Forex catamarca: Crisis De Divisas De 1991 En La India

7 razones por las que la India está mirando una crisis monetaria

En mi columna anterior. Cuando la rupia se negociaba a 65 contra el dólar de los EE. UU. que había escrito acerca de cómo la rupia podría llegar a 70 frente al dólar en un futuro próximo y por qué la rupia se ha depreciado tanto recientemente.

La economía de la India se encuentra en una posición peligrosa hoy y la situación puede espiral fuera de control. De cómo hacerlo.

Un déficit en cuenta corriente ocurre cuando un país está importando más bienes y servicios de lo que está exportando (si lo contrario era cierto, estaría en un superávit). El déficit en cuenta corriente de India ha explotado 1125 por ciento desde 2007, pasando de $ 8 mil millones a $ 90 mil millones. En otras palabras, India está importando $ 90 mil millones más de lo que está exportando.

Sin embargo, en 2007, la India tenía 300.000 millones de dólares en reservas de divisas. Podría cubrir su déficit de cuenta corriente 37,5 veces más. En la actualidad, las reservas de divisas de India se han reducido a 275 mil millones de dólares: sólo puede cubrir su déficit por cuenta corriente 3 veces.

El déficit de la cuenta corriente de India ha crecido constantemente a lo largo de los últimos 5 años: no sólo aumentó de un día a otro. Puesto que muchos de los países que comercian con la India sólo aceptan divisas a cambio (principalmente el dólar), parecería obvio que la India mantendrá continuamente un arsenal creciente de reservas de divisas a través de los años; Por desgracia, la India no hizo eso. No es de extrañar que el primer ministro Manmohan Singh intentara tranquilizar al país que a diferencia de 1991, cuando "el país sólo tenía reservas de divisas para 15 días de importaciones, ahora tenemos reservas para siete meses". 7 meses antes de que nos quedemos sin reservas? Eso apenas suena tranquilizador. (También se lee. PM resalta el lado brillante de la ruptura)

Aquí es donde la situación puede comenzar a sonar grave. La economía estadounidense, 5 años después de la crisis financiera de 2008, está empezando a hacer emerger la economía. Cuando la economía de un país está creciendo, las tasas de interés comienzan a subir, y el país empieza a imprimir menos dinero de lo requerido. Ahora estamos sentados en una situación peligrosa donde, no sólo la depreciación de la rupia pesadamente contra el dólar, pero la oferta de dólares es probable que se contraigan en los próximos meses. Hicimos hincapié en la necesidad de dólares de EE. UU. con el fin de mantener el déficit de la cuenta de divisas en jaque. Esto pone una carga adicional sobre la rupia.

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Además, estarán en juego dos factores adicionales. En primer lugar, el empuje en las tasas de interés en los Estados Unidos y en el extranjero crea mayores incentivos para los inversores internacionales para invertir en el extranjero frente a la India. Ya se está sintiendo el impacto. Desde marzo de este año, las reservas de divisas ya han caído en $ 14 mil millones debido a los inversores optan por invertir en los EE. UU. y otros países frente a la India.

En segundo lugar, es importante señalar que un déficit en cuenta corriente no puede ser etiquetado como "malo" simplemente porque no es un superávit de cuenta corriente. Después de todo, la mayoría de los países desarrollados tienen altos déficit en cuenta corriente. Un déficit de cuenta corriente elevado puede ser necesario si un país está creciendo y requiere que las importaciones estimulen el crecimiento. Una manera de medir la salud de un déficit en cuenta corriente es compararlo con el PIB del país. Los estudios académicos sugieren que un déficit en cuenta corriente que es el 2,5 por ciento del PIB de un país es sostenible.

Lo que hace que la situación de India sea peligrosa es que actualmente está en casi el 5 por ciento de su PIB. Además, los economistas encuestados en todo el mundo esperan que el PIB de la India caiga aún más este año fiscal.

Qué significa todo esto? En última instancia, la fe que el mercado coloca en su economía es lo que le da tranquilidad. Sentimientos corren el mercado. ¿Cuáles son los signos actuales que apuntan?

El debilitamiento adicional de la rupia debido a una menor oferta de dólares y mayores tasas de interés en el extranjero.

Los economistas predijeron un PIB más bajo para el año fiscal actual, una señal desastrosa ya que acabamos de presenciar un descenso del PIB del 6,2% al 5% desde el último año fiscal hasta el año fiscal actual.

3. Déficit de cuenta corriente

Un nuevo aumento en el déficit de la cuenta corriente de India.

El gobierno señala que dentro de meses podría quedar sin reservas extranjeras.

$ 170 mil millones en deuda a corto plazo a pagar, mientras que en 2008 fue sólo $ 80 mil millones.

De mayo a agosto de 2013, las inversiones de FII en la India han disminuido en $ 2 mil millones.

Tanto el sector privado como el público se mantienen claros en las estrategias de inversión hasta las elecciones del próximo año.

Al tener todo esto en cuenta, requerirá un esfuerzo heroico por parte del recién nombrado gobernador de RBI, Raghuram Rajan, para evitar que se desarrolle una crisis monetaria.

Raghu Kumar es el co-fundador de RKSV, una compañía de corretaje. Las opiniones expresadas aquí son las opiniones personales del autor. NDTV no es responsable de la exactitud, integridad, idoneidad o validez de cualquier información dada aquí. Toda la información se proporciona en forma tal cual. La información, los hechos o las opiniones que aparecen en el blog no reflejan las opiniones de NDTV y NDTV no asume ninguna responsabilidad ni responsabilidad por el mismo.

Historia publicada por primera vez: 31 de agosto de 2013 13:47 IST

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¿Tiene la economía india una sensación de crisis de 1991?

La abrupta caída de la rupia a más de 55 por dólar, un déficit de la cuenta corriente del 4% del PIB, las reformas estancadas, el liderazgo político débil y una economía global cojeando, no es de extrañar que la crisis de 1991 se paralelice.

Pero hablar de 1991 puede ser exagerado, al menos por ahora. "Somos una economía mucho mejor y más resistente que en 1991", dice Jamal Mecklai, director ejecutivo de Mecklai Financial, una firma de consultoría de riesgo de divisas.

¿Cuentan los números la historia?

A primera vista, algunos grandes números causan alarma. El déficit en cuenta corriente de la India en 1991 fue del 3% del PIB, hoy está en el 4%. El déficit fiscal en 1991 era casi 8% del PIB y eso era sólo para el gobierno central. El déficit actual es un poco más bajo que el 6%, mejor que 1991, pero apenas cómodo.

Sin embargo, "la situación actual es mucho mejor ya que la economía es mucho más competitiva ahora con mayores tasas de crecimiento", dice Indranil Sengupta, economista jefe de la India, Bank of America Merrill Lynch. "Las reservas de divisas también son mucho más altas, así que tenemos un cojín". En el 91, las reservas cubrían sólo dos semanas de importaciones. Pueden cubrir las importaciones desde hace seis meses.

Y como señala Shashanka Bhide, del Consejo Nacional de Investigación Económica Aplicada: "En 1991, estábamos en una fase en que estábamos endureciendo la política monetaria elevando las tasas de interés debido a una inflación muy alta, pero ahora hemos empezado a aflojar la política monetaria, es decir, Pico puede haber pasado. " Pero está más allá de los números macro que los cambios reales han sucedido. Uno de los mayores cambios ha sido en el sistema bancario, crítico para la salud de la economía en general.

Sengupta dice: "El sistema bancario es mucho más grande y fuerte y los problemas son más direccionables". En 1991, los bancos no estaban sujetos a nada como el nivel de revelaciones que son obligatorias ahora. Incluso en la economía en general, ha habido cambios bruscos. "En comparación con 1991, tenemos una infraestructura mucho mejor para que podamos hacer los ajustes necesarios en la economía de manera más eficiente", dice Bhide.

El mes pasado, en una mesa redonda (a la que asistió el primer ministro, Manmohan Singh, quien era ministro de Finanzas en el '91), el gobernador de la RBI, D Subbarao, señaló números macro que se aproximaban a los '91 niveles. "Ese es un panorama bastante inquietante", dijo (según cita Reuters). "Sin embargo, todavía diría que en 1991 una implosión era inminente, en 2012, una implosión no lo es".

¿Necesitamos una crisis?

Irónicamente, como muchos observadores señalan, es esta falta de una crisis que ha reforzado la inercia política. "Los gobiernos sólo toman medidas cuando tienen la espalda contra la pared", dice Mecklai. "No estamos en esa situación hoy."

"Cuando iniciamos el proceso de reforma en 1991, hubo mucho entusiasmo y también presión externa y el gobierno fue capaz de llevar a cabo reformas rápidamente", dice Govind Rao, director del Instituto Nacional de Finanzas Públicas y Política. "Pero en la situación actual, parece que con un gobierno de coalición, no es tan fácil llevar a cabo reformas importantes, como introducir reformas en el mercado minorista y en el mercado de trabajo".

A pesar de que la economía nacional está en mejor forma, es el estado de la economía global lo que preocupa, especialmente para una economía más integrada e influenciada por los ciclos económicos fuera de sus fronteras de lo que era hace 20 años.

"El ambiente externo es débil comparado con 1991 y los precios de las materias primas son por lo tanto relativamente más débiles [excepto petróleo] que en 1991," dice Bhide. Y para una economía más dependiente de la fuerte demanda de exportación del mundo desarrollado ahora que en 1991, eso es preocupante.

¿Suficiente en el Kitty?

Tomemos la "suficiencia" de las reservas de divisas, por ejemplo. Actualmente, la India tiene suficiente para pagar seis meses de importaciones, en comparación con dos semanas en 1991. Pero esto no es una comparación relevante, ya que la balanza de pagos de India está profundamente afectada por las inversiones extranjeras, que eran bajas hace 20 años. Y como señaló Subbarao, la deuda externa a corto plazo como porcentaje del total es el doble del nivel que tenía en 1991.

Y "sentimiento" todavía puede causar estragos. India estaba en mucho mejor forma macroeconómica en la víspera de la crisis de 2008 de lo que era ahora. Pero eso no impidió que el dinero de los inversionistas se inundara de la India, y como lo hicieron, las reservas se erosionaron por $ 60 mil millones entre abril y noviembre de 2008 durante el apogeo de la crisis.

Incluso si la India es estructuralmente una economía mejor en 2012 que en 1991, que puede ser un pequeño consuelo para todos los afectados por lo que podría suceder durante los próximos meses. El cambiador rápido de juegos será una acción política firme antes de la crisis. Si eso sucede, ya no se sentirá como 1991.

Las preocupaciones sobre la crisis de BoP de 1991 exageraron: Standard Chartered

(Según StanChart & hellip;)

NUEVA DELHI: Standard Chartered redujo hoy el pronóstico de crecimiento de la India para el año fiscal actual a un 4,7 por ciento desde un 5,5 por ciento anterior, citando "riesgos al alza" a la inflación y al déficit fiscal.

De acuerdo con los servicios financieros mundiales principales, una fuerte debilidad en el valor de la rupia está empezando a pesar sobre la economía de la India. Como se refleja en la depresión de la actividad industrial y el repunte de la inflación de julio en el IPM.

"Revisamos nuestro pronóstico de crecimiento del PIB para el FY'14 al 4,7 por ciento desde el 5,5 por ciento", dijo Standard Chartered en una nota de investigación de hoy.

Los dos factores han impulsado esta revisión a la baja, primero es la debilidad de la actividad industrial y el segundo factor es que la actividad industrial más lenta es probable que siga pesando en el sector de servicios.

En el primer trimestre de 2004, el índice de producción industrial (PII) se contrajo un 1 por ciento, frente al crecimiento del 2 por ciento en el cuarto trimestre de 2004. Un repunte agudo en este espacio parece "improbable" ante las recientes pérdidas cambiarias, las tasas de interés más altas y el sentimiento débil, dijo Standard Chartered.

Con respecto a la desaceleración en el sector de servicios, el informe dijo: "Las suscripciones de telecomunicaciones y los servicios PMI, ya reflejan esto, esperamos que se vuelva más amplia a medida que avanza el año".

Standard Chartered opina que las preocupaciones por la crisis de la balanza de pagos (BoP) de 1991 son exageradas. "El déficit de la cuenta corriente de la India (C / A) se está estrechando, esperamos que esto, junto con una pausa en el rally de USD, empuje al USD-INR más bajo en el cuarto trimestre, aunque las preocupaciones electorales permanezcan en segundo plano".

El banco tiene una perspectiva positiva en la cuenta corriente. "El déficit comercial se redujo a $ 12.2 mil millones en julio de $ 20 mil millones en mayo y es probable que mejore más en el corto plazo", dijo el banco.

"Las importaciones de oro y plata han disminuido sustancialmente a raíz de los incrementos de los derechos de importación y de restricciones de importación más estrictas, y las exportaciones deberían beneficiarse de la recuperación del crecimiento mundial, lo que probablemente reducirá el déficit de la cuenta corriente al 4% En FY13 ", agregó.

Si bien es probable que los riesgos de financiamiento persistan en el futuro cercano debido a las salidas de capital, el banco espera que las entradas se reanuden con el tiempo.

Según el informe, el monzón favorable, el gasto relacionado con las elecciones y un mejor crecimiento global en la segunda mitad del actual ejercicio financiero deberían proporcionar cierto apoyo, pero "el alto apalancamiento, las altas tasas de interés y la incertidumbre política siguen siendo fuertes".

"Dado que el gobierno ha enfatizado repetidamente su intención de adherirse al objetivo fiscal, no se puede descartar una subida extraordinaria de los precios del gasóleo o una reducción de otros gastos para acomodar la mayor carga de los subsidios", dijo Standard Chartered.

El crecimiento económico del país alcanzó una baja del 5 por ciento en el último año fiscal debido al mal desempeño en los sectores agrícola, manufacturero y minero.

El Banco Central, en su Revisión del Primer Trimestre de la Política Monetaria el 30 de julio, había reducido la proyección de crecimiento para 2013-14 a 5.5 por ciento de una estimación anterior de 5.7 por ciento. El gobierno en febrero había proyectado un crecimiento del 6.5 por ciento para 2013-14. (Con entradas de PTI)

318.9k Vistas y toro; Actualizado por Akshay Vaishnav. Sólo un otro indio. Devanand Shenoy. Orgulloso indio, que ha pasado toda su vida en la India. Biswa Jyoti. Ciudadano de la República de la India

1. La mayoría de los países del mundo dependen de la economía mundial para una amplia variedad de cosas. Para la India, dependemos de Asia Occidental para nuestro petróleo, Sudáfrica para nuestro oro, EE. UU. para nuestra tecnología, el sureste de Asia para el aceite vegetal, etc Para comprar estos artículos del mercado mundial, necesitamos dólares de EE. UU. - la moneda mundial del comercio . La única manera de ganar dinero es vendiendo lo suficiente de nuestras cosas en la economía global (exportaciones).

Desde 1960, la India dependía de la Unión Soviética para nuestras exportaciones, ya que no pudimos desarrollar buenas relaciones económicas con Estados Unidos y Europa Occidental. Fue una buena marcha por un tiempo (India y los soviéticos) hasta que el proverbial sh * t comenzó a golpear al ventilador. A finales de la década de 1980, la Unión Soviética comenzó a agrietarse y en 1991 se dividieron en 15 naciones (Rusia, Kazajstán, Ucrania, etc.). Ahora, la India tenía un problema importante porque nuestro principal comprador estaba en agitación. Las exportaciones bajaron significativamente. Disolución de la Unión Soviética

2. Mientras tanto, había este tipo Saddam Hussein que tuvo su desgracia en Kuwait en 1990. Esto llevó a EE. UU. a la guerra con Irak a principios de 1991. Los campos de petróleo comenzaron a quemarse y los barcos encontraron difícil alcanzar el Golfo Pérsico. Irak y Kuwait eran nuestros grandes proveedores de petróleo. La guerra llevó a la destrucción de nuestras importaciones de petróleo y los precios subieron sustancialmente, duplicándose en pocos meses. Guerra del Golfo y choque del precio del petróleo en 1990.

3. A finales de la década de 1980 el sistema político de India estaba implosionando. El primer ministro Rajiv Gandhi estuvo involucrado en una serie de problemas - el escándalo Bofors. Un caso de Shah Bano que eventualmente condujo a su derrocamiento en 1989. Lo que siguió fueron dos líderes más terribles que eran tan inestables como incompetentes. Esto tuvo un efecto enorme en la economía india que fue totalmente olvidado en la crisis política. En 1991 este gobierno se interrumpió. Hasta que Narasimha Rao fue juramentado como primer ministro en 1991, la economía india se quedó en el abandono grosero.

------------------------- ------------ Así, 1991 fue el año de la tormenta perfecta. Esta triple crisis llevó a la India de rodillas. Por un lado, nuestro principal comprador se ha ido. Por otro lado, nuestros vendedores primarios estaban en guerra. En el medio, nuestra producción fue efectivamente detenida por la crisis política. Nos quedábamos sin dinero para comprar artículos esenciales como crudo y comida del resto del mundo. Esto se denomina un & quot; Crisis de la balanza de pagos & quot; - lo que significa que la India no pudo equilibrar sus cuentas - las exportaciones fueron significativamente menores que las importaciones.

Puesto que, no teníamos muchos dólares, fuimos y rogamos al FMI - la tienda de empeño del mundo. Ellos nos pidieron que prometamos nuestras reservas de oro a cambio del préstamo interino de $ 3.9 mil millones (una suma enorme para la India entonces) al igual que los prestamistas del vecindario pedir nuestro oro cuando queremos un préstamo de emergencia. Tomamos 67 toneladas de nuestro oro en dos aviones - uno a Londres y otro a Suiza para obtener esta asistencia. La historia de la India sobre la crisis

Un estímulo fiscal es necesario & # 039; India tuvo que mover físicamente el oro de la India, en el extranjero. Me informaron, por fuentes muy, muy confiables, que la furgoneta que tomaba el oro al aeropuerto se rompió, y había pánico total.

India comenzó su "liberalización" Cuando Rao se convirtió en nuestro Primer Ministro el 21 de junio de 1991. Esencialmente, fue la destrucción de algunas de las políticas idiota que Nehru y su familia pusieron en marcha en nuestro país (lo siento, no puedo resistir una excavación en Nehru). Licencia Raj

Eliminamos muchas de las restricciones a la importación. Hasta 1991, impusimos un arancel aduanero del 400% sobre muchos productos. Las industrias tuvieron que mendigar para obtener un ingrediente esencial importado. En 1991, los derechos sobre muchos productos se redujeron sustancialmente. Esto trajo un nuevo crecimiento en nuestras industrias.

Se suprimió la licencia de importación. Hasta 1991, usted necesita una licencia para importar cualquier cosa y esta licencia fue muy difícil de conseguir.

El gobierno eliminó las licencias de producción en muchas industrias. Hasta 1991, necesitaba el permiso del gobierno para producir y producir. De un golpe, la restricción se eliminó en muchas industrias.

Rao puso la economía doméstica de nuevo en pista con dos estrellas - Montek Singh y Manmohan Singh. Se dieron grandes incentivos a nuestras industrias locales. Las reglas del mercado de valores estaban relajadas.

Manmohan abolió el contrabando de oro & quot; (Recuerda las películas de Bollywood de los años 80?) De una sola vez. Permitió que los expatriados indios trajeran 5 kilos de oro sin ellos. Ahora, nadie tenía una razón para contrabandear oro & amp; electrónica.

Singh y Rao permitieron a los inversionistas extranjeros venir. Hasta entonces la India estaba viviendo en la paranoia de la compañía de las Indias Orientales. Muchos sectores se abrieron para la inversión extranjera y la colaboración. Ahora, empresas como Coke y Nike podrían entrar. De repente, la Bolsa de Bombay encontró una vida.

El gobierno comenzó a vender algunos de sus negocios al sector privado. Esto trajo efectivo y nueva ronda de eficiencia.

En resumen, la liberalización en el contexto de la India significó un retorno del sentido común que era difícil de encontrar en nuestros círculos económicos desde 1947. Acabamos de eliminar algunas de las reglas. Todavía hay un largo camino por recorrer.

Otras respuestas han resumido todo realmente bien, pero aquí permítame concentrarme en cómo llegamos a esta situación particular en 1991.

Dejame empezar por el principio. Mi respuesta comenzará en 1944 y culminará en 1991.

Las políticas están enmarcadas para lograr un fin. Las políticas industriales indias están enmarcadas para obtener un crecimiento económico más rápido a través de la rápida industrialización y hacer que la economía sea autosuficiente como un fin.

El sector industrial del país estaba en crisis en el momento de la independencia, ya que no fue promovido sino descuidado durante los dos siglos del Raj británico. Sus políticas explotadoras enmarcadas para servir a los intereses de su patria fueron la causa principal de la falta de industrialización en la India.

La India era el proveedor de materias primas y el consumidor de los bienes británicos. El deseo de los indios de industrializarse puede ser visto desde la perspectiva de la formación del Plan de Bombay en 1944, que fue el primer esfuerzo de industrias prominentes del país para dar forma a la política industrial del país mediante el énfasis en las industrias pesadas.

Basándose en el plan de Bombay. El primer paso concreto hacia la industrialización fue tomado en forma de la Resolución de la política industrial 1948. Estableció amplios contornos para la estrategia de industrialización. El objetivo básico era sentar las bases de una economía mixta en la que tanto el sector público como el privado desempeñaran un papel importante en el desarrollo industrial.

Pero para asegurar el desarrollo según el plan y la inclinación de Pandit Nehru hacia el gobierno del socialismo fabiano impuso regulaciones pesadas al sector privado bajo la forma de licenciar. Por lo tanto, dar un papel más importante para el sector público.

La Ley Industrial (Desarrollo y Regulación) de 1951 proporcionó los dientes necesarios al gobierno para imponer tales restricciones. Esto abrió el camino para la Resolución de Política Industrial 1956, que introdujo las licencias de patentes y en verdad fue la primera declaración comprensiva sobre la estrategia para el desarrollo industrial en la India.

La Resolución de la Política Industrial de 1956 fue moldeada por el modelo de crecimiento de Mahalanobis, el cual enfatizó el papel de las industrias pesadas en el crecimiento a largo plazo. Las resoluciones ampliaron el alcance del sector público con el objetivo básico de acelerar el crecimiento económico e impulsar el proceso de industrialización.

La política también apuntaba a reducir las disparidades regionales mediante el desarrollo de una base industrial amplia y dando impulso a las industrias de pequeña escala y las industrias artesanales, ya que tenían un enorme potencial para proporcionar empleo en masa. La política se mantuvo en línea con las creencias prevalentes de los tiempos, es decir, lograr la autosuficiencia. Pero la política se enfrentó a muchos fracasos en la implementación y como resultado logró exactamente lo contrario de lo que pretendía, es decir, las disparidades regionales y la concentración del poder económico.

De ahí que la comisión de investigación de los monopolios (MIC) se estableció en 1964 para revisar varios aspectos relacionados con la concentración del poder económico y el funcionamiento de las licencias industriales. El informe, al tiempo que enfatizaba que la economía planificada contribuyó al crecimiento de la industria culpó al sistema de licencias que permitió a las grandes casas comerciales obtener una proporción desproporcionadamente grande de licencias que había llevado a la prevención y exclusión de la capacidad.

Posteriormente, un comité de investigación de licencias Industriales aconsejó que las grandes casas industriales deben recibir licencias solamente para establecer industrias en sectores de inversión principal y pesada.

Además, con el fin de controlar la concentración del poder económico se introdujo la Ley de Prácticas Comerciales Monopolísticas y Restrictivas (MRTP). Las grandes industrias fueron designadas como empresas de MRTP y eran elegibles para participar en industrias que no estaban reservadas para el gobierno o industrias de pequeña escala.

La política de licencias industriales, así como la Política Industrial 1973, enfatizaron la necesidad de controlar la concentración de la riqueza y dieron importancia a las industrias de pequeña y mediana escala. Continuando con el favoritismo hacia las industrias de pequeña escala, la política industrial de 1977 dio un paso adelante al introducir centros industriales distritales para prestar apoyo a SSI.

También introduce la nueva categoría llamada SECTOR TINY y amplió considerablemente la lista de reserva de industrias de pequeña escala. Pero debido a choques exógenos (guerras) así como a disturbios internos (emergencia) ya problemas de implementación la política no tuvo un efecto significativo. La floreciente situación económica llevó a la formulación de la Política Industrial 1980, que sembró las semillas de la liberalización.

La política industrial de 1980 hizo hincapié en la promoción de la competencia en el mercado interior, la mejora técnica y la modernización de las industrias, así como la utilización óptima de la capacidad instalada para garantizar una mayor productividad, niveles de empleo más elevados, Anunciado para revivir la eficiencia de PSU junto con las disposiciones de expansión automática.

Las PSU fueron liberadas de una serie de restricciones y se les proporcionó una mayor autonomía. Se tomaron medidas importantes desregulando todas las industrias excepto las especificadas en la lista negativa. La «liberalización limitada» iniciada en 1980 llegó a su cumbre con un cambio de política histórico en 1991.

La política industrial 1991 estableció un cambio de paradigma en la evaluación de la política industrial y el desarrollo. Aumento del déficit fiscal y el déficit monetizado junto con las crisis financieras mundiales (guerra del Golfo, crisis del petróleo) jugó un papel importante en el inicio del nuevo capítulo en la historia de la política industrial y el crecimiento económico.

El objetivo de la política era mantener un crecimiento sostenido de la productividad, mejorar el empleo remunerado y lograr una utilización óptima de los recursos humanos. Para lograr la competitividad internacional y transformar a la India en un actor importante en la arena mundial ".

Claramente el enfoque de la política era desatender la industria del control burocrático.

Entre las reformas importantes que se lograron con esta política se encuentran:

Abolición de la concesión de licencias industriales para la mayoría de las industrias salvo algunas que eran importantes debido a las preocupaciones estratégicas y de seguridad y las cuestiones ambientales sociales.

Papel importante asignado a la IED. 51% de IED permitida en industrias pesadas e industrias tecnológicamente importantes.

Aprobación automática de acuerdos tecnológicos para la promoción de la tecnología y la contratación de experiencia en tecnología extranjera.

Reestructuración de PSU's para incrementar la productividad, evitar la dotación de personal, aumentar la tecnología y aumentar la tasa de retorno.

Desinversión de las PSU para aumentar los recursos y aumentar la participación privada.

La política se dio cuenta de que la intervención gubernamental en la decisión de inversión de las grandes empresas a través de la ley MRTP ha demostrado ser disuasivo para el crecimiento industrial. Por lo tanto, la política se centraba más en el control de las prácticas comerciales desleales y restrictivas. Se sustituyeron las disposiciones que restringían las fusiones, fusiones y adquisiciones.

Desde entonces, las reformas del GLP iniciadas en 1991 se han ampliado considerablemente.

Algunas de las medidas se mencionan a continuación.

La Comisión de Competencia de la India se estableció en 2002 con el fin de evitar que las prácticas tengan efectos negativos sobre la competencia en los mercados.

En 1997 se introdujo una nueva política industrial en el Nordeste para mitigar los desequilibrios regionales debidos al crecimiento económico.

Se centró en la desinversión de las PSU pasó de la venta de participación minoritaria a apuestas estratégicas.

Centrarse en el PP con el gobierno desempeñando un papel facilitador en lugar de un papel regulador.

Los límites de IED aumentaron en casi todos los sectores, incluyendo la defensa y las telecomunicaciones.

Conclusión

Es evidente, a partir de la evolución de la política industrial, que el papel gubernamental en el desarrollo ha sido extenso. El camino a seguir hacia el desarrollo industrial ha evolucionado con el tiempo. En las etapas iniciales se esforzó por tener una base indígena para la actividad económica. Trató de salvar al sector doméstico de las fluctuaciones extranjeras. Todavía no estábamos equipados.

Evitó que las industrias nacionales se sometieran a una competencia rigurosa y, por lo tanto, resultó en una baja eficiencia y limitó su capacidad para ampliar las oportunidades de empleo. El énfasis en la autosuficiencia y la falta de inversión en I + D fue un obstáculo para el desarrollo tecnológico y, por lo tanto, condujo a la producción de bienes de calidad inferior. La creencia de que los bienes extranjeros son superiores a los bienes indios sigue siendo frecuente hoy en día.

Dicho esto, debe tenerse en cuenta la condición del país después de dos siglos de explotación y una separación traumática antes de evaluar el progreso y el enfoque de la política industrial sucesiva.

La falta de habilidades empresariales, bajos niveles de alfabetización, mano de obra no calificada, ausencia de tecnología, etc. eran características importantes de la economía india antes de la independencia.

A la luz de esto, los planes y políticas desempeñaron un papel importante al consolidar una base sólida para las actuales políticas industriales.

Como dice el Dr. Manmohan Singh: "En una visión a largo plazo del desarrollo económico de la India durante las últimas cuatro décadas, estaba lejos de ser desastroso. Hemos logrado mucho en los primeros 40 años, que es una escala de tiempo muy corta, con una carga tan grande de población analfabeta y no calificada. La mediocridad del resultado se debió principalmente a los extraordinarios choques económicos de largo alcance sostenidos por la economía durante la década de 1965-1975 (Tres guerras).

T. N. Ninan, editor del Economic Times, un influyente diario, dijo: "Esta es la crisis económica más grave que hemos enfrentado. Nunca hemos tenido este tipo de problema de la deuda. La posición fiscal del gobierno nunca ha sido tan mala como lo es hoy. Habrá algo de demurring de críticos sobre un préstamo. Habrá alguna oposición. La izquierda se opondrá a este arreglo. Pero la mayoría de nosotros sabemos que la alternativa será mucho peor que aceptar un I. M.F. Préstamo. & Quot; Esto resume lo que India estaba pasando en ese momento. La economía estaba en un embrollo debido a los rápidos cambios en el gobierno, pasamos por gobiernos como bebidas frías en un caluroso día de verano. Cuatro gobiernos en dos años lograron crear una atmósfera frenética en los círculos financieros del país. El mismo artículo continúa mencionando cómo la India compró barriles de petróleo a un ritmo más alto debido a la guerra del Golfo Pérsico.

Ahora, en ese punto del tiempo, la valoración de la rupia india, la tasa a la que se negociaba con otras monedas fue a través de algo llamado como tipo de cambio vinculado en contraposición a la tasa determinada por el mercado que estamos siguiendo ahora. (Para más detalles sobre estos lea este artículo en el sitio de RBI: Reserve Bank of India.)

Ahora, el uso de este tipo de cambio vinculado produjo una cuestión de balanza de pagos a finales de los ochenta. Para entender esto, debemos profundizar en cómo exactamente la rupia fue valorada.

Como dice el artículo en el sitio de RBI, 1975,

Para asegurar la estabilidad de la rupia, y evitar las debilidades asociadas con una moneda única paridad, la rupia estaba vinculada a una cesta de monedas. La selección de moneda y la asignación de peso se dejaron a la discreción del RBI y no se anunció públicamente. Antes de esto, la rupia había sido valorada contra el oro (1947-1971), y luego la libra esterlina (1971-1975).

Para decirlo muy sencillamente, (y salir en una extremidad y ponerlo), el costo de una rupia se determinó en cuanto a las reservas de la moneda / oro que teníamos en el país.

Volviendo a la cuestión de la balanza de pagos. La balanza de pagos significa en términos simples el monto total de las transacciones financieras que el país tiene con el mundo exterior. Ahora, la crisis surge cuando un país no puede pagar las deudas (pagar las deudas) que debe, y / o pagar por las importaciones esenciales que realiza.

La aparición de este escenario, que tuvo lugar en la India en 1991, desencadena una serie de incidentes que sólo agravan el problema. Los inversores se aplazan por el creciente nivel de las deudas, el Gobierno comienza a agotar sus reservas de divisas, las monedas vinculadas a fin de apoyar el valor de su moneda nacional y así sucesivamente.

Para citar el artículo de NYTimes otra vez,

La deuda externa de India ha subido a unos 72.000 millones de dólares, convirtiéndose en el tercer mayor deudor del mundo después de Brasil y México. En 1980, su deuda externa ascendía a 20.500 millones de dólares. En el momento (enero de 1991), funcionarios occidentales dicen, la India tiene sólo $ 1.1 mil millones en sus reservas de moneda fuerte, suficiente para dos semanas de importaciones. Las cosas eran bastante serias como se puede imaginar.

Así, para abordar esta emergencia, la India se acercó al FMI o al Fondo Monetario Internacional, que se estableció con el objetivo básico de gestionar las monedas mundiales mediante la estabilización de los tipos de cambio y también mantuvo un fondo en el que contribuyeron los países participantes; Los mismos fondos podrían utilizarse para contrarrestar los problemas de la balanza de pagos, no muy diferente de lo que la India estaba enfrentando.

India approached the IMF for approximately $2.2 billion worth of loans, and as with all loans, it came with a rider.

An interesting history tidbit, forty-seven tons of gold pledged for the loan was airlifted to the United Kingdom to pledge it with the Bank of England and 20 tons to the Union Bank of Switzerland to raise $ 600 million. The van that was transporting gold to the airport broke down on the way.

India was told to allow foreign companies to enter it's market, do something about the License Raj in place since Independence, and embrace globalization.

India did just that, and the duo of P. V. Narasimha Rao. who took over from the incumbent Prime Minster Chandar Sekhar in June 1991, whose government collapsed due to the outflow of India's gold, and his finance minister Manmohan Singh brought about neo-liberal policies in place. (A few of the policies that IMF wanted were not implemented though.)

This article, Welcome to India in Business provides a quite simple worded overview of the reforms that happened in the Indian Economy.

Soon, Indian economy geared up and peaked at a growth rate of 9% in 2007-2008 and the forex reserves peaked at $314.61 billion at the end of May 2008.

12.8k Views • Upvoted by Balaji Viswanathan. MBA from Babson

Mr. Balaji Viswanathan has summed it up pretty well.

Basically, we had only two weeks of foreign exchange left. we were screwed.

Call this because of Nehru's conservative socialistic policies . his belief of making India completely self-sufficient (hardly possible in a world which is so inter-related and where we have to depend on each other), or because of the badly drafted Foreign Exchange Regulation Act, we had no money to import essential items that we could not have survived without.

Consider also, that we had not progressed as much as we should have because of the socialist policy that had been imposed on us by Nehru in the 50s. Even after his death, his daughter Indira did no better in repairing our relations on the international scene. We had a closed economy, we were trying to severely control the currency leaving the country, and investment by foreign entities in India was practically banned. We were on our own, foolishly believing that we could build a country that is self-sufficient, without any support from foreign nations. Also, Indira's imposition of national emergency and all the led upto it caused complete neglect of our economy. Her son didn't do any better. and by now the stringent laws in India has ensured that corruption had infiltrated our political system to its very roots. License Raj was now common. the government officials did not perform their duties without bribes. Not to mention. because of Nehru's socialistic policies, all of the important sectors in India were government owned. Because of that there was no competition from private companies, no incentive for these government units to work - most of them were sick and going in losses. Imagine what a condition we were in!

So two weeks of foreign exchange, and we had no choice but to run to IMF.

Everyone knows who really controlled the IMF back then. USA saw this as a chance for their MNCs to enter Indian markets, The choice before India was, take the loan. and succumb to our demands - open up your economies. With two weeks of FOREX, we were in no position to negotiate. We accepted their offer.

Our economy was now supposed to be liberalized, privatized and globalized.

We now allow foreign investments, and FERA has been replaced by FEMA. The government started disinvesting in all of the government owned companies, allowing private companies to take over. which significantly improved the situation. Also, we have partially globalized, but only partially not completely. In hindsight this was a good decision because it protected us from the South-East Asian Currency Crisis (1997-98) and to a certain extent from the Recession that hit the global economy in 2008.

India not headed for 1991-like crisis: PM

Prime Minister Manmohan Singh on Friday said India is not heading back to 1991-like balance of payment crisis, when the country was forced to pledge its gold to pay its import bills.

"There is no reason to believe that we are going down the hill and that 1991 is on the horizon," the prime minister said in the Rajya Sabha, the upper house of Parliament.

Manmohan Singh pointed out that India has around $280 billion of foreign exchange reserve, which is sufficient to finance nearly 7 months of imports.

In 1991, India's foreign exchange reserves had fallen to $3 billion, not enough even to cover three weeks' of imports. The country was forced to pledge its gold to pay its bills.

"We are not at that level. We will not go to that level," the Prime Minister said.

Indian Financial crisis of 1991

INDIAN FINANCIAL CRISIS OF 1991

A look at Indian economy as it faced one of its worst financial crisis since independence.

Introducción

In India, 1991 is known as the watershed year. This is the year when major steps were taken to liberalise the Indian economy. Various policies were implemented, and many were discarded. This change came about due to the Balance of Payments crisis in 1991. Foreign exchange reserves were at their lowest, the Indian government was in debt, so much so that it had to trade up all of its gold reserves to the IMF to secure a loan of $2.2 billion. (Chandrasekhar, 2008)

Since India's independence in 1947, up to the financial crisis of 1991, Indian economy had mainly focused on becoming a self reliant sovereign with policies based on import substitution and development of heavy industries. The growth of expenditures by the government up until the crisis can be partially explained by the political instability of the late 1970's as well as the oil shock of 1979-80. This meant that while revenue was low, expenditure was still increasing at a rate greater than the revenue. This increase of expenditure more than revenues meant that there were fewer resources for investment.

This paper will try to look at the various economic reforms that took place due to the crisis and also the changes in development that occurred during the same period. According to Srinivasan (2004: p.8) development can be broadly defined as the “process of enhancing the capability and opportunity of individuals in the society so they can reach their full potential of growth and contributions”. For development to occur, it is important to have adequate level of income, education and health in a society.

Industrial Policy of India

The first Industrial Policy Resolution passed in 1948 was broad in its scope and direction but an important distinction had been made with regard to the industries which would be developed by the public sector and those which would be developed by the private sector. This resolution paved the way for the Industrial Policy Resolution of 1956 which was more comprehensive and focused. The Industrial Policy Resolution of 1956 laid emphasis on heavy industries and was shaped by the Mahalanobis Model of Growth. Due to the scarcity of resources and underdeveloped private sector this policy directed the public sector to undertake the development of the industries. All industries that were of basic and strategic importance along with those requiring huge investments came under the ambit of the public sector. Another objective of this policy was to remove the regional disparities by developing those regions which had a low industrial base. This policy was a landmark and formed the basis for subsequent policies. The objective of The Industrial Policy of 1991 was to unshackle the Indian industry from bureaucratic controls by removing many quantitative restrictions and reservations, improving productivity through automatic approval of technological agreements related to high priority industries, and promoting development of low industrialised regions by giving incentive to industries to locate in those areas. (Jadhav, 2005)

Trade Policy of India

Before liberalisation the trade policy in India was characterised by high tariffs, import restrictions, import licensing and quantitative restrictions. Import of manufactured consumer goods was completely banned. This period is also known as the “licensing raj” a term coined by Indian statesman Chakravarthi Rajagopalachari who opposed it. He believed that it would lead to corruption and economic stagnation. These practices not only sheltered the domestic producers from foreign competition but also led to wastefulness and low productivity.

After the crisis, the Indian government undertook many trade reforms. Import licensing was abolished completely by 1993. And, with a shift towards market determined flexible exchange rate system import licensing too was removed. The government argued that any impact on the balance of payments account due to removal of the import licensing could now be dealt with a change in the exchange rate. Removal of quantitative restrictions on capital and intermediate goods was welcomed by the Indian industry, as not only was the number of domestic producers small but also this would increase competition and hence, productivity. However, quantitative restrictions on final consumer goods were harder to remove due to the large number of domestic producers who would be affected. All quantitative restrictions were finally removed in 2001 due to a ruling by the World Trade Organisation dispute panel on a complaint filed by the United States.(Ahluwalia, 2002)

Legislative Changes

During the period leading up to the crisis many new acts were enforced one of them being the Monopolies and Restrictive Trade Practices Act (MRTP) one of the most controversial acts. This act was brought into effect in 1969, to prevent the concentration of economic power which may prove detrimental to society. It regulated the mergers, acquisitions, amalgamations, and appointment of directors of dominant undertakings. This act was made redundant in July 1991 and was replaced by the Competition act in 2002. Unlike the MRTP Act the Competition Act aimed to promote competition and thereby lead to a higher level of efficiency. It also did not frown upon dominance per se, but only took action if that dominance was abused. It was also clearer on the actions that would be taken against offenders.(Legislative Dept. Government of India)

Another act which was of prominence during the period is the Foreign Exchange Regulation Act (FERA), which came into effect in 1973. This act came into being due to the shortage of foreign exchange in India. This act aimed to conserve and properly utilise India's foreign exchange resources. However, it made any offence committed under it a criminal offence. This act was repealed in 1999, as it had become incompatible as liberalisation took place. The Foreign Exchange Management Act (FEMA) was passed in 1999, replacing FERA. This Act was more pro-liberalisation and any offences under it were civil offences.(Legislative Dept. Government of India)

Exchange Rate Regime

The Indian Exchange rate system followed up until the time of the crisis was a managed float exchange regime, with the Rupees real effective exchange rate (REER) placed on a controlled, floating basis and linked to a “basket of currencies” of India's major trading partners. This regime meant that the Rupee was highly overvalued. During the crisis, it was found that if India was to get out of the crisis it would need to devalue the Rupee substantially, and the adjustment took place in two stages on 1st July and 3rd July, 1991. After this adjustment India started to follow the Liberalised Exchange Rate Management System (LERMS) which placed an implicit tax on exports. Hence, this too was discarded in 1993 by the Reserve Bank of India (RBI) in favour of the Unified exchange rate system. (Sultan, n. d.)

TABLA 1

The above graph shows the changes in the exchange rate between the Rupee (INR) and the Dollar starting from the year 1985 to 1995. Keeping the Dollar fixed at $1, the INR went from Rs.12.36 to a dollar in 1985 to Rs.22.74 in 1991 and depreciated to Rs.32.42 to a dollar in 1995.

Capital Flows

Before India's liberalisation which began in 1991, Capital flows to India were restricted to aid flows, NRI deposits and commercial borrowings. There was very little Foreign Direct Investment, and close to nil Foreign Portfolio Investment up until the reforms of 1991. Table 2 illustrates the above composition of Capital flows to India starting from year 1986 up to 2001. Since the reforms however, capital flows to India saw a significant increase, a trend that breaks away from that of the previous two decades. Table 3 below shows the increase in the net capital inflows from $7.1 billion in 1990-91 to $45.8 billion in 1996-97 and reaching $108 billion in 2007-08. (Mohan, 2009)

TABLA 2

Source :Kohli: Capital Flows and their Macroeconomic Effects in India, IMF Working paper, 2001

TABLA 3

Source: RBI Annual Report on Composition of Capital (Net), 2009

Fiscal Discipline, Savings and Investment

During the crisis of 1991, India's financial stability had come under the scanner. Statistics have shown that the crisis was largely due to the growing government expenditure of the 1980's. An increase in government expenditure meant that it was borrowing more and more from the Reserve Bank of India (RBI). This led to an expansionary effect on the money supply.

Hence an increase in money supply meant that price levels too would have to increase leading to inflation. The fiscal deficits of the government rose from 9% of GDP in 1980-81 to 12.7% of GDP in 1990-91. This deficit had to be financed through borrowings and this meant that government debts too rose rapidly, along with an increase in the percentage of interest payments to GDP. (Ghosh, 2006)

The immediate step after the onset of the crisis was to reduce the fiscal deficit. The combined fiscal deficit of the central and state governments was reduced from 9.4% of GDP in 1990-91 to 7% of GDP in 1992-93. The Balance of Payments crisis was over by 1993. After the crisis public savings deteriorated from +1.7% of GDP in 1996-97 to -1.7% of GDP in 2000-01. This was reflected in the fiscal deficit too reaching 9.6% of GDP in 2000-01, which was the highest in the developing countries. It was also of significance because the public debt to GDP ratio too was at 80%. Also this debt was not used to finance any public investments which had remained constant. (Ahluwalia, 2002)

Agricultural Reforms

At the time of the reforms almost 60% of the Indian population depended on agriculture for their livelihood. Hence, a common critique of the reforms followed by India has been that it focused largely on the Industrial and Trade policy while neglecting the Agricultural sector. Critics point out the deceleration of growth in the second half of the 1990's from 4.3% of GDP from 1992-97 to 2.3% between 1997-02 is proof of this neglect. However, this criticism doesn't hold under scrutiny, as in the same period agricultural exports increased from Rs.60 billion in 1990-91 to Rs.398 billion in 2005-06 (Ministry of Commerce, Government of India, 2008). This can be owed to the depreciation of the Rupee, and the reduced protection of the industry.

Although agriculture benefited from the reforms, it suffered in other ways. There was a decline in public investment in irrigation, water management, soil conservation, and rural infrastructure which are essential for agriculture. The low investment in agriculture has led to stagnation and hence, the demand for unskilled labour too has not increased much, leading to a slower decline in poverty. The reason for the stagnation is partially due to the deterioration in the fiscal position of state governments combined with politically motivated subsidies like fertilizer subsidy and under pricing of power and water. This benefits the rich farmers while negatively affecting the environment and the poorer farmer's incomes. A reduction in subsidy would not only increase revenues but these revenues could be used to finance rural development projects. However, reduction in subsidy is something that no person irrespective of party affiliations will ever want to discuss as these are politically sensitive issues. ( Jha, 2007)

Impact of Economic Reforms on HDI

The Human Development Index (HDI) has its origins in the Human Development Reports (HDR) of the United Nations Development Programme (UNDP). This index was developed in 1990 by Pakistani economist Mahbub ul Haq, and Indian economist Amartya Sen. The HDI unlike other indices, has its focus on three major aspects of development. Firstly, it measures life expectancy at birth. Secondly, it takes into account adult literacy combined with the gross enrolment ratio, i. e. the number of students enrolled in primary, secondary and tertiary levels of education, regardless of age. Thirdly, it considers the GDP per capita in purchasing power parity (PPP), which is a reflection of the standard of living of the population being studied. The three aspects all have equal weightage and combined together give an idea about the development of a country. The three aspects combined together are measured between a range of 0 to1, with 0 being the lowest and 1 being the highest Human Development Index. (UNDP Human development Report)

TABLA 4

Source: UNDP Human Development Report

The table above shows the movements in the HDI of India starting in 1990 up to the year 2000. As is graphed, the changes in HDI have not been very significant over the decade, although the corresponding changes in GDP have been significant. Below are some reasons for this low rate of increase in the HDI.

The population boom

India's population crossed the one billion mark by 2000, and the 2001 census put India's population at 1,026.44 million. India's population between 1901 and 2001 has seen an increase of almost 789 million. Also, out of this increase 85% of it occurred during the second half of the century, from 1951 to 2001, and only 15% was added during the first half, i. e. 1901 to 1950. This disproportionate growth in population can be attributed to the rapid fall in death rate as medical advancements were made to control communicable disease like malaria, cholera, small pox etc. The rate of increase of population could have been higher, had it not been for the decline in birth rate which had been stagnant almost until the late seventies. Since the seventies the birth rate has been declining, however it has been disproportionate within India. Few states like Tamil Nadu, Goa, Kerala, Andhra Pradesh, Karnataka, West Bengal, Maharashtra, Gujarat and Punjab have seen a rapid fall in the birth rate. While states like Bihar, Haryana, Rajasthan, Uttar Pradesh and Madhya Pradesh have had a much slower pace of decline in the birth rate. (Srinivasan, 2004)

Despite the fall in death rate, followed by a slower but nonetheless decline in birth rates across India. The growth rate went to a high of almost 2.2% in the late seventies and early eighties before declining in the following decade. This process is also known as the Demographic Transition, which occurs in all populations.

Employment Generation & Poverty Reduction

With a decline in the rate of increase in population, there has also been a subsequent decline in the percentage of population under the poverty line. In India the poverty line is estimated on the basis of Head Count Ratio, i. e. on the basis of the cost of food items required to meet the minimum calorie needs of a family. The Planning Commission of India estimated that the percentage of people below the poverty line in 1977-78 was almost 48% which decline thereafter to 26.1% in 1997-98. Starting in 1980's the Government of India has emphasised on programmes to alleviate poverty and provide basic needs at stable and low prices, provide incentive to industries to locate in backward areas, and hence give a boost to the local infrastructure and provide employment opportunities. The total money spent on such programmes is estimated to have been over 10% of the planned budget expenditure over 1980 and 1990. The government started antipoverty programmes like the National Rural Employment Programme which was initiated in the 1980, and the Rural Landless Employment Guarantee Programme, first formulated in 1983 to address the plight of the rural poor by expanding their employment opportunities. The Central Government also delegated the work of implementation of the various antipoverty programmes, land taxation, reform, and ownership policies to the State government. And although the Central government exerts political and financial pressure on the State government to effectively implement the policies, there remain many bureaucratic hurdles and corruption which sometimes retards or slows down the impact of the policies. (Library of Congress, 1995)

As per The Government of India, poverty line for the urban areas is currently at Rs.296 per month and in the rural areas its Rs.276 per month. This is the minimum wage a person would need to earn in a month to consume 2200 calories in India. Although poverty has been on the decline in India, again this decline has not been equal across the states, with many of the northern states, like Bihar, Uttar Pradesh, Rajasthan, Haryana, lagging behind and states like Kerala, Goa, Tamil Nadu, Maharashtra, Karnataka, West Bengal, Gujarat faring much better than the national average.

Salud & amp; Life Expectancy

The Public expenditure on health in India is dismally small, and the reforms have had little to no impact in improving this situation. Even in 2001 public expenditure in health was at a mere 0.9% of GDP while private expenditure on health was 4.2% of GDP. Despite the known merits of having a high public expenditure in health, the government has taken few steps to ensure better health services, facilities and infrastructure. Hence, there has been greater reliance on the private sector to provide these facilities which denies easy access to the poor. The presence of externalities as well as information asymmetry is reason enough for the state to intervene and correct this market failure, on the grounds of both equity and efficiency.(Chandrasekhar and Ghosh, 2006) Table 5 shows the health expenditure by the Central and State government as a percentage of GDP.

TABLA 5

Source: Chandrasekhar and Ghosh; Health Expenditure in India, The Hindu Business Line, 2006

As is clear from this table, the combined expenditure by the Central and State governments even in the mid-1980's was more than 1% of GDP, as compared too 0.9% in 2001-02. Although we do see an increase in 2003-04 the expenditure as a part of GDP has not changed much.

Also what is of concern is that a lot of the expenditure incurred has been towards the revenue expenditure, i. e. like payments of salaries etc rather than towards building better infrastructure and facilities, i. e. capital expenditure.(Chandrasekhar and Ghosh, 2006)

Health facilities and infrastructure have a direct relation to the life expectancy, if more of the population has access to good and cheap health care facilities then the citizen of that country are more likely to have a higher life expectancy. However, looking at the UNDP reports, India in comparison to other countries has not seen a significant change in the life expectancy at birth in the decade since the reforms started. In 1990, according to the UNDP report, the life expectancy in India was 59 years, which has only reached 62.9 years by 2000. This clearly reflects the negligence of the Indian government to address the issue of low public expenditure on health, especially as the poorer sections of the society have little access to private health care facilities.

TABLE 6

Source: UNDP Human Development Report

Adult Literacy

As stated by Rawat and Chauhan (2007) education is an engine of economic growth and social change. It helps in the progress of a country by bringing to the front revolutionary ideas and changes. Education significantly affects poverty, income distribution, health, fertility, mortality, and the overall quality of life. It is also one of the human rights set out in the U. N. Charter.

India realised the importance of education and set up the National Policy on Education (NPE) in 1986 to help eradicate illiteracy. The target was to provide elementary education to every citizen. This is being done through programmes like the Sarva Shiksha Abhiyan (SSA), Mid Day Meal where all primary students are provided with food for free, and the District Primary Education Programme (DPEP). In 1951 India's literacy rate was 18.3% which has grown to 55.7% in 2000. However, similar to the health sector, education too has seen a decline in public spending, with a consequent rapid privatisation of education. This has not only meant a decline in the quality of education but has also made education less accessible to the poor. This has come due to inadequate state expenditure followed by downgrading of many government institutes and their services, and the profitability of private spending on education. The combined expenditure by the central and state governments on education was only 3.7% of GDP in 2003-04 as against the target expenditure of 6% for the period.(Rawat & Chauhan, 2007)

TABLE 7

Source: UNDP Human Development Report

In the National Family Health Survey (NFHS) conducted by the International Institute of Population Sciences (IIPS), Mumbai designated by the Ministry of Health and Family Welfare (MOHFW) to conduct the survey. It has been found that the states that fared worst in the literacy were also the same that did badly in other areas, like life expectancy and were also the poorer states of India. The national average of literacy rate in India was at 67.6% while states like Bihar, Uttar Pradesh, Rajasthan and Madhya Pradesh had literacy rates below the national average. And the states like Goa, Kerala, Karnataka, Maharshtra, Tamil Nadu, Himachal Pradesh and West Bengal had literacy rates above the national average. This in itself reflects the effect that a high level of literacy has on income distribution, health, life expectancy and the overall quality of life. (NFHS, 2007)

Resumen

After looking at the above it can be concluded that although India has witnessed many economic reforms and removal of controls after the initial crisis in 1991, especially those relating to Industrial and Trade sectors. These reforms have not been implemented fully and hence, have not realised their full potential. India is an agrarian society with almost 60% of the workforce engaged in agricultural activities. This should be reason enough to increase public expenditure in agriculture and make it more efficient, and increase the rate of employment to help alleviate poverty. Similarly, public expenditure in Health and Education too needs to increase for India to see a higher level of human development. As has been discussed above Education and Health directly affect the income distribution, life expectancy and overall quality of life. The low levels of public spending in these areas, along with higher private expenditure has meant that the poor of the country are deprived of a good quality of health and education due to their high cost. India still has a long way to go to ensure equality in opportunity and quality of life to its citizen.

Bibliografía

1. Ahluwalia, Montek S. (2002) ; Economic reforms in India since 1991: Has Gradualism worked. Journal of Economic Perspectives

2. Chandrasekhar, C. P. (2008) ; Financial Liberalisation and the New Dynamics of Growth in India, Third World Network

3. Chandrasekhar, C. P. &erio; Ghosh, Jayati (2006) ; India's potential demographic dividend, The Hindu Business Line

4. Ghosh, Arunabha (2006) ; Pathways through financial crisis: India, Global Economic Governance

5. International Institute of Population Sciences, NFHS (2007)

6. Jadhav, Narendra (2005) ; Indian Industrial Policy since 1956

7. Jha, Raghbendra (2007) ; Investment & Subsidies in Indian Agriculture, ASARC Working Paper

8. Library of Congress (2005) ; Antipoverty programs by Indian government

9. Mohan, Rakesh (2009) ; Capital flows to India, BIS Papers No. 44

10. Rawat, Deepa & Chauhan, S. S.S. (2007) ; The Relationship between public expenditure and status of education in India: An input-output approach

11. Srinivasan, K. (2004) ; Population and Development in India since Independence:An overview, Journal of Family Welfare Vol.50

12. Sultan, Khwaja M. (n. d.) ; Workshop on Macroeconomic Aspects, USAID/India

13. United Nations Development Programme, Human Development Reports

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The Invasion of Kuwait . also known as the Iraq–Kuwait War . was a major conflict between Ba'athist Iraq and the Emirate of Kuwait, which resulted in the seven-month-long Iraqi occupation of Kuwait, and subsequently led to direct military intervention by US-led forces in the Gulf War and the setting alight by Iraq of 600 Kuwaiti oil wells. In 1990 Iraq accused Kuwait of stealing Iraqi petroleum through slant drilling, although some Iraqi sources indicated Saddam Hussein's decision to attack Kuwait was made a few months before the actual invasion. Some feel there were several reasons for the Iraqi move, including Iraq's inability to pay more than US$80 billion that had been borrowed to finance the Iran–Iraq war, and Kuwaiti overproduction of petroleum which kept revenues down for Iraq. The invasion started on 2 August 1990, and within two days of intense combat, most of the Kuwaiti Armed Forces were either overrun by the Iraqi Republican Guard or fell back to neighboring Saudi Arabia and Bahrain. The Emirate of Kuwait was annexed, and Saddam Hussein announced a few days later that it was the 19th province of Iraq. (Source: Invasion of Kuwait ).

The 1990 oil price spike occurred in response to the Iraqi invasion of Kuwait on August 2, 1990. [1] Lasting only 9 months, the price shock was less extreme and of shorter duration than the previous oil crises of 1973 and 1979-1980. yet the rise in prices is widely believed to have been a significant factor in the recession of the early 1990s. [2] Average monthly prices of oil rose from $17 per barrel in July to $36 per barrel in October.

First and foremost, it raised the price of oil and fed an inflationary spiral in India as in the rest of the world. Fears of instability arising from the Gulf crisis also led to volatility of forex flows. NRI deposits, which had then been the mainstay of India's balance of payments, started flowing out. The remittances from Indians employed overseas also declined, consequent on the war-like situation. Particularly, it impacted economies of remittance-dependent States and regions such as Kerala. The forex reserves started getting depleted. India had to go to the IMF, besides pledging gold to foreign central banks, and initiate a traumatic onrush into economic reforms — essential, but speeded by the crisis. The crisis of 1990-91 was unprecedented both in terms of its intensity and duration. The level of foreign currency assets came down to $1.2 billion at the end of April 1991. India had to experience a further threat of decline in reserves because the low level of reserves was itself both the cause and effect of a reduced inflow of FCNR deposits. There was also unwillingness on the part of international financial channels to renew short-term credit to Indian entities. Forex vulnerability feeds on itself. SBI — and, therefore, India — had to depend on overnight advances in New York, London and Tokyo markets to keep itself afloat. India was teetering at the edge of a default, primarily in the form of SBI's possible failure to meet its obligations. In 1991, India still had a fixed exchange rate system, where the rupee was pegged to the value of a basket of currencies of major trading partners. At the end of 1990, the Government of India found itself in serious economic trouble. The government was close to default and its foreign exchange reserves had dried up to the point that India could barely finance three weeks’ worth of imports. As in 1966, India faced high inflation, large government budget deficits, and a poor balance of payments position.

Hence, devaluation of 1991 was economically necessary to avert a financial crisis.

A lot of things actually.

The Nehruvian Socialism that India had been practicing since 47 was designed for a purpose, to push for an overall growth of the Indian economy, ensuring the that the various strata of the society could enjoy equal opportunities at upliftment. That's the way it was supposed to be theoretically. It was also aimed at ensuring an economic growth without too much of dependence on any of the power blocs which could have seriously put a dent in our ambitions of sovereignty. Moreorless it seemed to work out with India avoiding any major dependency on any of the superpowers and having learnt a lesson from the US over its reluctance to help fight the food crisis, it played a major role in making us self sufficient over time. However the problem with this approach was it made us lazy as there was no incentive to work efficiently and ensure quality and it became necessary to allow the private players to bring up the game. However before this happened India was ridden with a set of problems that pushed it to the 91 crisis.

1. Over the years the various governments played to the tunes of opportunistic politics. they constantly caved into populist measures thereby increasing the spending to a much larger level than what the government earned. 2.The government also had no control over unions and had to undertake the tasks of acquiring a loss making enterprise in order to ensure jobs to people. this was akin to economic suicide. 3.Over the years the strict measures taken to protect local producers had made them inefficient and the bureaucracy actually promoted inefficiency wherein if you as a producer were too efficient with your work you were supposed to be fined for it.

Nehru had actually started with an idea of pushing economic reforms with the knowledge that it was only wealth which could be redistributed among masses and not poverty. however half a century those same policies falling prey to bureaucrats and populism seeking politicians, were doing the exact opposite thing.

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forex crisis killer

Agencies estimate that the total loss to the exchequer in terms of duty drawback falsely claimed by the accused is to the tune of Rs 250-300 crore. However, the foreign exchange violations as of now are being calculated at over Rs 6,000 crore.

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This report tries to document the impact of climate change on human life globally. Science is only beginning to address the human impact of climatechange. However, dozens of research organizations and experts contributing to this report can agree on the widespread damage it causes. We feel itis the most plausible account of the current impact of climate change today. Forex crisis killer.

What has complicated matters further is the revelation that while remittances were sent to Hong Kong and Dubai via banks, actual exports were sent toAfghanistan. “The records show that the alleged exports were sent to Afghanistan but invoices were generated by Hong Kong importers. It is now amatter investigation as to who received them in Afghanistan and what the exports were linked to,” said an ED officer.

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Elaborating on the suspected role of other banks, an ED officer said, “We have as yet scrutinised only 28 accounts. As investigations progress, moreaccounts may be found and more banks may come under the scanner. We already have a complaint about a bank where such transactions can be traced backto a decade ago.”

Mobile-friendly · 15-10-2015 · Rs 6,000-cr forex ‘scam’: More banks may be involved; exports went to Afghanistan One …

Sources in the agency said in the past 10 years some banks have taken over the role of hawala operators. This suits both the bank and the exporters. The bank generates business and the exporter saves money as hawala transactions cost Rs 1.60 per dollar sent abroad while the same transaction througha bank costs Rs 1.20. The agency is also preparing to attach properties of the arrested accused and has already identified some that were bought withthe proceeds of the crime. Sources said in the six months following the opening of suspect accounts in HDFC Bank, Kalra made over Rs 1.5 crore viacommissions of 30-50 paise he earned as commission per dollar sent abroad. Dhawan, too, made close to Rs 16 crore from the suspected accounts.

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forex crisis killer. Much before 59 accounts, which are under the scanner of the ED and the CBI, were opened in BoB, 13 accounts were opened in HDFC Bank duringFebruary-March 2015 to send money abroad. It was HDFC Bank forex officer, Kamal Kalra — under ED custody — who allegedly introduced the unscrupulousexporters arrested in the case to BoB.

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According to the ED, the accused floated shell companies in India and Hong Kong. The Indian companies exported overvalued products by generating fakebills and the Hong Kong companies submitted fake import bills to claim duty drawback. The difference in the bills and actual value was moved throughbanking channels just as it happens through hawala networks. forex crisis killer.

Why Trading Forex is So Difficult - Long Term vs. Short Term 84 replies

The alleged over Rs 6,000-crore Bank of Baroda (BoB) forex scam is threatening to open a Pandora’s box in the banking sector. While BoB and HDFC Bankemployees have already been arrested by the Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED), investigations have found thatmore banks could be involved.

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One complaint in this regard, involving a bank other than BoB and HDFC Bank, has already reached ED headquarters and a case may be registered afterthe probe.

Macromanagement and Business Environment: Analysis of the 1991 Indian Economic Crisis

Acharya, Shankar (2002): ‘Macroeconomic Management in the Nineties’, Economic and Political Weekly, April 20

Acharya, Shankar (2003): ‘India’s Economy: Some Issues and Answers’, Academic Foundation, New Delhi

Ahluwalia, S Montek (1999): ‘India’s Economic Reforms - An Appraisal’, The Planning Commission, Articles, Aug 26

Bery Suman, Bosworth Bany, Panagariya Arvind (2005): ‘India Policy Forum, 2005–06’, Brookings Institution (Washington D. C.) and the National Council of Applied Economic Research (New Delhi), Sage Publications

Cerra Valerie and Saxena Sweta Chaman (2002): ‘IMF Staff papers: What caused the 1991 Currency Crisis in India?’ IMF

Donde, K and Saggar, M (1999): ‘Potential Output and Output Gap: A Review’, Reserve Bank of India Occasional Papers

Dornbusch Rudiger, Fischer Stanley, Startz Richard(2004): ‘Macroeconomics’, (9th Edition), McGraw-Hill / Irwin

Ghosh, Kanti Soumya and Bagchi, Soumen (2002): ‘Capital Account Liberalisation in India – Implications for Infrastructure Financing and Economic Growth’, Economic and Political Weekly, Dec 7

Goyal, Rajan (2004): ‘Does Higher Fiscal Deficit Lead to Rise in Interest Rates’, Economic and Political Weekly, May 22

International Finance Corporation (2004): ‘India – Business Environment, Opportunities and IFC Role 2004’, IFC

Jalan, Bimal (2004): ‘Balance of Payments-1956 to 1991’, The Indian Economy - Problems and Prospects-Edited by Bimal Jalan, Penguin

Kapila, Uma (2006): ‘Indian Economy Since Independence’, (18th Edition), Academic Foundation, New Delhi, p.988

Karnik, Ajit (2002): ‘Fiscal Responsibility and Budget Management Bill - Offering Credible Commitments’, Economic and Political Weekly, Jan 19

Kohli, Renu (2001): ‘Capital Account Liberalisation: Empirical Evidence and Policy Issues – I’, Economic and Political Weekly, April 14

Mundle, Sudipto and Rao, M. Govinda (2004): ‘Issues in Fiscal policy’, The Indian Economy - Problems and Prospects: Edited by Bimal Jalan, Penguin

Narasimhan, C. R.L. (2005): ‘RBI Report Reiterates Strong Growth Prospects’, Hindu Business Line, Sep 5

Organisation For Economic Co-Operation And Development (2002): ‘Foreign Direct Investment for Development: Maximising Benefits, Minimising Costs - Overview’, OECD Publication Service

Planning Commission: ‘Annual Report 1996-97 Economy and the Plan: An Overview’, The Planning Commission, Reports

Planning Commission: ‘Annual Report 1990-91: An Overview’, The Planning Commission, Reports

Planning Commission: ‘Annual Report 1991-92: An Overview’, The Planning Commission, Reports

Planning Commission: ‘Seventh Five Year Plan 1985-90’, The Planning Commission, Publications

Planning Commission: ‘Eighth Five Year Plan 1992-97’, The Planning Commission, Publications

Reddy, Y Venugopal (2006): ‘Foreign Exchange Reserves: New Realities and Options’, (Address by Dr. Y. V. Reddy, Governor, Reserve Bank of India at the 2006 Program of Seminars in Singapore during September 16 to 18, 2006 on the Theme "The World in Asia, Asia in the World")

Reddy, Y Venugopal (2006):‘Asian Perspective on Growth: Outlook for India’, (Address by Dr. Y. V Reddy, Governor, Reserve Bank of India at the G30's International Banking Seminar on September 18, 2006 hosted by the Monetary Authority of Singapore in Singapore)

Tribune News Service (2005): ‘High fiscal deficit dangerous: IMF’, The Tribune, Nov 25

Union Budget and Economic Survey (1992): ‘Economic Survey 1991-92A & 1991-92B’, Ministry of Finance, The Government of India, Publications

Virmani, Arvind (2002): ‘Challenges and Policy Response-Macro Policy Framework for Development’, The Planning Commission, Articles, April

Virmani, Arvind (2002): ‘Fiscal Deficit and Quality of Government Expenditure’, The Planning Commission, Articles, February

World Bank (2006): ‘World Bank Report – Business Ease 2006’, The World Bank

Indian Currency Futures And The Forex Market Finance Essay

Published: 23, March 2015

The foreign exchange (currency or Forex or FX) market exists wherever one currency is traded for another. It is the largest and most liquid financial market in the world. Exchanging currencies can take two basic forms: an outright or a swap. When two parties exchange one currency for another the transaction is called an outright. When two parties agree to exchange and re-exchange (in future) one currency for another, it is called a swap.

Indian Currency Futures:

A futures contract is a standardized contract, traded on an exchange, to buy or sell a certain underlying asset or an instrument at a certain date in the future, at a specified price. When the underlying is an exchange rate, the contract is termed as "currency futures contract". In other words, it is a contract to exchange one currency for another currency at a specified date and a specified rate in the future. Therefore, the buyer and the seller lock themselves into an exchange rate for a specific value or delivery date. Both parties of the futures contract must fulfill their obligations on the settlement date. Currency futures can be cash settled or settled by delivering the respective obligation of the seller and buyer.

Ejemplo:

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Let us presume that the Indian importer with a 1 million USD exposure chose to protect itself by buying futures. The company needed to buy 1000 contracts as one contract is of USD 1000 which is the same as the payment needed to be made by the importing company and therefore would totally offset the currency risk associated with the deal. For this purpose, only a very small portion of the total value needs to be put up as margin by the importing company. Typically it may be around 4%. Because of the increase in the cost of USD against INR during this period, for the payment on USD 1 million, the company had to pay Rs.4.594 crores as against Rs.4.412 crores. However this increase in cost was offset by the profit realized by being long in the futures contract. By hedging with the futures contracts the company hedged its exposures using currency futures.

The specifications for the contract are given on page no. 18.

Who can participate in Currency Futures?

Currency futures, like any other derivative market has three main participants.

Hedgers

Hedging is an excellent tool to offset the risks associated with fluctuations in the price of the currency in foreign exchange markets.

Hedgers take position in currency futures market only for protecting the position in cash market.

Speculators

Speculators are those participants who trade in the markets essentially for making profit from the anticipated up/down movement in the price.

Speculators provide the necessary liquidity to the markets by offering ample demand and supply.

Arbitragers

Arbitrage is the process of simultaneous buying and selling of same financial instrument in same or different markets in order to make immediate profits without any risk.

Arbitragers make profit by spotting price discrepancy between the rates of same financial asset in different markets.

Besides providing liquidity to the markets, arbitragers put a pressure on the market prices to move to rational or normal levels.

Who are benefited in Currency Futures?

Industries where payments are denominated in Foreign Exchange

Professionals receiving remuneration & stock options in foreign currency

As of now, the regulation does not allow Foreign Institutional Investors (FII) and Non-Resident Indian (NRI) to participate in this market.

How to Start?

Currency futures can be bought or sold through the trading members of National stock Exchange (NSE) to open the account with the NSE trading member one has to complete the formalities by signing the member constituent agreement, constituent registration form & a risk disclosure agreement after which a unique identification number is allocated.

An individual can enter the contract through the study of following:

Broker: It can be argued that since the success of the futures market also crucially hinges on bringing in newer sets of participants, the role played by other intermediaries (including brokers) would also be crucial. As brokers facilitate depth and liquidity required in these markets, it was felt that brokers could be permitted in the currency futures market, provided they meet "fit and proper" criteria as well as other eligibility norms, though their regulation and accreditation may be issues.

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KYC: If an individual or an entity wants to trade in currency futures as a retail investor, then it needs to get registered with a trading member of the exchange after entering into agreement and KYC (know your customer) details.

Currency futures trading being similar in form and structure to equity and commodity futures trading helps the trader to make a seamless transition.

With regard to the costs, there are two primary costs involved in trading on currency futures:

The brokerage structure varies with the volume and frequency of transactions. The transaction cost involves service tax, stamp duty and SEBI turnover fees.

MTM (Mark to Market): Like stock and commodity futures, currency futures would involve daily MTM (mark to market) margins. MTM would be worked out on the basis of daily closing prices of currency futures as declared by NSE. Settlement of MTM would take place on T +1 basis as is presently done in equity derivatives segment. NSE has laid out suitable mechanisms to pay in/pay out daily MTM margins from the brokers. NSCCL (National Securities Clearing Corporation Limited) would be responsible for the entire clearing, settlement and risk management functions.

How to hedge?

Payoff for buyer of futures: Long futures:

The payoff for a person who buys a futures contract is similar to the payoff for a person who holds an asset. He has a potentially unlimited upside as well as a potentially unlimited downside. Take the case of a speculator who buys a two-month currency futures contract when the USD stands at say Rs.43.19. The underlying asset in this case is the currency, USD. When the value of dollar moves up, i. e. when Rupee depreciates, the long futures position starts making profits, and when the dollar depreciates, i. e. when rupee appreciates, it starts making losses.

Payoff for seller of futures: Short futures:

The payoff for a person who sells a futures contract is similar to the payoff for a person who shorts an asset. He has a potentially unlimited upside as well as a potentially unlimited downside. Take the case of a speculator who sells a two month currency futures contract when the USD stands at say Rs.43.19. The underlying asset in this case is the currency, USD. When the value of dollar moves down, i. e. when rupee appreciates, the short futures position starts making profits, and when the dollar appreciates, i. e. when rupee depreciates, it starts making losses.

PARTICULARS

AMOUNT (Rs.)

CALCULATIONS

RESULT

Created on Thursday, 12 September 2013 09:47

Is India on the verge of a 1991- style crisis?

Some commentators have raised the prospect of India facing a repeat of the balance of payments crisis that shook the country in 1991. Fears have been expressed that after years of 8% - 9% expansion, growth could fall to as low as 3% - it was 4.4% in 2Q 2013.

The Indian Rupee depreciated about 18% and there has been an outflow of portfolio capital from stock markets. However, Prime Minister Manmohan Singh, who piloted the reforms of 1991 that placed the economy on a higher growth trajectory, has dismissed fears of a balance of payments crisis.

The budget deficit has risen to 5% of GDP last year (China and Brazil had deficits below 2% of GDP). The current account deficit of the balance of payments has increased to 4.8% of GDP. Despite this, it is very unlikely that India will face a balance of payments crisis similar to that in 1991. India’s external debt is only 28% of GDP and external reserves amount to about $275 billion. The downside risks are associated with the possible impact of the US Federal Reserve’s tapering policy on global financial markets. The mere talk of a possible reduction of the Fed’s QE3 program (liquidity infusion of USD 85 billion per month) has resulted in a market over-reaction which has led to a reversal of capital flows away from emerging markets. Countries with weak macroeconomic fundamentals, including India, have been particularly vulnerable. However, in recent days there has been some correction of the overshooting of the currency depreciation and share market declines, with both the Indian Rupee and the share indices firming up. There is a risk of further disruption when the Fed actually commences its tapering program – some commentators believe it could be as early as this month. The speed with which the Fed undertakes the tapering and the extent of the decline in bond yield differentials will be major determinants of the size of this risk.

Given India’s dependence on oil imports from the Middle East, the current uncertainties in that region also pose a downside risk. Despite this, the balance of probability is that India will avoid a crisis. In this short run, its economy will receive a boost from a good Monsoon and exports will benefit from the combination of a depreciated currency and the synchronized upturn in the US, China and Japan, as well as the bottoming-out of the recession in Europe. However, the stalled growth and persistently high inflation cannot be overcome without fiscal consolidation and structural reforms.

The Stalling of Reforms

The Indian authorities have claimed that the country’s problems are largely due to external developments. Foreign exchange markets have been accused of overreacting. While the imminent tapering of the Fed’s liquidity measures is a factor, the major causes of India’s current malaise can be attributed to the stalling of economic reforms. Confidence has also been eroded by what are seen as populist entitlement schemes. The decline in growth resulting from a lack of reforms leads to a reduction in government revenue which, in turn, makes these programs even more difficult to afford.

The high fiscal deficits between 2008 and 2011 have fuelled excess demand. This has stoked inflation and exerted pressure on the balance of payments. This has meant that interest rates have had to be maintained at high levels thereby squeezing growth. This has served to reinforce the negative impact on growth of the stalled structural reforms. The reforms of agriculture and supply chains have been neglected and subsidies have been pumped into rural areas. Consequently, food prices have risen sharply. The manufacturing base has not been strengthened, with industry continuing to be depressed by red tape and graft. New legislation has also made the process of land acquisition and compensation more complicated thereby disincentivizing investment.

The inertia of the government has exerted additional pressure on the Reserve Bank of India (RBI) to balance the twin objectives of growth and stability of prices/balance of payments. This task has been rendered more difficult by the dual nature of the performance of the Indian economy. Rural areas and informal sector firms are doing relatively well. Consumer Price Inflation, which has a heavy food and services weighting, has recorded near double digit increases. At the same time, the industrial and urban economy has slowed down significantly. Prices of manufactured goods have been rising by only 3%. In such a dualised context, the RBI has the unenviable task of setting interest rates for both segments of the two-speed economy. As a result, it has been criticized both for keeping policy too loose and too tight at the same time, depending on which part of the economy the observer is focusing upon. The RBI is compelled to use one instrument for what are, in practice, two economies. The bottom line is that demand management policies alone will not resolve this conundrum. The twin objectives of accelerated growth and price stability can only be achieved through structural reforms.

The Indian authorities have undertaken some measures to stabilize the economy in the short term. Fiscal consolidation has seen the deficit decline from 10% of GDP (including the states) to about 7%. The RBI has taken measures to drain liquidity out of markets; give oil exporters access to its dollar reserves; and tighten capital controls on residents. It has also made it easier for banks to borrow abroad. The RBI has sought to smoothen the movement of the Rupee through these measures rather than by raising interest rates at a time when growth is stalling. The new Governor, Raghuram Rajan, has immediately unveiled a number of measures to support the currency and open-up markets.

As mentioned above, the RBI can, at best, stabilize the currency and financial markets. The government has to implement structural reforms to revive the growth momentum. However, it is unlikely that politically difficult and potentially vote-losing action will be taken before the elections next year. The appointment of Raghuram Rajan is timely and welcome. He will be a strong advocate of liberalization and will argue robustly against populism.

In this context, the recent Food Security Act involves a massive expansion of the food subsidy program (US$ 14 billion). It comes on top of the Mahatma Gandhi National Rural Employment Guarantee Program. Some commentators see India’s rights-based approach to food security as a populist vote-gaining exercise which is not only unaffordable but is also undermining investor confidence, both local and foreign. However, a strong case can be made in support of India’s rights-based approach to food security and employment. It is important to stress that it can only be affordable, if. (1) the growth momentum is revived to swell the government coffers and (2) all subsidies and transfers are much better targeted and leakages minimized. IT can play an important role in this respect. The Aadhaar Scheme to issue biometric identity cards to all of India’s 1.2 billion citizens can: (1) improve the effectiveness of targeting; (2) increase transparency; and (3) enhance accountability. The Scheme will be used by the central, state and local government bodies, as well as enterprises, to swiftly confirm an individual’s identity for a variety of purposes, including the dispensing of welfare programs.

In summary, India cannot meet the twin objectives of accelerated growth and stability without an ambitious structural reform program. In addition, large projects, such as the Delhi-Mumbai Corridor, road development and other major infrastructure programs should be implemented expeditiously. The sharing of the benefits of growth more widely can be facilitated by improved delivery of spatially blind basic services program.

Implications for Sri Lanka

In recent years, India has been the third-ranked destination for Sri Lankan exports. It has also been ranked number one as the source for imports, tourists and foreign direct investment. With the Indian Rupee depreciating by about 18%, while the local currency has fallen only about 4%, Sri Lankan exports will become less competitive in Indian markets. Conversely, Indian exports to Sri Lanka will become more competitive. In addition, the greater depreciation of the Indian Rupee will make it more expensive for Indian tourists to visit Sri Lanka. It will also disincentivize FDI.

It is also noteworthy that Sri Lanka can draw important lessons from India’s policy challenges. These include the need for fiscal consolidation and structural reforms to achieve the twin objectives of growth and stability. The two countries also share the constraints that are being imposed by the timing of the political cycle.

Finally, as pointed out by Charitha Ratwatte (Daily FT 30 th July 2012) India’s Aadhaar Scheme also provides a model that can help improve the effectiveness of local subsidies and transfers, especially as the national identity card scheme already provides a good information base for launching such a program.

This is the Fifty-Second Economic Alert published by the Pathfinder Foundation. Readers’ comments are welcome at www. pathfinderfoundation. org

FOREX FOCUS: Indian Woes Suggest Euro Crisis Going Global

Global problems demand global solutions.

And signs are that the euro zone debt crisis is very much one that will need a global solution

Even as European leaders struggled to produce a convincing agreement for ending the crisis, more evidence emerged last week that the global impact of the crisis is spreading.

Initially, the inability of several euro zone countries to continue servicing their sovereign debt was seen largely as a problem for international banks that were exposed to these countries.

Fear of contagion through the international banking system was the major concern as European leaders scrambled to find some ways to avert a sovereign default.

Even the recent increase in swap lines among major central banks was aimed primarily at easing credit conditions and improving confidence in the banking system.

Now, however, the euro zone debt crisis poses a new threat, not just to banking but also to global growth.

As hopes for a solution to the crisis have faded, economic activity in the whole of the euro zone has slumped.

At first, the global impact was seen largely in the euro zone's major trading partners, such as China. As demand for Chinese exports declined, the country's industrial activity in goods slowed, forcing the Bank of China to start easing monetary policy a few weeks ago.

Now there are even signs that the currency is suffering as investors start to pull out. After months of relentless upward pressure, the yuan is now being sold, hitting its daily permitted low against the dollar for each of the last 10 days.

But it's the sudden downturn in that other major Asian economy, India, that is really causing alarm.

The country's industrial output plummeted 5.1% in October from a year ago and the government has now downgraded its 2012 growth forecast to 7.25% from as high as 9% previously.

With investors pulling out amid speculation the Reserve Bank of India will cut interest rates Friday, the rupee has taken a drubbing, falling to an all-time low against the dollar.

As far as global growth is concerned, an even larger problem could be looming.

In the last few months, the U. S. economic recovery has shown distinct signs of traction, with retail sales, consumer confidence and levels of employment all showing a marked improvement.

Chances are the recovery will continue, especially if the U. S. proves to be the closed economy that some economists think it is. The low level of trade relations with other countries means that the U. S. will be more immune to the problems of the euro zone.

However, there remains a high risk that a soaring dollar, which is benefitting from a reduction in global risk appetite, will take its toll on U. S. exports, ensuring that the euro zone debt crisis becomes an even larger global problem that will need a wider global solution.

Macromanagement and Business Environment: Analysis of the 1991 Indian Economic Crisis

In this paper, we discuss the importance that macroeconomic management, policies and stability have on promoting the business environment of a country. For this purpose, the analysis of the 1991 Balance of Payments (BoP) crisis in India has been done to show how poor macroeconomic management of the Indian economy during the 1980s precipitated the BoP crisis in 1991 and led to the disruption of business environment during the crisis phase. We then look at how the subsequent corrective macroeconomic management and policies led to the restoration and improvement of the business climate in the economy.

Figures in this publication

ECONOMICS FOR EVERYONE: FOREX FABLE - PART 1

PART 1 The Rupee vs. Dollar Duet

Actually, why should the rupee concern us at all? It is merely the price of a piece of paper. Is it any different from the pair of another bit of paper say a movie ticket? Sí lo es. Changes in the price of movie ticket only affects only film producers and viewers. Your movie visit becomes either cheaper or more expensive. Eso es todo. With the exchange rate, things are not that simple. The price of the rupee affects all of us - from the price of we pay for an imported soap to the ability of software firms to undercut the global competitors. Get the exchange rate wrong, and the entire economy is in deep trouble.

The rupee is back in the news. Now, the reason is its raising value. Last one year the falling rupee was giving nightmare to the business, corporates and the policy makers. The falling or weakening rupee was the headlines every second day for almost most of 2013. Now, it is the other way round

Let us understand what makes this duet of rupee vs dollar. 'A simple demand-supply framework for making sense of the rupee's movements'

How does one understand this mysterious complexity of foreign-exchange markets? Let us start with the most simple understanding of this process. To start with, a falling rupee (known as depreciation of rupee)and rising dollar (appreciation of dollar) means that dollars are in short supply and in great demand and hence the value of dollar goes up. A rising rupee (appreciation of rupee) and falling dollar (depreciation of dollar) means the reverse - an oversupply of dollars.

What we need to understand is why and how does this happen and what are the likely impacts and the government policies to manage this issue.

Headlines such as The rupee has appreciated or depreciated 30 paise or so many percentage against the dollar appear on a daily basis. Such reports on currency invariably attribute the reasons for In India, the conventional measure of the Rupee value is to compare it to the US Dollar. It is first important to remember that similar to how there are two sides to a coin, there are two sides to an exchange rate: two currencies.

1949 -52 the rupee is pegged to the pound. The latter is devalued and the rupee falls in tandem. There are calls for a revaluation to help lower inflation and the cost of capital goods.

1952-65 the rupee is kept steady despite balance of payments problems. India bailed out with international aid.

1966 the big devaluation. A severe forex crisis and drought send the government rushing to Washington for help. Is forced to devalue the rupee, sparking of political controversy.

1967- 81 the two oil shocks of 1973 and 1979 sends economy reeling. Remittances from workers in West Asia create a buffer. A current account surplus in the late 1970s keeps the rupee stable.

1982-90 the obsession with a stable rupee goes. Successive governments devalue the rupee. Exports boom. But there is trouble as the fiscal deficit and ECBs start climbing.

1991 the year of crisis. The rupee is devalued sharply in response to near bankruptcy. The reforms process is kicked off in earnest.

1992-2001 the rupee is gradually freed of controls. The RBI gradually devalues the rupee by 3-4 % a year. India avoids emerging markets meltdown.

2002 -03 Software exports change the rules of the game. India starts earning huge current account surpluses. Capital inflows, to pick up. The rupee starts going against dollar.

2012-13 Major depreciation in Rupee-breaches 60 plus mark.

2014 Rupee bounces back.

SOURCE: BUSINESS WORLD

Rupee weakening/depreciation or dollar strengthening/appreciating:

When we say rupee depreciated it means that the rupee has lost it value against dollar where the dollar has become stronger (for example we can say one dollar is change from 61 rs to say 62 rs. The reverse is true when we say rupee has appreciated (When the Rupee is trading at 62 against the US Dollar, it can appreciate to 61 against the Dollar due to Dollar weakness or Rupee strengthening).

That is, a rupee is said to fall or weaken or depreciate when more rupees are needed to buy a dollar. It is said to rise or strengthen or appreciate when less rupees are needed to buy a dollar ( Most exporters may want a weak currency (here rupee) why? See the impact para).

In this article let us discuss in detail about the rupee depreciation its causes and impact.

Depreciation and Devaluation:

It is important to note that rupee depreciation is different form devaluation. While in depreciation the value of currency is driven by the market forces (currency movements influenced indirectly by supply and demand, uncertainty in markets, markets/investors reaction to government decision, or some Economic/Political issue), whereas in devaluation the currency value is deliberately influenced (depreciated) by the government policy measures. Most often devaluation is done to boost the exports of the country (Indian government adopted the devaluation measures during 1966 and in 1991 during economic reforms).

When rupee depreciates:

The depreciating rupee will be positive for the exporting industries. For example, Indian IT sector which generates more than 80-90 per cent of their $100 + billion revenue from the overseas markets and this kind of appreciation in foreign currency will enhance their actual realization of revenue in dollar terms. According to some experts, every one per cent change in rupee-dollar has a 50 to 60 basis points impact on the margins on the net profit numbers of IT services companies(depends on the prevailing exchange rate). Individually, expatriates living outside India too gain by rupee depreciation.

Most exporters may want a weak currency (here rupee) why? Because when a currency depreciates, the exporters get more of the local currency for every unit of foreign currency though the quantum of trade remains unchanged. But this depends upon the nature of the product they export. Say for example if they are exporting manufacturing goods, machineries, automobiles and other product which use imported components as a part of their finished final product, then they do not benefit much since the imported goods become costly due to the depreciation of domestic currency ( say rupee).

It is to be noted that, with the recent depreciation of rupee the remittances from abroad have jumped substantially since the conversion brings in a higher returns for the NRIs (higher flow of NRI investments into Banks example Kerala and other places).

When a currency loses its value it creates many problems for the economy. It leads to high inflation, as India imports around 70 per cent of its crude oil requirement and the government will have to pay more for it in rupee terms. Due to the control on oil prices, the government may not easily pass the increased prices to the consumers. Further, this higher import bill will lead to rise in fiscal deficit for the government and will push the inflation, which is already hovering around the double-digit mark. Since the last few years, oil companies cited the fall in the rupee value to the dollar to increase petrol prices recently. For oil marketing companies with every fall in the rupee, the gap in their balance sheet increases.

On the other hand, Indian companies will also have to pay more in rupee terms for procuring their raw materials, because of a depreciating rupee against dollar. Some times corporate, who have foreign currency loans on their books, continue to do so despite a depreciating rupee, keeping in view the affordable interest rates in developed markets (it would be better to hold on to foreign currency debt as one can borrow at relatively low interest on dollar debt compared with high interest on rupee debt). The depreciation of rupee has impacted the some sectors in three ways. First, input costs have risen as these companies use imported components. Second, some companies will have to pay higher royalty to foreign parent firms/. Third, many companies have foreign currency loans in the form of external commercial borrowings and foreign currency convertible bonds. Companies with high exposure to Foreign Currency Convertible Bonds (FCCBs) may face default problems.

Individually, traveling abroad becomes more expensive as travel cost can go to higher levels. Students studying abroad too will be hit as more rupee will go out to pay for the courses and stay.

Not only is the rupee falling, for some, the pay cheque may shrink as well. Every industry which is dependent on imports will have to face an increase in cost of production and operations. In order to nullify the increase, these companies will have to rationalise costs within their control. One of this will be human resources. So, either lesser number of people will be hired or the salary bill will be kept constant or reduced.

When Rupee value depreciated

Reflection in the Stock Market:

Depreciation of rupee also affects the money flow in the Indian stock markets. FIIs, the main investors in the Indian equity markets, also start withdrawing their investments from the markets fearing loss of value. In terms of portfolios, theoretically as discussed earlier investment returns on the stock of companies who procure their raw materials (import) the returns will take a hit as the shares of these companies will fall(since higher cost of imports will affect their profitability). On the other hand stocks of Information Technology (IT) companies and export-oriented units may do better.

It is important to note that what causes this upward and downward movement of dollar vs rupee. We understand firm the above discussions that if the supply of dollar in the market is less, the value of dollar is bound to go up against rupee. Also the supply of dollar impacts the overall capital flow in the economy and thus impacts the exchange rate and the overall economic activity.

Now, let us look at the instances where supply of dollar and hence the overall capital flow gets affected. Dollar supply in the market comes from the following sources

There are four main ways in which India gets USD.

Exports - When we export goods and services we get paid in USD.

Investment. When foreign investors invest in India they bring in USD and thats another channel we get USD. Dollars come in through a variety of means - through, for instance, foreign institutional investors (FIIs) into the stock markets, foreign direct investment (FDI) into Greenfield projects or acquisitions

The third way which is remittances - NRIs sending in money to India (deposits by non-resident Indians).

Assistance or aid from multilateral institutions and borrowings by companies.

In essence, the demand for dollars arises from import needs, debt payments and outward remittances. Oil prices play a crucial role. In addition, to it and the external investments building up of mega projects (say a mega refinery project, power or any other infrastructure project) within the domestic economy also increases the dollar demand.

Overall, all the above factors influence the capital flows in the economy. When there is low capital flow (low supply of dollar) then the rupee depreciation takes place. Specifically, when a rupee depreciates it is due to the following factors

Increasing Trade deficit Balance of the country (increasing current Account deficit) due to more imports than exports, Oil prices.

Lower FII (Foreign Institutional Investors) and FDI (Foreign Direct Investment) investment. Government policy (both domestic and foreign) and the state of the economy. Volatility in the capital markets

Higher borrowing by Indian corporate for funding the business.

The reverse is true when the capital flows are positive i. e more capital flow and hence more dollars and low dollar value compared to rupee (rupee appreciation)

The recent volatility of Dollar has been a combination of all the above said factors. Also, it is to be noted that these factors are inter related and affects each other. For example, increasing oil prices leads to higher out flow of forex payments and thus resulting in higher current account deficit. This further affects the availability of dollar(less supply of dollar) in the market and hence its value (dollar value increases as more rupee is required to buy a dollar) against the domestic currency (say rupee). The increased value of dollar leads to higher payment of import bill which further widens the current account deficit and thus the vicious cycle continues.

Let us briefly discuss these factors,

Increasing trade deficit (Current Account deficit)

The biggest problem seems to be India's huge current account deficit, which hit a record high 4.8 per cent of gross domestic product in the year 2013. The measure of whether export-import equation is fine or not is called CAD (Current Account Deficit), which is largely the difference between exports and imports and in Indias case, the CAD is becoming higher and higher with each successive month, and this means that Indias foreign exchange reserves are diminishing. It is well known that India is a net importer (imports more than what it exports) which means it has a deficit and the deficit has been surging to new heights since the last few years especially with the increasing import of Oil and Gold. Also, since India has to bring in the majority of its requirement from outside the country and the demand for oil in India has been going up every year and this has led to the present situation. As and when the demand for oil increases in India or there is an increase in oil prices in the global market, there also arises a need for more dollars to pay the suppliers. This also results in a situation of higher deficit where the worth of the decreases significantly in comparison to the dollar. Worsening trade deficit is bad news for the rupee as the demand for US dollars goes up. A higher current account deficit weakens the currency. This deficit was being financed by foreign money for last many years, but as the U. S. economy gathers momentum, there is increasing likelihood that the Federal Reserve will taper its bond buying programme. CAD thus effectively measures the amount of net capital inflows from abroad that an economy depends on, whether in the form of borrowings or investment. Two factors have been blamed for widening of CAD. One is the import of gold. India is one of the largest consumers of gold and the heavy import of gold widens CAD as the government has to provide for dollars for every ounce of gold imported. The other factor is crude oil imports. India imports more than 75% of its crude oil requirement. A slowdown in inflows from foreign investors also leads to a weak currency.

Investments In the past two years India has witnessed volatility in the flow of the FII. From the initial surge of flow of investments, there has been a slowdown in the FII flow during the second half of the 2013 due to the following reason -

The proposed unwinding of the bond purchase programme (also called quantitative easing)

Crisis in the Eurozone

There are several factors. But the recent bout of weakness is fuelled by the prospect of the unwinding of the bond purchase programme (also called quantitative easing) of the US Federal Reserve. The US Fed had been printing money to bolster its economy. Now that there are signs of some strength in the US economy, it may start winding down the programme of adding more money into the system.

A possible winding down of the asset purchase programme of the US Fed and improvement in the health of the US economy will strengthen the US dollar. Investors will withdraw investments from emerging markets such as India in the short term and chase assets in the US, since assets in a strengthening US economy are seen as attractive. Thus the Federal Reserves decision to reduce its Quantitative Easing has also contributed to the present situation as every asset class has been affected by the decision. The fear of Fed pulling the plug on easy money has triggered a selloff by foreign institutional investors (FIIs). Also, lower rating by credit rating agencies, negative view by investors, investment bankers normally leads to a corresponding fall in India's weight and hence capital outflow.

The outflow of money from emerging markets may lead to currency weakness. Concerns over the pace of economic reforms, the health of the domestic economy and a yawning trade deficit are also impacting the rupee. Available statistics with the government show that both the debt market and the equities have witnessed a reverse flow of money. The fear is that the tempo of the outward flows might increase in the coming days.

India would need strong foreign capital flows to finance the current account deficit. However, with FII flows too came down, the pressure got accentuated and rupee nearly breached the 60-mark. Moreover, the global volatilities also had an impact in the entire Asian markets, including, India, The rupee weakness was also influenced due to the European crisis.

According to some experts, the problems are fundamental and our policy makers do not seem to realise the basic problem which is the huge deficit on current account and over dependence on capital inflows. The basic problem is we continue to live on borrowed money year after year.

SECTION IV Policy Issues

At a time when the rupee is depreciating, foreign portfolio investors are wary of investing in India since any rupee income they earn could get eroded by a higher exchange rate when they want to take back that income out of India. Thus, a sort of vicious cycle is triggered as the rupee dips, FIIs tend to pull out money and that in turn makes the rupee dip further. This can be offset by policy measures which can boost longer term capital flows from abroad like FDI or overseas borrowings. In fact, of late, the FIIs have been heading to greener pastures owing to the greater operational efficiency and lesser bureaucratic problems that have unsettled the Indian business fraternity and hampered its overall economic growth.

As discussed earlier, one of the big factors worsening Indias CAD is the ever increasing gold and oil imports. Reducing the import of Oil and Gold is not easy. Reducing their dependency has its own repercussion on the industry and the overall growth in the economy. These things tell us that it is absolutely essential for us to have a steady flow of USD or other big currency coming in the country in order to finance our Oil bill and pay for our other imports, if we run out of foreign exchange; we will be in big trouble. According to some experts, a major part of Indias external reserves, are not export earnings but dollars accumulated by the RBI when it mopped up dollars coming in through short-term flows . Therefore, bulk of the reserves is in the nature of debt and do not in real terms belong to the country. This further enhances the uncertainty and volatility of capital flow. One of the key reasons for this is the surge in short-term external commercial borrowing by companies on the assumption that the increasing supply of money and the very low interest rates will prevail indefinitely which may not be true in the long run.

Volatility in the equity market

The equity markets in India have been volatile for a certain period of time. This has put the FIIs into a dilemma as to whether they should be investing in India or not. In recent times their investments have touched an unprecedented level and so if they pull out then the inflow will go down as well. According to a report, the international investors in India have withdrawn to the tune of INR 44,162 crore during June 2013 and this is a record amount. This has also created a current account deficit (CAD) that is only increasing, thus contributing significantly to the depreciation of the INR. Also, some experts historically, the Indian Rupee has been depreciating roughly in line with the fall in its Purchasing Power Parity (PPP) since the early 1980s. While the PPP was 15 around 1982, the actual exchange rate was Rs 9.30 per US Dollar. It is the inflation that negatively impacts PPP and pushes a currency down. But the present spike was rather sharp on the back of debt default concern in the euro zone

RBI Measures Now let us see how does the Government or the RBI (RESERVE BANK OF INDIA) manages the value of currency in the market. If there is a sudden choking in the supply of dollars, the rupee weakens. When this happens, the RBI steps in and sells dollars from its foreign-exchange reserves. This increases the supply of dollars in the market. Also within the domestic market, when the rupee weakens, the RBI tries to control the supply of the rupee (i. e. its liquidity) by raising its price as reflected in interest rates and by asking banks to keep money with it to decrease rupee supply (by hiking the cash reserve ratio).Conversely, when dollars are pouring in the RBI purchases dollars through a variety of means. From time to time the RBI funds public-sector crude imports directly to relieve the pressure on the market.

Also, RBI periodically urges them to bring back exporters earnings as soon as it is realized, since, exporters are allowed up to 180 days to bring back their earnings. What happens is that exporters, anticipating a depreciation, keep their money out till the very last minute causing pressure on the supply. Companies also borrow abroad but keep the money outside for long periods. This also has leads to pressure in the system.

RBIs intervention to buy Foreign exchange during surge in capital investment leads to build-up of (foreign exchange) reserves, which provides self-insurance against external vulnerability of rupee.

When RBI sells its foreign exchange reserves, it stems (halts) the fall of rupee.

Higher foreign exchange reserve levels restore investor confidence and may lead to an increase in foreign direct and indirect investment flows boost in growth and helps bridge the current account deficit.

Some economists believe that if the RBI actually allows supply and demand to operate, the rupee's volatility will be lower.

It is to be noted that as the financial system develops, the growing integration of this forex market with the money market and the government securities market has meant closer linkages between monetary policy and exchange rate policies.

The government's recent decision to hike duty on gold, the second biggest import item, has helped cut imports of Gold to a larger extend compared to previous months. Of course the side effect of this is its impact on the gold and Jewellery industry business. However, if, FIIs continue to pull out, the government will have to come up with new plans.

According to economists, the key solution lies in better investment climate that helps people get other alternates to gold for investment domestically and for encouraging capital flows regularly. According to experts, there is a need to create a climate where exports rise (services exports declined last month), foreign investments (long term), NRI investments come into the country, and all that in turns help the CAD. Also, this situation can only be addressed by exporters who can bring in dollars in the system. As discussed earlier if the investments can be wooed back, then this imbalance can also be addressed to a certain extent. To make this happen the government should take relevant policy measuers.

NRE, NRO AND FCNR To increase dollar inflows and check the decline in the rupee, the RBI recently deregulated the interest rates offered by banks on non-resident external (NRE) and non-resident ordinary rupee (NRO) accounts. An NRE account is a rupee account from which money can be fully repatriated, that is, sent back to the country of your residence. An NRO account is also a rupee account, but one can repatriate only up to $1 million every year from this account. Foreign currency non-rupee (FCNR) account is the same as the NRE account except that the deposits are in foreign currencies. Though interest earned on NRE and FCNR accounts is tax-free in India, the interest income from NRO accounts is liable to tax. However, NRIs living in countries with which India has a Double Taxation Avoidance Agreement (DTAA) can avail of lower tax rates.

When rupee Appreciates Year 2014 started with a different note. The rupee started appreciating after a great downfall. The quick trend reversal was unexpected however was obvious since the capital flows are increasing along with the increasing FII and reducing current account deficit. One of the largest appreciation of rupee happened during 2002-03. The rupees rise would have been far sharper had the RBI not frantically bought dollars from the market to keep the rupee down.

As discussed earlier a strong domestic currency may strain the countrys export competitiveness. During 2003 the surging invisibles which include receipts from overseas workers and export boom in software and IT enabled services caused the major flow of dollars and thus the appreciation of rupee. Also, one of the main reason for this was the huge current account gap of the U. S (over $500 billion) during this time. With the subsequent collapse of interest rate and the fall in equity market the foreign investors were wary of pouring money into dollar assets thus leading to a weak dollar.

During the appreciation of rupee the following trend or strategy is observed in the markets

There is a surge in investments in the NRI accounts such as the NRE, NRO and FCNR. The appreciating rupee, the large interest rate differential between India and the US and an attractive forward premiums make Indian securities and deposits a tempting option for NRI.

Companies replace long term rupee loans with dollar-denominated external commercial borrowings (ECBs)

Keep selling the dollar receivables forward and lock in the forward premia with the view that rupee is likely to appreciate more.

Importers may consider leaving their positions unhedged for some more time in view of the positive rupee outlook.

SECTION V Economic Theory of Foreign Exchange valuation

VALUATION OF THE CURRENCY The judgement about the "right" value (whether the rupee is overvalued or undervalued) for the rupee is always debated among the experts.

Overvaluation and Undervaluation

It is quite common to hear people claim that a country's exchange rate is overvalued or undervalued. The first question one should ask when someone claims the exchange rate is overvalued is, overvalued with respect to what? There are two common reference exchange rates often considered. The person might mean the exchange rate is overvalued with respect to purchasing power parity (PPP), or it may mean the exchange rate is overvalued relative to the rate presumed needed to balance the current account.

Undervaluation of a currency

If a nation's currency is "undervalued," it means the rate at which it can be exchanged for other world currencies is too low. If you buy goods made in foreign countries -- or work for a company that sells goods overseas -- then currency values have a real impact on your purse.

A currency is considered undervalued when its value in foreign exchange is less than it "should" be based on economic conditions, at least in the opinion of currency traders, economists or governments. For example, say that foreign exchange traders believe $1 is the equivalent of 50 rupees. But if the actual exchange rate is 60 rupees to the dollar then the rupees is viewed as undervalued. That it is highly undervalued or depreciated against the dollar and the rupee explores its true value by appreciating to that level. According to a report during 2012 by the International Monetary Fund (IMF) rupee is highly undervalued against the dollar.

A currency may be undervalued simply because

There's insufficient demand for it or no one wants to buy

Currency undervaluation benefits the home country which does it since it makes their export cheap, boosts demand and hence revenue and the same time make the import expensive. Theoretically, undervalued currency allows a country to essentially impose a tax on imports, but without breaking the international trade rules that prohibit taxes that are actually called taxes(tarrifs/quotas/trade barriers in case of international trade). Sometimes it is alleged that governments also deliberately undervalue their currencies -- for example, by manipulating the money supply or setting artificially low exchange rates.

REER - Real effective exchange rate

In India, The RBI uses a six - country real effective exchange rate (Known as REER-6) against a basket of 6 other national currencies) to judge competitiveness. REER is the nominal exchange rate adjusted for inflation differentials. REER is the weighted average of any countrys currency to the basket of other (adjusted for inflation).A country whose REER Index is close to 100 is considered to be fair valued. When REER goes above 100 levels its believed to enter over-valued zone and less than 100 is undervalued.

Dólar

Hong Kong dollar

Euro

Pound sterling

Japanese Yen

Chinese Renminbi

The weighted average of a country's currency relative to an index or basket of other major currencies adjusted for the effects of inflation. The weights are determined by comparing the relative trade balances, in terms of one country's currency, with each other country within the index. This exchange rate is used to determine an individual country's currency value relative to the other major currencies in the index, as adjusted for the effects of inflation. All currencies within the said index are the major currencies being traded today: U. S. dollar, Japanese yen, euro, etc.

INDIAS ECONOMIC REFORMS EXTERNAL SECTOR - BACKGROUND

Ecconomic Reforms in india

Around two decades ago, the then, India's finance minister and the present prime minister Dr. Manmohan Singh unleashed a set of economic reforms (Liberalisation, Privatization and globalsiation). Indian economy was facing a major crisis in the foreign exchange front. Son

Continuously depleting foreign exchange reserves due to the impact of gulf war on the oil prices (only two weeks of FOREX was available).

Near - financial bankruptcy with 67 tons of treasury gold mortgaged by the Indian government to the Bank of England

Thus the government took some bold macroeconomic reforms. Some of the key reforms to manage the forex crisis and to ensure steady capital flow includes

Liberalised Exchange Rate Management System (LERMS) that created a dual exchange rate for the rupee. The partial float of the rupee was a fig leaf for one of the steepest controlled rupee devaluations in Indian history. On July 1, 1991, the exchange rate was 18 to the dollar. By March 1993, the exchange rate had plunged to 32 to a dollar - a decline of 77% in a little over 18 months.

The 'partial float' of the rupee led eventually to current account convertibility but not to the full capital account convertibility. The rupee 20 years later remains partially convertible on the capital account with the Reserve Bank of India ( RBI) allowing Indians to remit only up to a fixed amount $200,000 a year for capital investments abroad.

Since Dr Singh's interim Budget of July 1991 and his magical Budget of February 1992, the rupee has depreciated by more than 100% in 20 years (from 25.95 in February 1992 to just under 60 plus today). According to experts, a constantly weakening rupee pushes up the cost of imports, widens the trade and current account deficits . raises the external debt burden, makes petro products more expensive and fuels inflation (this trend could be observed since last two decades).

Reasons for reforms:

Prior to 1991, India followed License-quota-system and import substitution strategy. During that era, the encouragement for foreign companies to invest in India was less. Imported products attracted heavy custom duty (which led to rise of smugglers and mafias). Also, thanks to the license-quota-raj, the private Indian companies werent big or exposed enough to compete in international market so export was also low. Thus during that time incoming money (via export, investment) was very low. Hence RBI couldnt build up huge forex reserve. As discussed earlier 1991, the Forex reverses of India were about to exhaust. Then India had to open up its economy for private and foreign sector investment. Remove the license-quota-inspector raj etc. to boost the incoming flow of dollars and other foreign currencies. Hence post LPG reforms, RBI has been actively buying/selling dollars, pound yen etc. from the currency market, whenever FII/FDI inflow is high. Nowadays RBI intervenes in the FOREX market, only to stop the excess volatility (fluctuation) in rupee exchange rate.

Indias foreign exchange reserves is made up of

Foreign currency assets (FCA) (US dollar, euro, pound sterling, Canadian dollar, Australian dollar and Japanese yen etc.)

Special drawing rights (SDRs) of IMF

Reserve tranche position (RTP) in the International Monetary Fund (IMF)

The level of forex reserve is expressed in US dollars. Hence Indias forex reserve declines when US dollar appreciates against major international currencies and vice versa.

RBI gains Foreign exchange reserves by

Buying foreign currency (via intervention in the foreign exchange market

Funding from the International Bank for Reconstruction and Development (IBRD), Asian Development Bank (ADB), International Development Association (IDA) etc.

According to some experts a weak rupee may be more helpful in a country like china which has a huge manufacturing base with substantial exports. On the contrary: a current account deficit arising from an import bill of billion of dollar erodes the currency, pushes up inflation and lowers competitiveness. According to critics, a stronger rupee will not only trim our trade and current account deficits and temper inflation, it will attract more FDI and FII. The biggest long-term beneficiaries of a stronger rupee would be India's manufacturing productivity. Since, cheaper imports would allow companies to ramp up foreign technology and build infrastructural and manufacturing assets. These, in turn, would lead to a spike in competitiveness, boosting exports based on quality. Experts also point out that the Economists recent Big Mac Index shows that the rupee is undervalued Vis-A - Vis the US dollar by 61% while the yuan is undervalued by 41%.

SECTION VII NOTE ON CURRENCY

The Indian rupee is the official currency of the Republic of India. The issuance of the currency is controlled by the Reserve Bank of India. The modern rupee is subdivided into 100 paise (singular paisa), though as of 2011 only 50-paise coins are legal tender. Banknotes in circulation come in denominations of 5, 10, 20, 50, 100, 500 and 1000. Rupee coins are available in various denominations of 1,2, 5,10, 20, 50, 60, 75, 100, 150, 500 and 1000. The only other rupee coin has a nominal value of 50 paise, since lower denominations have been officially withdrawn.

The Indian rupee symbol ' (officially adopted in 2010) is derived from the Devanagari consonant (ra) and the Latin letter "R". The first series of coins with the rupee symbol was launched on 8 July 2011.The Reserve Bank manages currency in India and derives its role in currency management on the basis of the Reserve Bank of India Act, 1934. Recently RBI launched a website Paisa-Bolta-Hai to raise awareness of counterfeit currency among users of the INR. The Indian rupee sign is the currency sign: for the Indian rupee, the official currency of India. The new form of Indian rupee designed by Mr. Udaya Kumar (a student of Indian Institute of Technology). It was presented to the public by the Government of India on 15 July 2010, following its selection through an open competition among Indian residents. Before its adoption, the most commonly used symbols for the rupee were Rs, Re or, if the text was in an Indian language, an appropriate abbreviation in that language.

1US Dollarequals 59.96Indian Rupee

Chinese Renminbi The Renminbi is the official currency of the Peoples Republic of China. The name (simplified Chinese: literally means "people's currency. The yuan is the basic unit of the renminbi, but is also used to refer to the Chinese currency generally, especially in international contexts. (The distinction between the terms "renminbi" and "yuan" is similar to that between sterling and pound).

The United States dollar (sign: $; code: USD; also abbreviated US $), is referred to as the U. S. dollar, American dollar, US Dollar or Federal Reserve Note. It is the official currency of the United States and its overseas territories. It is divided into 100 smaller units called cents.

The U. S. dollar is fiat money. It is the currency most used in international transactions and is the world's most dominant reserve currency. Several countries use it as their official currency, and in many others it is the de facto currency. It is also used as the sole currency in two British Overseas Territories: the British Virgin Islands and the Turks and Caicos islands.

The pound sterling (symbol: ; ISO code: GBP), commonly known simply as the pound, is the official currency of the United Kingdom, Jersey, Guernsey, the Isle of Man, South Georgia and the South Sandwich Islands, the British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence (singular: penny). A number of nations that do not use sterling also have currencies called the pound.

Rupee Denominated Debt

Rupee denominated debt refers to that part of Indias total external debt that is denominated in Indias domestic currency, the Rupee.

In contrast to foreign currency denominated external debt, in case of rupee denominated debt the currency risk (the risk arising from appreciation or depreciation of the nominal exchange rate) is borne by the creditor and not by the borrower. The contractual liability (principal and interest that is designated to be paid by the borrower as agreed upon in the debt contract) is settled in foreign currency. Accordingly, the borrower always pays back the foreign currency equivalent of the rupee denomination valued at the spot exchange rate prevailing at that point in time. Thus, if the domestic currency appreciates vis--vis the foreign currency, the creditor stands to gain vis--vis the borrower since he receives more dollars per unit of Rupee.

In India rupee denominated debt comprises the following categories;

Rupee Debt; Includes the outstanding defense and civilian state credits extended to India by the erstwhile Union of Soviet Socialist Republics (USSR). The repayment is primarily through exports of goods to Russia.

Rupee denominated Non-Resident Indian (NRI) Deposits including the Non-Resident (External) Rupee Account (NR(E)RA) and Non-Resident Ordinary Rupee (NRO) account.

Foreign Institutional Investors (FII) investment in Government Treasury-Bills and dated securities

FII investment in corporate debt securities.

What are the lessons learnt. The above information and discussion indicates the following

The rupee dollar rate is a two way movement. That is they can swing either way. The trend has shown market (read business sentiments) tend to believe that it is always one way. During the appreciation everybody believes that the rupee will continue to gain against the dollar and the same belief exists during depreciation which is not right.

Exchange rates are no laughing matter. They have wrought havoc-in Mexico in 1992, East Asia in 1997(Thailand and others), Russia in 1998 and Argentina in 2002.The inevitable result: inflation and unemployment.

1997 Asian financial crisis

The Asian financial crisis was a period of financial crisis that gripped much of East Asia beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial contagion.

With the financial collapse of the Thai baht after the Thai government was forced to float the baht due to lack of foreign currency to support its fixed exchange rate, cutting its peg to the US$, after exhaustive efforts to support it in the face of a severe financial overextension that was in part real estate driven. At the time, Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt.

Indonesia, South Korea and Thailand were the countrys most affected by the crisis. Hong Kong, Malaysia, Laos and the Philippines were also hurt by the slump. China, Taiwan, Singapore, Brunei and Vietnam were less affected, although all suffered from a loss of demand and confidence throughout the region.

Foreign debt-to-GDP ratios rose from 100% to 167% in the four large Association of Southeast Asian Nations (ASEAN) economies in 199396, and then shot up beyond 180% during the worst of the crisis. In South Korea, the ratios rose from 13 to 21% and then as high as 40%, while the other northern newly industrialized countries fared much better. Only in Thailand and South Korea did debt service-to-exports ratios rise.

Although most of the governments of Asia had seemingly sound fiscal policies, the International Monetary Fund (IMF) stepped in to initiate a $40 billion program to stabilize the currencies of South Korea, Thailand, and Indonesia, economies particularly hard hit by the crisis. The efforts to stem a global economic crisis did little to stabilize the domestic situation in Indonesia, however. After 30 years in power, President Suharto was forced to step down on 21 May 1998 in the wake of widespread rioting that followed sharp price increases caused by a drastic devaluation of the rupiah. The effects of the crisis lingered through 1998. In 1998 the Philippines growth dropped to virtually zero. Only Singapore and Taiwan proved relatively insulated from the shock, but both suffered serious hits in passing, the former more so due to its size and geographical location between Malaysia and Indonesia. By 1999, however, analysts saw signs that the economies of Asia were beginning to recover. After the 1997 Asian Financial Crisis, economies in the region are working toward financial stability on financial supervision.

Until 1999, Asia attracted almost half of the total capital inflow into developing countries. The economies of Southeast Asia in particular maintained high interest rates attractive to foreign investors looking for a high rate of return. As a result the region's economies received a large inflow of money and experienced a dramatic run-up in asset prices. At the same time, the regional economies of Thailand, Malaysia, Indonesia, Singapore, and South Korea experienced high growth rates, 812% GDP, in the late 1980s and early 1990s. This achievement was widely acclaimed by financial institutions including IMF and World Bank, and was known as part of the "Asian economic miracle."

In 1994, economist Paul Krugman published an article attacking the idea of an "Asian economic miracle". He argued that East Asia's economic growth had historically been the result of increasing the level of investment in capital. However, total factor productivity had increased only marginally or not at all. Krugman argued that only growth in total factor productivity, and not capital investment, could lead to long-term prosperity. Krugman himself has admitted that he had not predicted the crisis nor foreseen its depth.

The case of East Asia (Thailand) and capital account convertibility

The Thais had it good for too long. They had enviable foreign currency inflows, booming exports, a reasonable debt service ratio and an exchange rate which did not show any signs of budging. All thanks to the Bank of Thailand, its central bank which supported the currency in the face of strong capital inflows. When the Thai baht took a sudden beating the authorities were forced to devaluate the baht. The corporates and other investors went overboard with their short term overseas borrowings. Easy access to funds meant substitution of domestic short term loans within off-shore short term borrowings. Since the baht value was fixed the Thai investors merrily borrowed overseas without hedging. With falling exports, some of them possibly in anticipation of depreciation started covering their exposures abroad i. e. buying forward dollars.

Ideally, under such conditions the currency should show a tendency to depreciate. Pero esto no sucedió. In fact, the bank of Thailand was defending the baht even in the face of growing curren

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sschub - Many times you when reading newspaper, you will face keywords like BoP, Current account, capital account, rupee weakens, India's foreign reserves etc. but only few of us have basic knowledge about these terms. So this article will help you to understands all these what and how. ok so lets move.

What is Balance of Payment?

Suppose you are going to get a company’s incoming and outgoing cash details, you’ve to check its account book.

Similarly Balance of Payment (BoP) is the account sheet (summary) that tells the cash flow between India and rest of the world.

BoP = Current account + capital account. (As per IMF definition, three parts: Current Account + Capital account + financial account).

so just know a brief overview:

What is Current account

Import, Export (always negative, because we export less and import more oil n gold, hence we’ve trade deficit.)

Income from abroad (interest, dividends paid on Indian investor’s FDI, FII in USA etc.)

Transfer (gift, remittances from NRI to their families etc. always positive for India because of large Diaspora abroad.)

What is Capital account (+ financial account)

Foreign investment in India (FDI, FII, ADR, direct purchase of land, assets).

External commercial borrowing, external assistance etc.

Since we want to track the flow of cash, so, whenever American invest in India (via FDI, FII, ADR etc) we add it as (plus), and

when Indians invest in USA (via FDI, FII, IDR etc.) we add it as (minus) and then get the final figure for Foreign investment.

Same goes for everything in balance of payment (remittances, External commercial borrowing whatever.)

In short, BoP= we are tracking the incoming and outgoing money.

For India, current account has been in deficit (negative number) and capital account has been in surplus (positive number).

The BoP accounting system is similar to double entry book-keeping.

Therefore theoretically, balance in current account and balance in capital account should be same (ignoring the +/- signs).

In other words, if there is deficit in current account, there has to be equal surplus in capital account. ¿Por qué?

How Rupee-dollar convertibility works

Suppose you want to import a dell computer from USA. And American exporter accepts only payments dollars.

If you can easily convert your rupee into dollars, that means Rupee is fully convertible. And rupee is fully convertible as far as Current account transactions are concerned (e. g. import, export, interest, dividends).

But rupee is partially convertible for capital account transection. (In crude terms it means, if an Indian wants to buy assets abroad or invest via FDI/FII OR borrow via External commericial borrowing (ECB) he cannot do it beyond the limits prescribed by RBI. (And vice versa e. g. American wants to convert his dollars to rupees to invest in India, then also RBI’s limits have to be followed).

RBI gets power to do ^this, via FERA and FEMA Acts.

1973: Foreign Exchange Regulations Act, 1973 (FERA).

1997: Tarapore Committee (of RBI), had recommended that India should have full capital account convertibility. (Meaning anyone should be allowed to freely move from local currency into foreign currency and back, without any restrictions by Government or RBI.)

2002: Government replaced FERA with Foreign Exchange Management Act (FEMA). Although full capital account convertibility is yet not given.

Full capital account convertibility has both pros and cons. But that’d require another article. Let’s get back to the topic, we are seeing the 6 th chapter of Economic Survey: Balance of Payment, exchange rates etc.

Rupee-Dollar Exchange rate

Let’s create a bogus technically incorrect model to understand the market based exchange rate system, once again:

Assume following things

There are only two countries in the world India and America.

India has rupee currency. Indian farmers don’t grow Onions.

America doesn’t have any currency, they trade using onions. The rate being 1kg onion=Rs.50

First situation . American investor thinks that Indian economy is rising. If we invest in India (FDI/FII), we’ll make good profit. So they’re more eager to convert their onions to Indian rupee currency. So they’d even agree to sell 1kg onions =Rs.45. (and then buy Indian shares/bonds worth Rs.45)

Result =Rupee strengthened against onion (dollar).

During this time, RBI governor also buys 300 billion kilo onions from the forex and stores these onions in his refrigerator. (Why? Because onions are selling cheap! And why onions are selling cheap? Because there is “surge” in capital investment in India by American investors.)

Ok everything is going nice and smooth. Now add third country to our bogus model: UAE.

Second situation . UAE has increased crude oil prices, and they don’t accept rupee currency. They also want payment in onions.

1 barrel of crude oil costs 132kg of Onions.

India is eager/desperate for oil, because if we don’t have crude oil, we can’t get petrol, diesel= whole economy will collapse.

So India would agree to buy 1kg onion even for Rs.55 (from American or forex agent or whoever is willing to sell his onions). Then India can give that onions to some Sheikh of UAE and import crude oil.

Third situation: The Sheikh of UAE gets even greedier, he demands 200kg onions for 1 barrel of crude oil. Now 1kg onion sells for Rs.59, Because those with onion surplus (vendors) know that India likes it or not, it’ll have to buy onions to pay for the crude oil!

Thus, Rupee has weakened against onion (Dollar.)

If such situation continues, then there will be huge inflation in India (because crude oil expensive=petrol/diesel expensive = transport expensive= milk/vegetables and everything else transported using petrol/diesel becomes expensive.)

Now RBI governor decides to become the hero and save the fall of rupee against onion. So, He loads a few tonnes of onions in his truck and drive it to the forex market.

Result: onion supply has increased, price should go down.

Now onions get little cheaper: 1kg onion =53 Rs.

Thus RBI’s “intervention” in the forex market has led to “ recovery ” of rupee.

Ok so what is conclusion of above?

RBI’s intervention to buy Foreign exchange during surge in capital investment= leads to build-up of (foreign exchange) reserves, which provides self-insurance against external vulnerability of rupee.

When RBI sells its foreign exchange reserves, it stems (halts) the fall of rupee.

Higher foreign exchange reserve levels restore investor confidence and may lead to an increase in foreign direct and indirect investment flows= boost in growth and helps bridge the current account deficit.

How Foreign Exchange Reserves build up

Prior to 1991, India followed License-quota-inspector (and suitcase) raj and import substitution strategy. (Beautifully explained class 11 NCERT textbook.)

During that era, foreign companies couldn’t invest in India.

Imported products such as radio / camera/ wristwatches attracted heavy custom duty. (And that led to rise of smugglers and mafias, and the Bollywood movies that romanticized their criminal lives.)

On the other hand, thanks to the license-quota-inspector (and suitcase) raj, the private Indian companies weren’t big or efficient enough to compete in international market so export was also low.

Result . during that time incoming money (via export, investment) was very low. Hence RBI couldn’t build up huge forex reserve. (when onion supply is low, its prices will be high)

Ultimately in 1991, the Forex reverses of India were about to exhaust.

Finally India had to pledge its gold to IMF and get loans.

Then India had to open up its economy for private and foreign sector investment. Remove the license-quota-inspector raj etc. to boost the incoming flow of dollars and other foreign currencies…..all those LPG reforms. (Although suitcase raj still continues, because the Mohans in the system are blinded by totally awesome people like A. Raja.)

fast-forward: now we’ve a trillion dollar economy, our software and automobile companies are globally recognized… blah blah blah.

But the lesson learnt: RBI should have good foreign exchange reserve.

Hence post LPG reforms, RBI has been buying dollars, pound yen etc. from the currency market, whenever FII/FDI inflow is high. Because during such situation, the foreign investors are more eager to get their dollars converted to rupee currency hence rupee is trading at higher rate e. g. 1$=Rs.49

But after global financial crisis, RBI has stopped building forex reserves actively.

Nowadays RBI intervenes in the forex market, only to stop the excess volatility (fluctuation) in rupee exchange rate.

However, there was a sharp decline in rupee in 2011-12. Then RBI had to sell foreign exchange worth 20 billion dollars. (so demand of foreign currency would decrease and rupee would stop).

Similarly in 2012 also RBI had to sell its foreign exchange reserve worth 3 billion dollars to prevent the fall of rupee. (in June 2012, Rupee had became very weak: 1$=around 57 Rupees. Thanks to RBI and Government’s interventions, it came back to the normal 53-54 level at the end of 2012.)

Foreign Exchange Reserves

India’s foreign exchange reserves is made up of

Foreign currency assets (FCA) (US dollar, euro, pound sterling, Canadian dollar, Australian dollar and Japanese yen etc.)

gold,

special drawing rights (SDRs) of IMF

Reserve tranche position (RTP) in the International Monetary Fund (IMF)

The level of forex reserve is expressed in US dollars. Hence India’s forex reserve declines when US dollar appreciates against major international currencies and vice versa.

RBI gains Foreign exchange reserves by

buying foreign currency (via intervention in the foreign exchange market

Funding from the International Bank for Reconstruction and Development (IBRD), Asian Development Bank (ADB), International Development Association (IDA) etc.

aid receipts,

interest receipts

Why our rupee is volatile ?

Volatility = Variation in something over the given time.

if today SENSEX is 12000 points, tomorrow it goes up by 200 points and day after it goes down by 300 points etc…..they we say “market is volatile”.

If morning shift’s SSC paper is too easy but evening shift’s SSC paper is too damn difficult then we can say “SSC paper is volatile”.

Similarly, if there is too much fluctuation in Dollar to rupee exchange rate, we say “rupee is volatile”.

In 2012, the rupee has experienced unusually high volatility. ¿Por qué?

Cause#1: import-export

Demand for Indian goods and services has declined due to Euro-zone crisis + America hasn’t fully recovered.

On the other hand, cost of import= very high due to oil and heavy gold import (due to high inflation).

Similarly high inflation = raw material / services become costly for the export. If he raises the prices, then his export product becomes less competitive than Cheap China made stuff.

Cause #2: FII

In the total foreign investment in India, majority comes from FII (and not from FDI).

FII money is “hot”, it leaves quickly whenever FII investors feels that India’s market is not giving good returns and or some other xyz country’s market is giving better returns.

There are week-to-week variation in such FII inflows and outflows. Hence it leads to changes in rupee-dollar exchange rate.

Cause #3: Dollar is strengthened

US treasury bonds are consider the safest investment. During the peak of Eurozone, Greece crisis, the big investors started pulling out money from Europe and investing it in US treasury bonds. = demand of dollar increased. So other currencies would automatically weaken against dollar.

Cause #4: policy paralysis

For past few years, Indian Government was lazy regarding environmental project clearances, land acquisition, FDI in retail, pension, insurance etc. that has led to foreign investors losing faith in Indian economy= slowdown in FII inflows. (besides Government did not allow more FDI in pension / insurance / retail etc. so FDI inflow did not increase either).

Cause #5: Risk On / Risk off

From the earlier article on debt vs equity, Government bonds = safer than equities (shares). But when an investment is safe= it doesn’t offer good returns.

When foreign investors feel confident, they display “risk on” behavior =they invest more in equities, particularly in developing countries. (which are risky but offer more profit).

But when foreign investors are not feeling confident, they display “risk off” behavior, = they usually fall back to investing in US treasury bonds or gold.

In India, majority of foreign investment comes from FII (and not FDI)

and FII investors are more prone to displaying this risk-on/risk-off behavior.

They plug in their money quickly, they pull out their money quickly. Thus, Indian rupee’s exchange rate becomes volatile against Dollar.

Therefore, Indian Government needs to inspire and sustain the confidence of foreign investors, to prevent the fall of rupee. RBI intervention in forex market, cannot help beyond a level.

How to recover rupee ?

Rupee is weakening against dollar, it means demand of rupee is less than the demand for dollars. So how did RBI and Government fix it? RBI =>

During 2012, RBI sold around 3 billion dollars from its forex reserves.

Oct-12, Rupee recovers, 1$=around 51 rupees.

RBI allowed Indian banks to give more interest on Foreign Currency Non-Resident (FCNR) bank accounts. (thus attracting more NRIs to save their dollars in Indian banks).

Govt =>

Govt. allowed FIIs to invest more money in govt. and corporate bonds.

Govt. eased the FDI policy for pension, insurance, aviation, multi-brand retail etc.

Govt. offered subsidies and tax benefits to exporters.

In this way we have an idea how RBI and Govt recovers rupee against foreign currency.

Not only Our rupee weakens

In 2012, Rupee wasnot the only currency that weakened against dollar.

The currencies of other emerging economies, such as Brazilian real, Argentina peso, Russian rouble, and South Africa’s rand also depreciated against the US dollar.

It means dollars’ demand has increased. In the wake of sovereign debt crisis in the euro zone and due to uncertain global economic environment, more and more investors are preferring to buy US treasury bonds and other securities in USA.

For more Economy articles click here Economy

6) Do you think India should use its huge foreign exchange reserves to finance infrastructure projects or to recapitalise fund-starved banks? Critically discuss.

India has a foreign exchange reserve of 350 billion$. Before we analyse the different ways in which they can be used, we need to know the benefits of having foreign exchange reserves.

Firstly, they help us stabilise our economy in global economic crisis. Second, India depends on imports for essential goods. So, we need their supply even in extreme crisis. Foreign exchange reserve allow this. Third, as China is doing, we can utilise them for increasing global clout.

They can also be used for other purposes such as infrastructure funding or bank recapitalisation.

Arguments for using FC reserves : 1) They are issues plaguing our economy. Resolving them at earliest will boost our growth. 2) FC reserves are huge and can easily resolve them.

1) Global economic situation is very volatile. Greek crisis, Chinese stock market crash, American fed tapering make it extremely fragile. 2) Geopolitcis also is volatile. Crude prices can move either way with any drastic change.

FC reserves have their own inherent use. Utilising them for some other purpose is dangerous for our Balance of payment. Every asset should do work its responsible for. We cannot use something like FC for recapitalising banks which have failed in their duty. Other means have to be sought for.

India has accumulated a significant amount of FOREX reserves amounting to $355 billion which ensures immunity from any global economic crisis like the one in 2008 and also combat high liquidity and volatility in the economic scenario.

The issue to use India’s FOREX reserve to finance Infrastructure projects and fund-starved banks is feasible with a significant reserve but the finals say for such an allocation rests with the board of the RBI as the FOREX reserve is not the property of the government. There is requirement of around $6 billion for the infrastructure and reviving banks which is a small portion of the FOREX reserve.

However in India’s infrastructure development scenarios, its not just the lack of investment, which could be taken care of by FOREX reserve, it also faces huge problems in fields of land acquisition, environmental clearances, license raj etc which along with increasing the duration of a project leads of cost over runs which is clearly wasting of money and effort.

The RBI however also has the aim to increase the FOREX reserve to double its value in coming years to completely insulate the country from economic ups and downs caused by various developed economies actions. But the issue of replenishment of the FOREX reserve is a grave one, whether the money pumped from FOREX reserve will have an ample return on investment as the money belongs to RBI and they as any other bank would require the funds to be replenished.

India has been steadily accumulating large amounts of foreign exchange reserves due to healthy turnaround in its economy. India like china, could look into funding of infrastructure projects of other countries. It has the following benefits—

1. social-capital— the expenditure of forex reserves on other countries will win India appreciation and gratitude. It will foster friendly relations and international cooperation. India’s funding of bhutanese supreme court and afganistan parliament is an example of cordial relations.

2. market for india—such infrastructure projects will mean more market for our infrastructure firms. This will increase the capacity of our capital assets, benefitting our domestic needs as well. It also creates market for service sector as bannking and insurance will look to invest in such projects

3. trade-benefits—- the infrastructure projects if underlaid under a detail vision, then it can promote strategic trade and act as a buffer against global economic volatality and threat of piracy. for example–chahabahar port

however, india unlike china is facing some limitations like–

1. cost of sterilisation— since india does not have deeper, matured financial institutions, it still depends on large number of traditional unsecured investments(hot money). As a result, it needs a sufficient buffer in case of capital flight. 2. poor health of exports—india to continously shore up its forex reserves need active participation in world exports which will create a safety-net in case of dip in forex reserves. Since india is not as powerful exporting country as china, it has to be careful in its use of forex reserves.

There is no country in the world using FOREX reserve for financing infrastructure..Please check. thaks

you are right… i interpreted the question as using forex reserves for infra projects outside the country…this is what china and norway have been doing fbecause of their large reserves of forex….rbi too discussing a proposal to buy foreign assets…plz reply if i have got you or not..

Its about domestic usage…also for project outside country there is no need to use FOREX reserve. No country have used FOREX even outside their territory. Forex reserves are for safety and liquidity purpose. State can use FOREX for capital investment outside.

the govt can’t use funds at their will. The foreign reserves that were used to buffer the international market voltality. but it can access it by creating SPVs. The reasons for such an act by the government is: 1. The huge infrastructure projects announced by the government and its unable to finance the funds. 2. During budget sessions we see a greater expenditure cut on many of the centrally sponsored schemes ex, health, education and using that funds to finance new programs launched by the government

The government should should act like a catalyst in the growth of the nation. The government should act to the concerns raised in PPPs.

The foreign exchange reserves which amount to staggering $355 billion can be utilized either to finance infrastructure projects or to recapitalize starved banks flooded with NPA’S. The reserves if at all used for infrastructure certainly can lead to infusion of life in various stalled projects and would aid the make in India scheme of the government. But these reserves are used to pay the import bills, and ongoing financial crisis in Greece may have certain impacts on developing economies like us. Moreover the increase in Brent crude prices may lead to increase in import bills. The reserves if used for supporting Public sector banks, would lower the NPA’s leading to cut in interest rates and spending of money by people, but it shall lead to compromise in balance of payments, which would affect the economy as a whole. So there must be an approach of Banks to build a larger stock of foreign exchange reserves which would aid the government in balancing the deficits in future.

excellent short and crisp answer..But u can use the space to write more points moreover these points could hv been added - 1)rbi’s monetary policy space constrained. 2)fiscal mismanagement by govt gets shielded by using forex to cover the deficits

PLEASE REVIEW FRIENDS

rising population of India has put tremendous pressure on basic infrastructural facility and ongoing compliance with Basel norms put heavy burden on Indian banking sector, further o mitigate the same funds have been channelized from the public accounts. Recent study unleashed that India will be in dire need of investment of one trillion dollar in infrastructure segment and for ensuring smooth inflow of investment government has proposed various models. ironically and pragmatically crude price downfall and world economy favored atmosphere helped Indian Forex reserve to cross marvelous figure of 350 billion mark, however this figure reignited debate among intellectuals about routing this reserve towards infrastructure and bank capitalization projects. Need of growing demand ought to deal with proper care and, funding thoroughly infrastructure project will no be wise enough however certain portion of this reserve should be channelized into banking system with prior condition of credit window to infrastructure projects which possibly deal with both infrastructure and bank capitalization problem. nevertheless country’s foreign reserve should not be seen as an investment alternative rather it is a mechanism to deal with the unforeseen conditions which may arise due to unpredictable nature of world economy which India had faced in 1991.

plz plz plz review…

nice one. you have mentioned that risks are there but at the same time they are ‘ very small’.what is your final stance on it? +ve or - ve?

Foreign exchange reserves constitutes of gold, Special drawing rights, sum of foreign currency deposits and bonds. The higher forex reserves reflects a positive outlook of country’s economy. It is saved and collected by central bank (RBI) for the purpose to meet the uncertainties and contingency. example - If a war broke out with China or Pakistan.

India’s banking sector is suffering from capitalization funds. The issue which emerges is that forex reserves must be used efficiently. keeping alignment with national interests. The use of forex reserves for financing the infrastructure projects is a decision which govt has to take n consultation with RBI. Forex reserves must not be use for purpose of recapitalization of fund-starved banks.

1- As forex reserve is protected and increased for the purpose to help the country’s economy out of crisis situation. India’s forex reserves is highest today but for a rising power $356 billion is comparatively less.

2- The NPA’s are in huge numbers. It can be major cause which might well stop the functioning of infrastructure projects.

3- It will be question on system of checks and balances. Forex reserves are saved by RBI and maintains it. The govt intervention to use forex reserves can effect the process of independent monetary policy formed by the autonomous central bank.

4- Forex reserves are mainly used for meeting their international payment obligations — both short and long terms, including sovereign and commercial debts, financing of imports, for intervention in the foreign currency markets during periods of volatility, besides helping to boost the confidence of the market in the ability of a country to meet its external obligations.

5- Infrastructure projects in India yield low or negative returns due to difficulties – political and economic – especially in adjusting the tariff structure, introducing labour reforms and upgrading technology. Thus, utilization of foreign exchange reserves for re-capitalization of fund-starved bank must can create an unecessary economic problem and further impinge the global positioning of India in terms of foreign loans.

India has amassed forex reserves of over 320bn$. Among others, the two options available to put these into productive purposes is investment in infrastructure and recapitalisation of banks. There are advantages of each with certain flip sides as well.

In the recent years, private sector investment in infrastructure is not forthcoming. and there is dire need to ramp up infra sector. Moreover government has sough to add 8 lakh crores in railways in next few years a part of which can be financed through forex reserves. Financing infrastructure sector like renewable energy and other technology intensive areas with forex will be all the more beneficial.

Banks as well are in desperate need of recapitalisation as there has been a double financial crunch on them in recent years. NPAs are mounting. Recapitalisation will tend to innervate the financial sector which will have cascading effects towards betterment of the economy.

Moreover, there are other alternatives for using forex reserves. Greater investment in international financial institutions, using them as a potential source of power on global platform and preserving them for rainy day when BoP accounts may not be in a favourable position are some of them.

Foreign exchange is the precious component of country’s fiscal health. with india attaining its all time high exchange reserve of $350 billion, there are suggestions to put it to use by investing in capitalisation of banks, and funding of infrastruture projects to ensure growth. RBI rightly rejected the idea of using it at present for various reasons. There are many reasons to not risk foreign reserves. Among them are - 1) reining volatile conditions in global market and economies do not rovide suitable conditions. 2) india being import oriented economy with imports dominating exports by large margin. 3) fall of oil prices along with reduced prices of indian imports has led to increase in foreign reserves. 4) India not completely in sustainable growth path with slowdown of manufatcuring and services 5) uncertainty in Infra projects and banks with High NPAs restrict space for risking forex reserves in them. 6) RBI could not use forex to shield the mismanagement of govt finances by political authorities. India rather than investing and risking precious forex reserves should shore up its reserves to sustainable levels by aiming to doubling the current amount within specific period. once india diversifies its exports along with that attains sutainable levels of forex reserves with improved levels of exports and reduction in imports or atleast zero imports, it would be prudent to use forex for developmental purposes as the present levels are not sustainable considering volatile situation of west asia and diminishing exports to western nations..

who say RBI has rightly rejected the idea..

-Forex reserves are the accumulation of wealth by central banks in form of hard currencies and golds. This reserve is helped to maintain the monetary balance by the banks. Recently India has increased its forex reserve to more than $350 billion. Some analysts are of the view that part of this reserve should be used for infrastructure projects and for recapitalization of PSBs.

-There can be reasons supporting for this decision. First, only a portion of Forex reserve has been proposed to use. Such a small risk can be taken initially. Second, the amount of interest paid to the part of forex reserve by the foreign countries to RBI is also not much. Thus part of the reserve can be invested in this sector.

-But there can also be reasons cited to counter this argument. First, the use of forex reserves for these kind of purposes would snatch the autonomy of RBI. Second, the forex reserves are for monetary policies and using it by government can be seen as alternative for fiscal deficit management.

-India should try to use different ways to invest in infra and recapitalize PSBs. Though the proportion of Forex reserve is less but it would affect the sentiments of the FII and FDIs investing in India. Moreover, it might also make the government to do away with the fiscal responsibility.

good answer..would hv been excellent if u had written in points as u hv mentioned first, second in paragraphs..first point in counter argument could be completed by saying that rbi loses its space for monetary policy decision making.

I tried to write it in points but because of only two points in each segment switched to para. But would to remember your feedback in future. Thanks for the review abd.

While most agree that the proposal is preposterous and a government that could not wring Debt Management Office out of RBI is certainly not going to do this.

Conclusion can be that once reserves cross $750 billion to $1trillion (CEA Arvind Subramanian’s figure for safety), RBI can design a Sovereign Wealth Fund (SWF) so as to invest abroad. Even then domestic investment is strict no-no as it has tendency to fuel inflation and RBI has recently secured “fighting inflation” as its priority.

The RBI uses foreign exchange reserves for financing of imports, for intervention in the foreign currency markets during periods of volatility, and to absorb any unforeseen external shocks, contingencies or unexpected capital movements.

The government of India intends to use a part of this foreign exchange reserves to finance infrastructure projects. Using foreign reserves for infra funding or to recapitalize fund-starved banks isn’t a good idea. Following reasons support this view:-

· Infrastructure projects in India yield low or negative returns due to slow execution

· The amount of foreign exchange reserves in India is modest when compared to some of the other countries in the region and it can be argued that the proposed plan may lead to more economic difficulties than anticipated benefits.

· The caution is warranted since the global financial markets are still not in good health

· In the absence of a sustainable recovery in global economies, the possibility of a capital flight cannot be ruled out in the event of a crisis situation.

Infrastructure indeed is a cash-starved sector. But rather than funding it from foreign exchange reserves, It should be by resolving the structural bottlenecks, such as ensuring fuel linkages and making the clearance process faster. Once this happens, private investments would automatically begin to flow into infrastructure development.

Use of Forex Reserve for the Infrastructure project

Forex is the Assets held by the central bank in form of the SDR. Oro. Dollar etc. In India it is held by the RBI for the Mainly the reason for the uncertainties and contingency.

The Idea of the Use of this Forex for the Infra firstly Floated by the Montk singh. the Then VC of the planning commission but till the date no conclusion come on the proposal. The Main reason Is the Bitter memory of the 1991 BOP Crisis. But The Situation changed today. It should be used for the projects for the following reasons :-

· (1) Huge Reserve :- India Have currently more than $350 Asset and use of the 3%-4% For the Infrastructure will not lead to the big risk.

(2) Bottle neck of the infra and No Alternate way for the funding :- Bottle neck of the infra is long and Well know problem and last decade Govt Experiment the PPP but do not get the success and not Since last 2-3 years Hoping on FDI but it’s also not get success.

(3) No Future risk :- India Economy growing highest in world. Efficient FRBM mechanism. Decreasing gap of the CAD in last 2 year, this suggest that There is less probability of the deep in forex reserve in next 3-4 years.

Though the Idea Seems Good In first sight there are some Monetary and accountability issues in the use of the forex reserve :-

(1) RBI’s Role :- It undermines the RBI’s autonomy as the sole arbiter on the use of forex reserves. RBI Solely responsible for the Inflation measures and The Forex increase the Ruppe circulation in economy that Effect the RBI management.

(2) Uncertainly in infra projects :- Already huge investment of the bank struck in the PPP based Infra projects and It’s main reason for the Increase of NPA. This experience suggest that even small part of forex investment is also risky.

(3) Uncertainty in Oil Market and Indian dependence on other :- India Import 75% of the crude and Oil Market equation is not in the reach of the Indian policy. This Area need the Strong Forex reserve.

The economic survey claims that by reducing SLR and priority sector lending, banks can be recapitalised without any capital infusion from the govt. Both SLR and PSL account to over 60% of the Bank’s credit.

Yes it is …But it’s the “Necessary Evil” 😀

SLR is the Prime for the stability of the Banking and PSL for the Equal Socio economic benefits. And In addition SLR is not in cash. it’s CRR that in cash.

For Infra. other way to get fund is the Money form disinvestment and Extra cess – on both Govt working.

( btw. In some Earlier Answer. I suggest the CRR and SLR for the Infra project. Write As per the Question demand 😀 )

The world around being in an economic dilemma, India is posing for a step to invest its pile of forex reserves to finance infrastructure projects and fund-starved banks. It can do so, may be with the following assurances:

a) India recently ranked as a top 10 favored foreign investment destination crossing Russia too. b) A well accommodated forex reserves that can immunizes India from on going world economic crisis. c) Liberalized FDI policies in many sectors can offer a chance to crop up the foreign investments in future that can act as a source of funding. d) With the initiatives of Make in India, attractive return rates compared to other countries as of now may attract foreign investment.

But the other side of the coin differs or infact contrasts to the above features. They are: a) India is not a export driven economy, but import dependent one. b) Weak Oil prices may speculate this action, but their reversal can happen any time with fragile middle east political conditions. c) India has a long history of high gestation period in Infrastructure projects and low returns which may end up in losses too. d) Banks must have the credible monetary policy to develop, not using fragile Forex reserves e) Finally, India foreign fund was mainly in FII rather than FDI. FII is more volatile that can make external sector vulnerable.

Conclusion Subash one line even like some percentage of forex reserves can be channelized after proper risk assesments rest all good .

There are some concern in Utilising the forex reserve for these purposes - a. India’s forex reserve is only nearly 350 bn dollar and most of them is because of FII which is hot money and can outflow in short time and thus can create a currency crisis in country if India don’t have adequate backing of forex reserve.

segundo. It is an interference in the autonomy of the RBI as it is function of RBI to manage monetry policy and forex reserve. do. It is an backdoor for currency appriciation which can harm India’s export. re. India’s infrastructure organisation is not trustwothy and these projects have long gestation period so it is wise not to invest in such risky area. But there are some points which supports the investments eg: a. Only 3-4% of total forex reserve will be needed in the process so it is worth risk taking. segundo. India’s most current forex reserve lies with foreign central banks which gives interest rates like 3-4%. c China has also utilised its forex reserve to fund its infra projects so India should also do that. Since India’s infrastructure are starved for investment and PSB have to infused with huge capital so government should take the step but simultaneously ensuring that its forex reserve are replenished again mainly by FDI and current account surplus.

Foreign exchange reserves of any country play a huge role having a favorable balance of payments and determines macro economic stability of economy. Indian government is thinking towards using huge reserves to finance infrastructure projects or recapitalise needy banks.

India’s targeted growth of 8% is possible only if favorable ecosystem along with infrastructure is developed for success of programmes like Make in India, Indigenization of technology etc. In addition it can redistribute the growth through financial inclusion. banks have a crucial role to play. However infrastructure development needs long term finance. according to finance ministry – banks and PSU’s need infusion of 40000 crores in next two years. India can utilize its growing foreign exchange reserves as alternative model of financing to PPP model for infra development. Recent initiative of BRICS to establish contingency reserve fund could act as buffer, if need arises However this could be a difficult task as foreign exchange reserves do not come under the ambit of central government. RBI would not be willing to part with it easily. Thus functional challenges remain in execution of this idea. additionally there is risk of disturbing the balance of payments. While It is a good idea to mobilize finance for much needed infrastructure development, India needs to be cautious in deciding how much to recapitalise and at the same time how to sustain the exchange reserves at healthy levels for economy.

After liberalisation of indian economy we have seen an upsurge in foreign reserve and FEX amount to roughly 300 billion dollars. which is bound to rise with rising exports. currently we are in a dire need of infrastructure investment with govt. trying with innovative solutions such IIB etc to finace projects from telecom, highways, communication, rural connectivity . basel 3 norms also require bank recapitalisation. arguementts against - 1.FII largely account for FEX and not FDI. 2.FEX not large enough to be on a safe side. 3.not hig returns on onfrastructure with delays in PPP projexts as have been seen. 4.reduce role of RBI as govt. role would increase. 5.main function is to ensure cuurenct stability with looming crisis of greece and in past of US and EU. in favour 1.need of infrastrucure. investment. 2.FEX largely parked in deposits and securities with low rate of returns. 3.investments in SEZ can increase exports and further increasing FEX.

thus, when suficient enough FEX can be investe in the form of sovereign funds.

India has substantial amount of forex reserve and it is increasing time to time as reported by the RBI. For any country forex reserve act as a safety cushion to protect it’s country’s currency against devaluation in foreign exchange market. Forex reserve also help to pay debt to international organisation. In the recent scenario Indian currency is suffering from devaluation in currency exchange market against US dollar so forex reserve can be useful in this case. RBI can decisively use its reserve by participating in exchange market. It can stop devaluation of rupee by releasing sufficient amount of its accumulated reserve. Today’s world is also witnessing Greek Crisis. Greece is suffering from huge debt burden in IMF and ECB. Many european countries are denying to bail out Greece until or unless it take some strict austerity measures. But austerity can lead to slow growth can adversely impact on its unemployment. Greek people therefore deliberately rejected this idea of austerity in referendum. In a nutshell today’s Greece is going through a dilemma. In the current global scenario whole global economy is suffering a deep recession after 2008.India till now has been protected itself from it’s impact. Recently RBI Governor has also stated that currently this country has enough Forex reserve to confront a crisis like Greece. So forex reserve give a dimension of confidence in economy and also attracts foreign investor to invest in this country which in turn accelerate FDI growth in country. On the other hand our nationalised bank is currently starving from capital deficit. For stalled projects and deplorable agricultural income most corporate lenders and farmers are unable to pay back their debt. This helps to grow NPA. So under this circumstances surplus forex reserve can be a boost we can invest it in our industrial growth and also give to our bank to help them to revive from capital deficiency. So government should take decision judiciously and should also frame a correct policy notion which will correctly bifurcate the share of forex reserve in domestic market and also in international economic affairs.

Foreign exchange reserves serve to provide cushion against shocks in economy and also act as a stabilizing device for the same. India has over $300b of Forex reserves which is a good number. Significance of healthy Forex reserves to India is tied in history. Back in 1991 India was on the verge of default and its reserves had almost dried up which implied it could barely import oil which in turn was so crucial to our economy and still is. The highly volatile West Asia has made crude oil prices volatile. Moreover, fortunes of other economies exercise influence on Indian economy as witnessed in the ongoing tussle between EU and Greece. Slowdown in Chinese economy does not bode well for us. Thankfully, India can cope with it because of the healthy state of its Forex reserves. Therefore, it can be said that presently, India should focus on investments in the form of FDI and FII and make the ‘Ease of doing Business’ index favorable for it. Indian government has also advised banks to raise capital from the market and it can also look at divestment as an option. Using Forex reserves however, in current scenario would not be the best option.

I totally lie in sync to what the ex - RBIgovernor feels and strongly stand against the notion of using FOREX to fund infra projects The only instance when RBI deployed its reserves for infra funding was when a window was created through setting up of an overseas subsidary of IIFC (UK). 2008. But beyond that the RBI is pretty conservative in opening up ist reserves kitty. FOREX reserves are meant to act as a cushion which the RBI is holding for a rainy day. In order to finance the infra projects. the govt has to make sure that the stalled projects gathers momentum which will autoativally allow FDI’s to flow in to fund the infra sector apart from emboldening the ‘Make in India’ concept As far as the recapitalization of the fund starved banks are concerned. a special economic vehicle should be desighned for this plus a greater chunk of the budgeting expenditure should be infused rather than exploiting the Foreign Exchange Reserves

1990-92 Early 1990s Recession

The recession of the early 1990s lasted from July 1990 to March 1991. It was the largest recession since that of the early 1980s and contributed to George H. W. Bush's re-election defeat in 1992. Although mainly attributable to the workings of the business cycle and restrictive monetary policy, the 1990-91 recession demonstrated the growing importance of financial markets to the American and world economies.

From November 1982 to July 1990 the U. S. economy experienced robust growth, modest unemployment, and low inflation. The "Reagan boom" rested on shaky foundations, however, and as the 1980s progressed signs of trouble began to mount. On October 19, 1987 stock markets around the world crashed. In the U. S. the Dow Jones Industrial Average lost over 22% of its value. Although the causes of "Black Monday" were complex, many saw the crash as a sign that investors were worried about the inflation that might result from large U. S. budget deficits. The American housing market presented another sign of weakness, as in the second half of the 1980s a large number of savings and loan associations (private banks that specialized in home mortgages) went bankrupt. The collapse of the S&L industry negatively impacted the welfare of many American households and precipitated a large government bailout that placed further strain on the budget.

Although the 1987 stock market crash and the S&L crisis were separate phenomena, they demonstrated the growing importance of financial markets—and associated public and private sector debt—to the workings of the American economy. Other causes of the early 1990s recession included moves by the U. S. Federal Reserve to raise interest rates in the late 1980s and Iraq's invasion of Kuwait in the summer of 1990. The latter drove up the world price of oil, decreased consumer confidence, and exacerbated the downturn that was already underway.

Although the National Bureau of Economic Research has concluded that the early 1990s recession lasted just eight months, conditions improved slowly thereafter, with unemployment reaching almost 8% as late as June 1992. The sluggish recovery was a key factor in George H. W. Bush's defeat for re-election to the U. S. presidency in November 1992.

Mark Carlson, "A Brief History of the 1987 Stock Market Crash with a Discussion of the Federal Reserve Response," Federal Reserve Board, Washington, D. C. (2006): http://www. federalreserve. gov/Pubs/feds/2007/200713/200713pap. pdf

Peter Temin, "The Causes of American Business Cycles: An Essay in Economic Historiography," in Jeffrey C. Fuhrer and Scott Schuh, eds. Beyond Shocks: What Causes Business Cycles? (Federal Reserve Bank of Boston, 1998), 37-59.

Carl Walsh, "What Caused the 1990-1991 Recession?" Economic Review of the Federal Reserve Bank of San Francisco (1993): 34-48: http://www. frbsf. org/publications/economics/review/1993/93-2_34-48.pdf

December 24th 2009

Indian Rupee’s Rise is Sustainable

While the Indian Rupee has risen more than 10%, since bottoming in March, it has increased only 4.3% in value in the year-to-date. Still, given how turbulent the first few months of 2009 were (a continuation of 2008, really), this modest appreciation was actually the third highest, among Asian currencies, behind only the Indonesian Rupiah and Korean Won.

For those of you that don’t regularly follow the Rupee (to be fair, I probably fall into this category), it has basically ebbed and flowed over the last couple years in accordance with risk appetite, hardly breaking ranks with other emerging market currencies. It rose to record highs in 2007, only to lose 30% of its value in 2008 as the credit crisis exploded. In 2009, as I pointed out above, it has staged a modest recovery, as investors have hungrily poured money back into emerging markets.

In fact, the benchmark Indian stock market index has risen 79% this year, its best performance since 1991. The bond market has also been performing well, thanks to a recent upgrade by Moody’s of the government’s sovereign local currency debt. “Moody’s said the move reflects ‘increasing evidence that the Indian economy has demonstrated its resilience to the global crisis and is expected to resume a high growth path with its underlying credit metrics relatively intact.’ & # 8221; As a result, foreign capital, some of which is bound to be speculative, is pouring into India. $100 million a day is being plowed into Indian stocks by foreign funds.

Analysts remain extremely optimistic about near-term prospects of India, partly because of its association with China (termed “Chindia.”) “India’s exports climbed in November for the first time in 14 months after sliding an average 21 percent since October 200…Overseas shipments rose 18 percent to $13.3 billion from a year earlier.” The result is blazing GDP growth, clocked at 7.9% in the recent quarter. Interest rates are already a healthy 3.25%, and can be expected to rise in the near-term as the economic recovery continues to cement itself.

Certain risks remain, namely that the government is spending money like there’s no tomorrow. It will borrow the equivalent of $100 Billion this year to finance a record budget deficit, equal to 6.8% of GDP. Compared to other economies, however, this is hardly remarkable, which is why India’s sovereign credit rating was upgraded despite the rising debt. “Moody’s said the government’s debt trajectory was stable and the government had high debt financing capability.”

Going forward, forex traders are relatively conservative in their forecasts for the Rupee, with consensus estimates for the currency to remain relatively flat during the course of the next year. This is surprising, given that it remains well off of its 2007 highs and thus, relatively cheap. Perhaps, its a sign that investors are nervous about the Indian government’s lack of a coherent long-term plan. Perhaps, it reflects uncertainty about bubbles that are forming in other corners of emerging markets. Probably, it shows that despite all of the progress that was made in 2009 towards containing the credit crisis, investors still remain vigilant, and are hedging their bets accordingly.

More about this next time.

Forex catamarca

Saturday 14 October 2017

Crisis De Divisas De 1991 En La India

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