Monday, October 15, 2007
The decoupling hypothesis
Many people believe that China and India have decoupled from the US economy, so a slowdown in the US (which appears to be on its way) will not affect growth in China and India. Writing in Indian Express, Ila Patnaik looks at the facts about the trade linkages between India and the US.
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The article is very useful in laying out the facts about Indian export dependence on the US market, and on China. It sets the stage for an analysis of India's trade picture. Everyone is focussed on the nominal bilateral exchange rate of the Rupee with the US Dollar. It makes more sense to consider the real effective exchange rate (which weighs different currencies by their level of trade with India) to see if Indian exporters are really suffering from the fall in the US Dollar and by how much. Such an analysis might be useful before the export lobby pushes a gullible media into forcing the government to undertake harmful policies to compensate them for a strong Rupee.
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