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India in a Globalizing World Some Policy Dilemmas

India in a Globalizing World Some Policy Dilemmas. Distinguished Speaker Series Cornell University Ithaca, New York August 28, 2012 Dr. Duvvuri Subbarao Governor Reserve Bank of India . 1. India Macroeconomic Situation. Cause for Concern?. 2. 2.

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India in a Globalizing World Some Policy Dilemmas

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  1. India in a Globalizing WorldSome Policy Dilemmas Distinguished Speaker Series Cornell University Ithaca, New York August 28, 2012 Dr. Duvvuri Subbarao Governor Reserve Bank of India 1

  2. India Macroeconomic Situation Cause for Concern? 2 2

  3. India - Macroeconomic SituationLong Term Trends in Growth Rate 3 3

  4. India Growth Story What drove India’s growth in the pre-crisis period? 4

  5. India Growth Story Started fraying, beginning with the global financial crisis of 2008/09 5

  6. From One Crisis to Another Just as we were recovering from 2008/09 crisis, the eurozone crisis hit us. Policy space to respond to the crisis is much less now than in 2008/09. 6 6

  7. IndiaCurrent Macroeconomic Situation Growth has moderated Inflation is high and persistent Balance of Payments under stress Twin deficits (fiscal deficit, current account deficit) Investment has decelerated No policy space for stimulus 7 7

  8. Three Policy Dilemmas How do we manage the growth-inflation dynamics? External Sector - how do we manage the short-term trade-offs without compromising long-term sustainability? Fiscal Consolidation - how to manage the political economy constraints? 8 8

  9. Dilemma - 1 How do we manage the growth-inflation dynamics? 9 9

  10. Why has growth slowed? 10 10

  11. What is the inflation story? 11

  12. What is driving Inflation? • Food (cyclical + structural) • Global commodity prices + depreciation • Fiscal deficit • Demand pressures 12

  13. Inflation and RBI • What has RBI done to control inflation? • Has RBI succeeded in controlling inflation? 13 13

  14. Growth - Inflation Risks • Global Uncertainty • Commodity Prices • Fiscal Deficit • Monsoon Performance • Supply Response 14

  15. Dilemma - 1 How do we manage the growth-inflation dynamics? 15 15

  16. Dilemma - 2 External Sector - how do we manage the short-term trade-offs without compromising long term sustainability? 16 16

  17. What is the external sector problem? • Large current account deficit (CAD) • Financing the CAD with stable flows 17

  18. External Sector Problem • Why has current account deficit (CAD) increased? • Why have capital flows thinned? • What has been the result of this? 19

  19. How much has the rupee depreciated and why? Nominal Exchange Rate 20

  20. Rupee Depreciation? What is the impact of rupee depreciation? 21 21

  21. What has RBI done to contain volatility in the exchange rate? 22 22

  22. What is the ‘Capital Flows’ problem? • We want capital flows just equal to CAD • But they are invariably either too much or too little • And they are volatile 23 23 23

  23. Capital Flows - How volatile?Quickly Reversing Trends Pre-Crisis (2005/08) - Great Moderation - Volatile Inflows Crisis (2008/09) - Safe Haven - Outflows - Sudden exit Post-Crisis (2010/11) - Volatile inflows - ‘Currency Wars’ Eurozone Crisis (2011) - Confidence Effect - Outflows 24 24

  24. Managing Capital Flows Change in world view on capital controls from pre-crisis to post-crisis 25 25

  25. Managing Capital Flows • Two options • Capital Controls • Exchange Rate Management • No option is totally benign 26 26 26

  26. Managing Capital FlowsNo Benign Options Capital inflows Do not intervene Currency appreciation Intervene but Inflationary pressure but do not sterilize Intervene and Upward pressure on sterilize interest rates 27 27 27

  27. What is RBI’s policy - on capital account? - on exchange rate? External Sector Management 28 28

  28. External Sector Management Sustainable Solution • Reducing CAD in the medium term • Financing CAD in the short-term 29 29

  29. Policy Dilemma - 3 How to manage the political economy of fiscal consolidation? 30

  30. Why is fiscal deficit a problem? Fiscal Deficit 31 31

  31. India’s Fiscal Deficit • What is India’s fiscal deficit problem? • What are the challenges in fiscal consolidation? 32 32

  32. Why 2012 is not 1991? 33 33

  33. India and China 34

  34. Is the “India Growth Story” still credible? 35 35

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