is is in demand the demand for of price and a new expands to meet above C), and the excess deficit of With limited and the will CE. The real the reserves, economy depreciate will then back goods the Y E' TT exchange rate to its to original This latter towards for over will the it into to an that ultimately In the level an traded where demand spills will induce appreciates A. goods. away expenditure move back are to OET. C, as and = OEoT>, will increased demand excess common balance the at of equilibrium which equilibrium good the goods deficit, two a set and nontraded expenditure (unsustainable) the demand traded a trade of traded aggregate of external ("OT for the Given is balance both of slope and nontraded switching The PP curve and supply in output goods. A. in an expansion relative be at are the nontraded rate the running will trade and expenditure there output is vertically curve can be met through their the equivalent given in There output (E former is iOiO the (N) equilibrium as the an increase the goods. deficit for and nontraded The economy 1' and Suppose to increase er output no trade Whereas to initial rate frontier CT) indifference exchange A possibility traded curves tangent real production erl. process the 28 FIGURE 2 NEER, REER AND eR (1981~82=100) 110 ‘100 90 80 70 60 50 1 40 1981-82 , .-. I I 1983-84 I I 198546 I I 198748 I I 1989-90 I 1 I 1991-92 -.-NEER +REER + eR REER: REAL EFIWXWE EXCHANGE RATE; NEER: NOMINAL EITEXXWE eR : REAL EXCHANGE RATE . I 1993-94 29 Table 2A. Real Exchange Rates eRS and eR 105 100 95 90 85 . 80 75 I 1982-83 I I 1084-85 1 1 1986-87 I I 1988-89 I I 1990-91 I 1 I 1992-93 +eRS +eR eRS = R&U EXCHANGE RATE AFTER INCORPORATING SERVICES SEC70R IN NO: eR : REWAXCHANGERATE (EXCLUDING SERVICES) 30 FIGURE 3 VARIATION IN REAL EXCHANGE RATE OBSERVED VS PREDICTED 6 4 2 0 -2 -4 -6 1982-83 1984-85 + 1986-87 OBSERVED + 1991-92 PREDICTED _. 1993-94 31 APPENDIX A note on the data traded and nontraded The data following sources I and methodology used for classification of WPI into goods used in this study has been primarily obtained from the sources: Annual data on Wholesale Price Index (WPI) was obtained from the Ministry of Industry. As final data on the wholesale price Indices for the year 1993-94 was available only up to November 1993, we have: (a) used provisional WPI for (b) derived the wholesale price indices for March (for which no data was available) inflation rate of 8.4%. For classification and Import policy used. of goods documents the months data commodities. For odd nontraded to traded traded goods. This not fixed traded goods market prices Items which nontraded Table Two distinct group goods includes quota are Real WPI data are those restrictions which canalized or are is are In to In by domestic about as the traded and words prices. determined subject into subject other and Economic for (defined exported are of available Rate which international goods is February an annual goods, Export of Commerce were issues was classified on them. by various Indices commodities influenced the months of so as to give Exchange the of nontraded are from Price the goods), Traded margin. have on Wholesale deriving and January. into traded and nontraded published by the Ministry Data on other variables was obtained Survey and National Account Statistics. Disaggregated of December ratio tariff domestic contrast demand of and non- imported to 448 at the but do prices of this the to and fixed import quotas are of UP1 into traded and nontraded supply. treated goods. 1A gives time the classification periods for which traded/nontraded classification goods. is made as 32 are as foll0WS: TIME PERIOD BASIS OF CLASSIFICATION 1982-83 to 1991-92 Export 1993, and Import Policy published on March (April 1990 30, 1990 to March 1992-93 to 1993-94 Export 1997, and Import Policy published on June (April 1992 30, 1992) to March As can be noted, remains uniform that there data from for has accordance the been 1992-93 with This separately) table and the real classification period no major onwards, the more The new series goods the of also change WPI from rates in to above inflation obtained This policy policy during this to the period. classified (for methodology them. due announced 1993-94 for and nontraded is differently rates from as traded 1991-92. been trade the goods trade 1982-83 using the to has liberalized documents exchange 1982-83 however, obtained of traded in traded is given fact WPI in 1992. and nontraded in Table and nontraded 2A. goods 33 TABLE 1A YEAR S. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 Commodity Rice Wheat Jowar Bajra Maize Barley Ragi Gram Arhar Moong Masur Urad Potatoes Sweet potatoes Onions Tapioca Ginger (Fresh) Peas green Tomatoes Cauliflower Banana Mangoes Apples Oranges Cashew nuts Coconut/fresh Papaya Grapes Milk %3s Fish Mutton Poultry chicken Pork Black pepper Chiles (Dry) Turmeric Cardamom Ginger/dry Betelnuts Cumin Garlic Tea Coffee Raw Cotton Raw Jute Mesta Raw hemp Weight 3.685 2.248 0.420 0.178 0.191 0.053 0.049 0.410 0.274 0.201 0.054 0.154 0.472 0.068 0.156 0.128 0.082 0.137 0.117 0.131 0.468 0.964 0.379 0.274 0.115 0.534 0.020 0.044 1.961 0.263 0.507 0.521 0.375 0.117 0.042 0.319 0.051 0.055 0.038 0.151 0.214 0.077 0.564 0.125 1.335 0.160 0.050 0.011 1982-83 to 1992-93 to 1991-92 1993-94 Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Traded Traded Traded Traded Non-Traded Traded Non-Traded Non-Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Traded Traded Traded Traded Non-Traded Traded Non-Traded Non-Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded 34 Table 1A (cont.) 1982-83 YEAR to 1992-93 S. No. Commodity Weight 1991-92 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 Raw wool Raw silk Coir fibre Groundnut seed Rape & mustard seed Cotton seed Copra Gingelly seed Linseed Castor seed Nigerseed Safflower(Kardiseed) Sunflower Soybean Mahuaseed Hidesraw Skinsraw Tanning materials Sugarcane Tobacco Rubber Lac Logs & timber Fodder Iron ore Manganese ore Bauxite Chromite Limestone Mica Fluorite Gypsum Fireclay Kasoline Dolomite Magnesite Asbestos Kyanite Rock phosphate Barytes Sulphur & pyrites Steatite Silica sand Imported petroleum crude Indigenous petroleum crude Coking coal Non-coking coal Coke Lignite 0.082 0.116 0.037 Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Traded Non-Traded Non-Traded Traded Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Traded Traded 1.296 0.661 1.254 0.111 0.142 0.101 0.056 0.038 0.083 0.025 0.074 0.020 0.096 0.078 0.001 2.706 0.275 0.114 0.036 0.571 0.552 0.154 0.048 0.011 0.018 0.070 0.003 0.004 0.003 0.002 0.004 0.008 0.012 0.040 0.001 0.083 0.003 0.087 0.002 0.001 3.004 1.270 0.353 0.798 0.064 0.041 to 1993-94 Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Traded Non-Traded Non-Traded Traded Traded Traded Non-Traded Traded Traded Traded Traded Non-Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Non-Tradt-d Non-Tradt,ti Traded Traded Traded Traded 35 Table 1A (cont.) 1982-83 S. No. 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 Commodity Liquified petroleum gas Petrol Kerosene Aviation turbine fuel High speed diesel oil Light diesel oil Naptha Bituman Furnace oil Lubricants Elec. for domestic purposes Elec. for power purposes Elec. for irrigation purposes Elec. for industrial purposes Elec. for special purposes Elec. for other purposes Tinned Milk Powder Butter Ghee Baby Food (All Kinds) Skimmed Milk Powder Canned Juices Jams/Jellies/marmalades Canned fish Maida Sooji (Rawa) Atta Bran (All kinds) Bread & Buns Biscuits Non-levy sugar Levy-sugar Sugar Khandsari Gur Manufacture of common salt Cocoa, Chocolate, sugar & Confectionery Hydrogenated vanaspati Gingelly oil Kardi oil Mahua oil Solvent extracted groundnut oil Rape & Mustard Oil Coconut Oil Groundnut Oil Cotton seed oil Rice bran oil Imported Edible oil Rape & mustard seed cake Groundnut cake Weight 0.677 0.806 0.868 0.341 2.154 0.203 0.342 0.181 0.641 0.453 0.362 0.527 0.317 0.825 0.024 0.686 0.145 0.053 0.256 0.085 0.103 0.053 0.015 0.126 0.297 0.149 0.763 0.321 0.145 0.097 0.000 0.000 2.013 0.300 1.746 0.035 0.088 0.517 0.235 0.075 0.025 0.021 0.276 0.171 0.526 0.064 0.067 0.468 0.041 0.110 to 1991-92 Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Traded Traded Traded Traded Traded Non-Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded YEAR 1992-93 to 1993-94 Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Traded Traded Traded Traded Traded Non-Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Trader! Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Tradcc! Non-Tradcc! Non-Traded Non-Tr;idI,.! Traded Traded 36 Table 1A (cont.) 1982-83 YEAR to 1992-93 S. No. Commodity Weight 1991-92 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 179 180 181 182 183 184 185 186 187 188 189 190 191 192 193 194 195 Cottonseed oil cake Deoiled cake Linseed oil cake Coconut oil cake Gingelly oil cake Caster oil cake Packed tea Instant coffee Cattle feed Poultry feed Maize starch Glucose & dextrose Malted food Rectified spirit Indian made foreign spirit Malt liquor Soft drink & carbonated water Bidi Cigarettes Zerda Hanks Cones Longcloth/sheeting Poplin/shirting Coating/Drill Dhoties, sareas & voils Miscellaneous Cotton cloth (Powerloom) Cotton cloth (Handloom) Khadi cloth Viscose staple fiber Polyester staple fiber Viscose filament yarn Filament yarn synthetic Blended mixed cloth Art silk cloth Woollen yarn Woollen cloth Suiting cloth Woollen hosiery Hessain cloth Hessain & sacking bags D.W. tarpaulin Cotton Hosiery Shirts/bushshirts Coiryarn Coirmats & mattings Plywood commercial planks 0.135 0.079 0.003 0.034 0.024 0.006 0.127 0.109 0.061 0.042 0.034 0.050 0.053 0.034 0.065 0.059 0.066 1.086 0.556 0.283 0.616 0.616 0.360 1.127 0.295 1.188 0.189 0.906 0.740 0.056 0.163 0.239 0.314 0.574 1.573 0.058 0.140 0.045 0.076 0.078 0.200 0.456 0.033 1.186 0.174 0.097 0.046 0.188 Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Traded Traded Traded Non-Traded Traded Traded Traded Non-Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded to 1993-94 Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Traded Traded Traded Non-Traded Traded Traded Traded Non-Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded 37 Table 1A (cont.) 1982-83 1991-92 YEAR to 1992-93 to 1993-94 S. No. Commodity Weight 196 Resawan 6 hewan timber planks railways sleepers & others Pulp Printing paper white Map, litho paper M.G. paper poster Kraft paper Newsprint Duplex board Straw & mill board Other boards (All kinds) Printing & publishing of newspaper, periodicals, etc. Sheep & goat skin Sole leather Footwear Western type Giant tires Motor tires cycle tires Tractor tires Giant tubes Cycle tubes PVC pipes & tubing Decorative laminates Rubber & canvas footwear Camelback Hoses Tooth brushes Rubber belting Sodiumhydroxide (Caustic soda) Sodium carbonate (Soda ash) Oxygen Calicum carbide Sodium phosphate Nitric acid Titanium dioxide Sulfuric acid Liquid chlorine Benzene Low density polyethylene Acrylic fiber Formaldehyde Acetylene Ammonium sulphate N-content Urea N-content Complex fertilizers N-content Di-ammonium phosphate N-content Superphosphate P205 content Ammonium phosphate P205 content 1.010 Non-Traded Non-Traded 0.090 Traded Traded Traded Traded Traded Non-Traded Traded Traded Traded Non-Traded Traded Traded Traded Traded Traded Non-Traded Traded Traded Traded Traded Traded Non-Traded Traded Non-Traded Non-Traded Traded Non-Traded Non-Traded Traded Traded Traded Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Non-Traded Traded Non-Traded Non-Traded Traded Non-Traded Non-Traded Traded Traded Traded Traded Traded Non-Traded Non-Traded Traded 197 198 199 200 201 202 203 204 205 206 207 208 209 210 211 212 213 214 215 216 217 218 219 220 221 222 223 224 225 226 227 228 229 230 231 232 233 234 235 236 237 238 239 240 241 242 0.226 0.059 0.036 0.143 0.137 0.115 0.125 0.200 0.740 0.388 0.277 0.353 0.499 0.085 0.053 0.060 0.031 0.038 0.315 0.127 0.108 0.039 0.097 0.002 0.138 0.300 0.149 0.051 0.047 0.046 0.025 0.027 0.075 0.044 0.066 0.240 0.086 0.032 0.028 0.040 0.992 0.138 0.052 0.064 0.115 Non-Traded Traded Non-Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded 38 Table 1A (cont.) 1982-83 1991-92 YEAR to 1992-93 to 1993-94 S. No. Commodity Weight 243 244 245 246 247 248 249 250 251 252 253 254 255 256 257 Complex fertilizers NPKcontent Calicum ammonium nitrate N-content Pesticides Paints (Except alum paints) Enamels Varnishes Vat dyes (Indigo solubilized & others) Reactive dyes Organic pigments Optical whitening agents Vitamin tablets (A,B,C,D 6 Others) Vitamin capsules Vitamin liquids Chloramphenicol Penicillin (Vials,tablets & other products) Streptomycin (Vials & other products) Tetracycline (In capsules, vials & others) Powder/granular other than vitamin Liquid oral other than vitamin Liquid Injectable other than vitamin Capsule other than vitamin & antibiotics Tablet except vitamin & penicillin Ointments Syrup Drugs & pharmaceuticals n.e.c. Ayurvedic medicines liquid Household laundry soap Toilet soap Synthetic detergents Agarbatti Tooth paste Tooth powder Powder talc/face Hair oils Glycerine Resins Cream snow Synthetic resins Synthetic rubber Polyethylene molding powder Rubber chemicals P.V.C. resins P.V.C. sheets Caprolactum Polystyrene Safety Matches Blasting powder 0.322 0.025 0.202 0.106 0.113 0.021 0.160 0.077 0.078 0.021 0.061 0.030 0.043 0.028 0.047 Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Traded Non-Traded Traded Non-Traded 0.034 0.068 Non-Traded Non-Traded Non-Traded Non-Traded 0.027 0.116 0.084 0.047 0.300 0.063 0.030 0.054 0.033 Traded Traded Traded Traded Traded Non-Traded Non-Traded Non-Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Traded Traded Non-Traded Non-Traded Non-Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Traded Traded Traded Traded Traded Traded Non-Traded Non-Traded 258 259 260 261 262 263 264 265 266 267 268 269 270 271 272 273 274 275 276 277 278 279 280 281 282 283 284 285 286 287 288 289 0.594 0.121 0.165 0.134 0.070 0.025 0.016 0.038 0.027 0.014 0.011 0.065 0.066 0.105 0.048 0.070 0.019 0.082 0.022 0.233 0.054 Traded Non-Traded Non-Traded Traded Traded Traded Traded Traded Traded Traded Non-Traded Traded Traded Traded 39 Table 1A (cont.1 S. No. Commoditv Weight 290 291 292 293 294 295 296 297 298 299 300 301 302 303 304 305 306 307 308 309 310 311 312 313 314 315 316 317 318 Cine color positive Printing ink Carbon black Fatty acids Fire works Napthols Castor oil Essential oils Linseed oil Flavoring essence Firebricks Basic refractories Building bricks Ceramic tiles Non-ceramic tiles Bottles Sheet glass High tension insulators Tumblers Bangles Crockery Sanitary ware Cement Lime Mica products Asbestos cement corrugated sheets Asbestos cement pressure pipes Ports 6 poles Grinding wheels Coated abrasive Electrodes Hume pipes Basic pig iron Foundry pig iron Other pig iron Steel ingots (plain carbon) Blooms Billets & slabs Skelps Oro mild steel tensile plate Angles, channels & sections Joist & rolls Bars & rods Defective cutting Scrap (all kinds) Carbon tools & high speed steel Stainless steel Malleable castings Ordinary castings 0.044 0.040 0.083 0.076 0.030 0.024 319 320 321 322 323 324 325 326 327 328 329 330 331 332 333 334 335 336 337 338 0.119 0.020 0.117 0.016 0.091 0.067 0.454 0.037 0.046 0.069 0.040 0.041 0.034 0.023 0.017 0.072 0.860 0.056 0.041 0.089 0.069 0.028 0.045 0.015 0.261 0.022 0.023 0.031 0.033 0.330 0.090 0.277 0.040 0.126 0.218 0.035 0.955 0.023 0.084 0.063 0.113 0.084 0.307 1982-83 1991-92 YEAR to 1992-93 to 1993-94 Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Traded Traded Traded Traded Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Traded Traded Traded Traded Traded Traded Non-Traded Non-Traded Non-Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Non-Traded Non-Tr;idt,d 40 Table 1A (cont.) S. No. Commoditv Weight 339 340 341 342 343 344 345 346 347 348 349 350 351 352 353 354 355 356 357 358 359 360 361 362 363 364 365 366 367 368 369 370 371 372 373 374 375 376 377 378 379 380 381 382 383 384 385 386 387 Non-ferrous castings (all kinds) Stamping & forgings Heavy Light structurals Heavy rails (23 Kgs. upwards) Tin plates Sheets Bright bars Axles, wheels 6 tires Pipes & tubes Spun pipes Steel wire Wire Ferro manganese Ferro silicon Alloy steel, stainless steel Aluminum ingots Aluminum Sheets & Strips Aluminum bars & rods Aluminum foils Aluminum rolled products Copper brass & rods Brass sheets 6 strips Tin Lead Nickel Zinc Calcined alumina Barrels Drums Tin boxes/containers Bolts & nuts Utensils Hurricane lanterns Steel files Twist drills Spanners Locks Steel furniture Razor blades Collapsible tubes Tractors Dumpers its parts & accessories Boilers, Internal combustion engines Diesel engines (stationary types) Road rollers Mining machinery Machinery for cotton & synthetic Ring spinning 6 doubling frames 0.025 0.225 0.215 0.057 0.058 0.301 0.032 0.029 0.569 0.077 0.073 0.095 0.049 0.045 0.102 0.206 0.034 0.078 0.064 0.072 0.181 0.050 0.060 0.053 0.032 0.097 0.098 0.081 0.062 0.420 0.293 0.552 0.009 0.025 0.024 0.026 0.029 0.252 0.020 0.030 0.343 0.027 0.387 0.214 0.325 0.018 0.079 0.134 0.335 1982-83 1991-92 YEAR 1992-93 to 1993-94 to Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Traded Traded Traded Traded Traded Traded Non-Traded Non-Traded Traded Non-Traded Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Non-Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Non-Traded Non-Traded Non-TradtJJ Non-TradtAd Non-Tradc.c! Non-Tradt,c! Traded Traded Traded Non-Traded Traded Traded Traded 41 Table 1A (cont.) S. No. Commoditv Weight 1982-83 t0 1991-92 388 389 390 391 392 393 394 395 396 397 398 399 400 401 402 403 404 405 406 407 408 409 410 411 412 413 414 415 416 417 418 419 420 421 422 423 424 425 426 427 428 429 430 431 432 433 434 435 436 Powerlooms (automatic & others) Tea machinery Refrigerators (domestic) Power driven pumps Air & gas compressors Ball bearings lathes Typewriters Computing machines Sewing machines Air Conditioners Components & accessories of generators Transformers Switch gears Components & accessories of switch gears Electric motors phase one HP Electric motors phase three HP Starters Alternators Electric motor contractors Enamelled copper wires P.V.C. insulated cables Paper insulated cables Drycore cables Wires Rubber insulated 6 other cables Batteries Dry cell Table fans Ceiling fans Glass lamps Fluorescent tubes Transistor sets T.V. sets AC Electronic automatic indicators Broad gauge diesel locomotives Broad gauge passenger carriages Broad gauge open wagons Truck chassis (diesel) Car chassis assembled Bus chassis (diesel) Body manufactured for buses Body manufactured for trucks, vans etc Diesel fuel pumps Gears (All kinds) Jeeps Three wheelers Motorcycles Scooters 0.206 0.038 0.105 0.208 0.130 0.362 0.208 0.038 0.033 0.053 0.034 0.098 0.267 0.158 0.172 0.114 0.157 0.087 0.052 0.042 0.102 0.359 0.095 0.042 0.057 0.073 0.067 0.164 0.063 0.170 0.139 0.052 0.165 0.157 0.139 0.124 0.088 0.062 0.683 0.214 0.228 0.076 0.060 0.039 0.050 0.101 0.039 0.094 0.105 Non-Traded Traded Non-Traded Traded Non-Traded Traded Traded Non-Traded Non-Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded YEAR 1992-93 t0 1993-94 Traded Traded Non-Traded Traded Non-Traded Traded Traded Non-Traded Non-Traded Traded Non-Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Traded Traded Non-Traded Non-Traded Non-Traded Non-Traded 42 Table 1A (cont.) YEAR S. No. Commodity WeiEht 437 438 439 440 441 442 443 444 445 446 447 448 Bicycles Shock absorbers Radiators Pistons Trailers Gaskets Springs Other automobile spare Wristwatch Gramophone records Fountain pen House service meter 0.132 0.010 0.021 0.017 0.022 0.016 0.062 0.462 0.352 0.189 0.409 0.022 parts 1982-83 1991-92 Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded to 1992-93 to 1993-94 Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded Non-Traded 43 TABLE 2A Annual Data on Inflation Rates for Traded and Nontraded Goods And Real Exchange Rate WPI Year INFLATION Traded (1) Nontraded 1981-82 1982-83 1983-84 1984-85 100.00 107.37 118.95 131.30 100.00 103.76 110.29 115.66 7.37 10.79 10.38 3.76 6.29 4.87 -3.61 -4.49 -5.51 100.00 96.39 91.90 86.38 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 132.70 141.26 153.92 171.29 182.62 203.57 122.60 129.31 139.45 147.82 158.78 174.59 1.07 6.45 8.96 11.29 6.61 11.47 6.00 5.47 7.84 6.00 7.41 9.96 4.93 -0.98 -1.12 -5.28 0.80 -1.51 91.32 90.34 89.22 83.94 84.74 83.22 231.93 246.40 264.93 198.84 217.66 13.93 6.24 13.89 9.46 -0.04 3.23 83.18 86.41 237.03 7.52 8.90 1.38 87.79 1992-93 1993-94 (2) Traded (3) Nontraded (4) Real Exchange Rate (eR) % Change INDEX (4)-(3) 1981-82=100 (5) (6) 44 For exchange these the year rates were 1993-94, worked wholesale out price indices, on a monthly basis inflation as well. rates Table and 3A gives results. TABLE 3A Monthly Data on Inflation Rates And Real Year (1) Month (2) For Traded Exchange and Nontraded Goods Rate TRADED NONTRADED WPI % Chance (3) (4) WPI % Change (5) (6) Real Exchange Rate (eR) (6)-(4) % Change (7) 1993 JANUARY 249.88 - 220.33 1993 FEBRUARY 253.29 1.36 220.23 -0.04 -1.40 1993 MARCH 252.60 -0.27 221.00 0.35 0.62 1993 APRIL 253.89 0.51 222.65 0.75 0.24 1993 MAY 256.00 0.83 225.04 1.07 0.24 1993 JUNE 256.87 0.34 228.72 1.63 1.29 1993 JULY 261.80 1.92 231.81 1.35 -0.57 1993 AUGUST 265.46 1.40 236.01 1.81 0.41 1993 SEPTEMBER 266.80 0.50 240.70 1.99 1.49 1993 OCTOBER 267.99 0.45 242.86 0.90 0.45 1993 NOVEMBER 268.45 0.17 241.89 -0.40 -0.57 1993 DECEMBER* 267.67 -0.29 240.44 -0.60 -0.31 1994 JANUARY* 267.40 -0.10 241.12 0.29 0.39 NOTE: Results for the based provisional months data. of December 1993 and January 1994 real are 45 APPENDIX II The program used for obtaining nontraded c *** C 10 50 70 C C C C 20 100 71 30 and goods is given below: PROGRAMTO COMPUTEWEIGHTEDPRICE INDEX OF TRADED AND NONTRADEDGOODS IMPLICIT DOUBLEPRECISION (A-H,O-Z) CHARACTER*12FNAME WRITE (*,lO) FORMAT(lX,'PLEASE ENTER THE NAME OF THE DATA FILE: '\) READ(*,50) FNAME FORMAT(A) OPEN(5,FILE-FNAME) OPEN(6,FILE='OUTP',STATUS-'NEW') SUMWT= 0.0 SUMWNT= 0.0 TRADP = 0.0 TRADNP- 0.0 READ(5,20,END=1OO)IYEAR,ICOM,COMWT,PINDX IYEAR IS THE YEAR CODE ICOM IS COMMODITYCODE (l-TRADED, 2=NONTRADED) COMWTIS THE WEIGHT OF THE RESPECTIVE COMMOFITYIN OVERALLWPI PINDX IS THE WHOLESALEPRICE INDEX FORMAT(I5,12,2FlO.O) IF(ICOM.EQ.l) THEN Y- COMWT*PINDX TRADP =Y + TRADP SUMWT= SUMWT+ COMWT ENDIF IF(ICOM. EQ.2) THEN Z- COMWT*PINDX TRADNP- Z + TRADNP SUMWNT- SUMWNT+ COMWT ENDIF GO TO 70 WPIT = TRADP/SUMWT WPINT - TRADNP/SUMWNT WRITE(6,71)SUMWT,SUMWNT FORMAT(lX,3F15.4) WRITE(6,3O)IYEAR,WPIT FORMAT(2X,'YEAR =', 17,5X,'WEIGHTED WPI FOR TRADED GOODS=' #,F10.2,//) 40 the weighted WPI for traded WRITE(6,4O)IYEAR,WPINT FORMAT(2X,'YEAR =', 17,5X,'WEIGHTED WPI FOR NONTRADEDGOODS=' #,F10.2;//) . CLOSE(5) CLOSE(6) END 46 APPENDIX AN ALGEBRAIC We can Figure, to for (P,>, foreign formalize obtain the the any given (Nd) Nd - a small of terms macroeconomic the money of trade (N') for MODEL model price of (given depicted nontraded Pf) and in market addition the level supply al(PN-PT) d the nontraded + a2Y + a3Bo + a4(M s goods is d -M ) prices, (nominal) w and of payments, are the money demand and given by: 0 Y notation wage for money supply - al(PTd-PN) rate, is MS the the domestic supply of goods, and output money (nominal). (T') for + (1-a2)Y traded + (1-a3)Bo the +(l-a4)(MS-Md) (A.6) at demand is (A.4) B. = Td - TS market function (Md/N.Pd) N balance (A.5) prices is given by: Y = Td - TS where at TS = co + cl(PTd-PN) output The money by (A.2) previous (Td) Td - a Domestic our the The demand given (A. 3) is Md of (A.1) + bl(PN-w) to the goods Nd = NS where by as follows. and 0 - NS = b. economy determinants (Bo), The demand VERSION OF THE AUSTRALIAN external borrowing 3 the (A.7) is given by: = k(Y/N)a population. (A. 8) The money supply process is determined from 47 the following accounting and a behavioral relationship import of the consolidated banking system, function AM' = ANFA + D where the ANFA = X - I + B. (A.lO) I- (A.ll) ANFA system, value do + dl is D (A.9) the the of b cyp,) change change in net in exports, total foreign domestic assumed assets of credit to be given the of the consolidated banking exogenously, system, I and banking the X level of imports. From and (A.l) (A.7), to (A.3), and substituting and rearranging yields y in an expression (A.l) for the from (A.2), (A.5) determinants of Pn as (A.12) PN = constant We can use nontraded (Bo), goods + bl(l-a2) -a2clw al+bl(l-a2) + a3 al+bl(l-a2) this good and compare price constant rose w required with by more d P T' and change (PN) that in for (P:) judge and to what the equilibrium deviated form the observed actual (P,) that the (MS-Md) estimate f or the than or tradables weather to and with PN a1+a2c1 al+bl(l-a2)P: a4 Bo + al+bl(l-a2) expression price + change to observed and any excessive the rate for Next, changes monetary current erl in in change nontraded (with we can estimate money expansion the the the borrowing equilibrium in real in foreign see whether was required MS = Md). extent required exchange Figure. wages the (w), (MS > Md), rate a in price to India 48 In the the extent second of consider monetary expansion of First exercises monetary the for and exports balance above the we ask observed payments, that is note from (A.8), that will form changes for be necessary the What would is: there also (MS > Md). derivations so that (X), it expansion following The question (A.8)-(A.11). (Bo) the any excessive empirically, in of in the To do this monetary have level was equilibrium to judge submodel been of in the required capital the inflows overall ANFA - O? we can derive the standard quantity theory relationship YPd where v, the = v . M income A.8a) velocity of money is given by v = l/(k.ya-') with y = Y/N, Next, per from (A.8b) capita (A.lO) income. with ANFA - 0, we have X+Bo-I-O substituting (A.9) for yield credit inflow I after (D)req, for Comparing estimated from an the the pN for (YP,) the change leads to Bo>/v l from required in ANFA = 0, (X+ expansion observed changes in provide our will derive = [a3/al+bl in a relationship + (l-a2)ldB and in for M form domestic foreign capital ) I/d1 credit from the exports and foreign estimate from and as dl[(X+BoWy actual (A.8a), expansion exports a-l = (A.13) We can also (A.ll), exogenous which Dreq for from some manipulation, (X+Bo), stability (Al0.a) (A.12) of (A.13) required (MS-Md) between for capital in PN monetary inflows (A.12). and dB, (A.12a) as 49 Denoting n S the elasticity respectively, we have al = Making use dividing Y, the of Nd (A.3), l nd; after numerator demand from bl and supply (A.l) = NS and l substituting and denominator of (A.2) nontraded goods by nd and that ns for of al the and RHS of b 1 (A.12a) as above, by real and output yields pN where of = [(a3aY/N)/(nd+ns(l-a2))]dB/Y N = Nd = NS and dW = dPTd = d(MS-Md) = 0 (A.12b)