Monday, February 23, 2009

Why has India coped rather well with the decline in capital inflows?

I have an article in Financial Express today titled Why has India coped rather well with the decline in capital inflows?, and they have an editorial on it.


  1. Great piece!
    With commodity prices at rock bottom, this is indeed historic opportunity to build strong infrastructure - for us and more so for China.

  2. india is perched precariously at the moment. 2009 end thru 2010 will see india really impacted by the global bust.

    1. Realestate Bust: The prices are just beginning to fall. This has 2-3 yrs to play out. Expect prices to crash to 2001 level at the minimum.

    2. Rural unemployment Bust: Present numbers suggest that rural and blue collar workers are hugely impacted by the crumbling indian exports. Expect rioting conditions & Mayavati ascendency to PMship.

    3. Last 5 yrs credit orgy had indians overspending & overearning starry eyed mungerilals going crazy(top5-8% of the pop). The BUST will be a sobering reminder of enormity of indian problems.

    4. Only 35 mil household in india is in the organized sector. A vast 80% of indians live on less than $2 a day. Unlike old india, these section is bombarded w/ media peddling affluence in the top indian segment as well from abroad. This is increasingly looking like a tinderbox.

    5. 50% of indians are younger than 25 yrs. While last 5 yrs of orgy made few paper billionaires in india,, the employment picture did not improve as much. A demographic BOMB in the making.

    6. IT & outsourcing BUST: This bust will be a huge downer for the yuppies & starry-eyed jumping jack indians. W/ unemployement soaring to double digits in the western world, outsourcing jobs will no longer be feasible. Bengalruru/heyderbad has just begun to feel the pain. Expect moombai/delhi(ncr) to join them. Expect throngs of unemployed indians from abroad coming back to india, deflating hyperinflated compensations for indians geared for credit orgy / easy money of yore..

    7. expect GDP for the next decade in the 2-4% range. I am being optimistic w/ a positive number here.

    8. Indians will be more drawn to safe govt jobs. First whiff of that is being felt even now.

    9. Bollywood will be swamped by Hollywood as bollywood clowns will be replaced by international/US stars.

  3. As customary we shall do nothing about our energy dependence. Why not plan for the next oil price spike by inviting Shai Agassi to India and join the quest to end oil (dependence). Denmark, Israel, Australia, Ontario and California have already signed up. We need one of our progressive states or even cities to take the lead. More info at

  4. While the decline in oil prices has certainly help, it is important to understand that the "Software Revolution" has fundamentally transformed India's BoP.

    Some numbers:

    Crude and Petro Imports (Custom Basis):
    FY2001: $15.65bn
    FY2008: $79.64bn
    Change: $64bn

    Net Invisibles
    FY2001: $9.79bn(2.12% of GDP)
    FY2008: $72.65bn (6.60% of GDP)

    Note the following numbers:

    Net Misc. Receipts (Invisibles)
    Software exports are included in this category.
    FY2001: $2132mn(0.37% of GDP)
    FY2008: $37047mn (3.41% of GDP)

    Net Pvt. Transfer Receipts
    Money sent home earlier largely from the Gulf, but now increasingly by software guys
    FY2001: $12854mn(2.78% of GDP)
    FY2008: $40778mn (3.70% of GDP)

    There are other positive developments:

    Stable capital flows have increased:

    FY2001: $4029mn(0.87% of GDP)
    FY2008: $32435mn (2.95% of GDP)

    In addition, there has been rapid growth of goods exports as well.

    Export/GDP (Exports BoP basis)


    GDP data used is from IMF. So there may be some FY, CY conflict. But I think, it broadly conveys my point.

  5. Econlogic,

    There is no question that over a longer period, there's been a sea change in India's BOP.

    But I'm after a more short-term thing. Over a period of less than a year, $6 billion a month peeled off. This is a big number. Why does it hurt so little? I think I have a fair answer there: over a closely related time period, we've got back a gain of $6 billion a month owing to the drop in crude oil prices.

  6. Ajay,

    Exchange rate expectations are key. The moment there is some scope for timing payments and receipts, flows become a function of expectations.

    1. Yes, there are extensive capital controls and CIP does not hold. Yet, uncovered interest parity in (in some form) India can operate through hedging of trade flows and the currency swap market.

    2. Even without the hedging route, trade flows do not happen on purely cash basis. There is the normal leading and lagging based on expected direction of the currency and the carry.


    Even if we have a trade deficit and no other capital inflows, the flow situation in the market may still be in surplus because the corporate sector is selling 1-year worth of exports forward and choosing not to cover imports.

    Similarly, we are emerging from a dollar weakness cycle and the corporate sector is probably net forward sold. If the hedge ratios were to change to net forward bought, RBI would not have been able to manage even with a decline in oil prices.

    The key question is why did exchange rate expectations not go for a toss?

    One part of the answer is your point:

    1. Decline in oil prices certainly helped as it shaped expectations of market players.

    2. The second part of the issue is the fundamental changes I outlined. Traders know that India's BoP has fundamentally changed and the vulnerabilities of yesteryears are gone. Not many could have imagined even in 2000 that India could withstand $130 per barrel oil prices.

    3. Last point is people are thinking whether the current rally in the dollar is sustainable. Right now the dollar is benefiting from the status of treasuries as the ultimate risk free asset. What do ballooning deficits imply for the future? There is always the incentive to inflate debts away.

  7. Uncanny the recurring resemblance between your "op"-eds and the actual editorials of the Express Group. I reckon the Business Standard was right: you are working for a newspaper. So much for transparency...


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