tag:blogger.com,1999:blog-19649274.post6514148260393400905..comments2024-03-27T17:16:12.789+05:30Comments on The Leap Blog: Who's afraid of a big current account deficit?Ajay Shahhttp://www.blogger.com/profile/03835842741008200034noreply@blogger.comBlogger18125tag:blogger.com,1999:blog-19649274.post-66766833702461824372013-11-29T23:16:59.737+05:302013-11-29T23:16:59.737+05:30This was an excellent article, but I dont agree wi...This was an excellent article, but I dont agree with the central theme of the argument that a large CAD is good. To understand your thought process clear, I would be extremely grateful if you can answer my following queries:<br />1) Consider situation where CAD is 0 or even surplus...Still foreigners eg. PE funds, FIIs investing in Indian bond and stock markets with the confidence in the economy...Wouldn't investors be more comfortable hoping rupee would appreciate and they gain thereby and not just making an opportunistic bet when rupee depreciates<br />2) Doesn't your argument make implicit assumptions of 1) Elasticity of exports and imports 2) Perfect mobility of capital flows 3) Rupee remaining at the same or stable level throughout the process 4)Prepondarance of only short term investors, rather speculators....None of them hold true in real life<br />3)In the Savings, Investment, CAD identity, are we not ignoring the role of Fiscal deficit....A high level of investment may co-exist with a high fiscal deficit leading to a problem of twin deficit. Is it correct to portray an identity as it were a functional relationship. It can also be argued that a 0 CAD could co-exist with Investment exceeding Savings and balance getting adjusted in reduction of Fiscal deficit (Utopian, I know, but just a possibility which negates the statement that CAD is good.<br /><br />4) I feel that your argument about accountability is spot on, so is the point about financial market repression...but dont you think that import of gold which worsens (or in your view betters) the CAD situation, is definitely bad for the economy<br /><br />5) If I understand correctly, Investment in the Investment saving identity means real investment or investment in physical assets...how does investment in financial assets (which is not a part of GDP and hence the identity you have referred) affect the Real investment Savings gap? Isn't investment in bonds by foreigners just a 'short term financing' of the rupee....some kind of succor given to the rupee which the rupee will get addicted to, in CAD persists, causing the currency forever to be dependent on the foreign flows...Ideally should it not be the other way round?<br />What has this to do with real investment anyways?<br /><br />Thanks very much for the article...It was extremely though provoking and stimulating<br /><br />Regards,<br /><br />Kunal KhairnarKunalhttps://www.blogger.com/profile/05859067856028304589noreply@blogger.comtag:blogger.com,1999:blog-19649274.post-3998667071117045772013-10-09T12:20:53.767+05:302013-10-09T12:20:53.767+05:30Thank God !! Raghu is as xenophobic as I am.
http...Thank God !! Raghu is as xenophobic as I am.<br /><br />http://economictimes.indiatimes.com/news/economy/finance/rbi-governor-raghuram-rajan-vows-to-free-markets-for-1-trillion-core-sector-investments/articleshow/23752054.cms<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-82997811634303458752013-10-08T10:02:05.859+05:302013-10-08T10:02:05.859+05:30This sort of lucid and reason based thinking is al...This sort of lucid and reason based thinking is almost heresy in Indian economic policy establishment. I would like to echo the sentiment expressed in a comment earlier ... This sort of analysis and wisdom is rare.<br />The point on the Bond market being the barometer of government performance in advanced economies is spot on.DesTexhttp://finance.yahoo.comnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-4858660110372756402013-10-05T15:05:17.962+05:302013-10-05T15:05:17.962+05:30Thanks for taking time to respond. Do not agree w...Thanks for taking time to respond. Do not agree with your thesis. Will sign off with 2 thoughts:<br /><br />1. Should you include some real quantitative data to support the thesis ? Otherwise, one could argue that the article is based on the author's subjective logic.<br /><br />2. Should the tradeoffs be discussed i.e., impact of CAD on a number of economic indicators on both the short term and the long term ?. analogy -- while prescribing a medicine, should you also consider side effects/ other intended effects.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-16353853951355102212013-10-04T22:23:44.098+05:302013-10-04T22:23:44.098+05:30Why would I argue THAT to the government? And, why...Why would I argue THAT to the government? And, why put the cart before the horse? Even if I had to argue anything to the government I would argue in favor of long term policies. The CAD is irrelevant, its a secondary measure. <br /><br />Yep, very little FDI in retail. Which means that the policies need further work. Precisely why one gets the sense that more pressure is needed from the market. By the way, I have no desire for FDI. It would be nicer if it were domestic investment but it seems domestic business is not willing to play ball with the govt given its arbitrariness. And, similarly for FDI. No wonder there is no FDI in retail. That's exactly the point! Another example is the policy for foreign universities - in 2008 the goal was a grand opening up, and it has been opened up in small steps, liberalizing marginally every time because whatever has been done hasn't been enough. 5 years and counting... eventually, we will get to the right policy for investment into higher education and similarly for retail - domestic or FDI or whatever....Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-5929532232004133072013-10-04T14:49:59.206+05:302013-10-04T14:49:59.206+05:30One more comment -- policy announcements and proje...One more comment -- policy announcements and project clearances are not equal to inflows and investment in projects e.g., no FDI in retailing till date. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-45956909115623100282013-10-04T14:40:36.092+05:302013-10-04T14:40:36.092+05:30Proof of the pudding lies in eating it. So a sugg...Proof of the pudding lies in eating it. So a suggestion -- you could argue to the Government to have policies that will lead to a higer level of CAD, as this will drive down Ruppee, spur growth and make Indian goods and services more competitive. Make the suggestion and find out whether you premise is implementable or academic ?<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-7078191402063224402013-10-04T00:39:29.195+05:302013-10-04T00:39:29.195+05:30Well, much of the problem accumulates over times o...Well, much of the problem accumulates over times of low volatility, when the problems are ignored for long periods. The actual periods of volatility are actually simply resolution of long-standing issues. The period of volatility was great from the point of view of long term fundamentals as billion of dollars worth of projects got cleared, many measures were taken which were long pending - like clearance for foreign universities and FDI for other sectors. If we get the kind of urgency we saw from the govt in pushing through policies during this volatility, I'm prepared to have rupee go to a 100 and petrol at 115. No problem, whatsoever. :) Just imagine how much will get done by the govt if that happens!! Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-37180347116371271002013-10-03T20:03:32.422+05:302013-10-03T20:03:32.422+05:30Ajay, you crack me up.
Anyway, I think the comme...Ajay, you crack me up. <br /><br />Anyway, I think the comment above it on internal vs external drivers of capital flows is the more interesting one.<br /><br />In general your piece does a good service, and I'll likely give it to students to read. But it appears premised on the standard idea that capital responds mostly to domestic conditions. There's a lot more room for legitimate argument when K flows are externally driven (e.g. Helene Rey's recent piece http://www.voxeu.org/article/dilemma-not-trilemma-global-financial-cycle-and-monetary-policy-independence). <br /><br />In India's case, this isn't to say the rupee didn't deserve to get hammered. Rather, the external forces of the QE-driven K inflows probably prevented it from getting a much-deserved hammering earlier. So India suffered because of not getting the accountability signal earlier and having to tolerate Mr. Mukherjee longer than it should have.RGnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-25674300909995832032013-10-03T18:50:43.871+05:302013-10-03T18:50:43.871+05:30The statement " CAD is exactly equal to inves...The statement " CAD is exactly equal to investments minus savings" is quite misleading and partially incorrect. I believe budget deficit is the primary mechanism to support the gap between investment and savings. CAD is only a secondary source of support , only to the extent of the need for importing capital assets (machineries, intellectual properties etc). <br /><br />I think you should have a follow up blog to clarify your thought process.<br /><br /> <br /> Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-38910784690921056842013-10-03T17:20:23.820+05:302013-10-03T17:20:23.820+05:30Agree that the economy needs to be more efficient ...Agree that the economy needs to be more efficient and competitive and that the value of Ruppee is an outcome of the relative strenth of the Indian economy and not a cause. <br /><br />There are arguments for both a higher and lower Ruppee. As you point out lower Ruppee makes products and services competitive but reduces the buying power of the citizens. There are tradeoffs involved. Point is not high or low Ruppee but stability in the value and not the high level of volatility as has been witnessed. Volatility makes planning very difficult. <br /><br />Capital flows can slow down for a number of reasons --both internal and external. High level of CAD makes the Ruppee vulernable to high level of volatility. What happens if the capital flows remain low for an extended period of time, Ruppee goes to 100 and petrol sells for 115 Ruppees ?<br /><br />Self correcting mechanism is good in theory, but can be a challenge in situations of high volatility e.g., during the GFC, should the banks have been allowed to fail and go out of business ?<br /><br />Point being made was that the article argues the issue from one point of view and overlooks the trade offs involved in having a high CAD.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-67739522480150121322013-10-03T14:08:22.213+05:302013-10-03T14:08:22.213+05:30Two things:
The rupee depreciation is not a root...Two things: <br /><br />The rupee depreciation is not a root cause as you make it out to be. For rupee to appreciate we need to fix the root causes of low productivity and low competitiveness. It makes no sense to ask for a stronger rupee without asking to fix the root causes which need long term commitment and a major change in the way we function.<br /><br />Secondly, its not clear how many people benefit and how many don't. Rupee depreciation helps exporters and pretty much every company benefits by being more competitive in comparison to other countries. IT industry benefits a great deal. All of that leads to more jobs in the export services and manufacturing sector. Although, its not as much as one would hope for because of other hurdles put up by poor government policies. But, because of the examples I gave, I am not sure whether we have a net benefit or loss. <br /><br />Furthermore, it is a self-corrective system. A lower currency would promote more investment into exports which eventually would increase productivity and lead to currency appreciation. That is, if we implement the right policies to increase productivity which is the only way to have a strong economy and currency, at the end of the day. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-52358903646078875792013-10-03T13:59:33.730+05:302013-10-03T13:59:33.730+05:30FDI isn't just about 'owning' domestic...FDI isn't just about 'owning' domestic assets, but investment into creating new domestic assets (which might not even be physical assets, but IP, etc) which make a return for the foreign owner and the local economy. So, it depends on other rules and policies to do with FDI. That being said, I would prioritize domestic investment over FDI. Today, domestic investors are also not investing due to various problems and are going abroad, so those problems should be prioritized.<br /><br />We often tend towards xenophobia because of our colonial past. But, if one looks at many MNCs, they tend to have better governance and technology and quality standards than local business and we get to import technology and know-how which is pretty standard in the rest of the world. So, FDI has a lot of benefits as long as your concerns are reflected by adequate protections on the investment made into domestic assets. Furthermore, foreign capital can demand greater accountability from the government as opposed to domestic capital (which is boxed in and has no choice). When the government is the bottleneck as it is today, that is a good thing. <br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-21983775022368561342013-10-03T13:11:23.940+05:302013-10-03T13:11:23.940+05:30Economic well being is not equal to overall econom...Economic well being is not equal to overall economic growth. There is the question of inflation and how individuals are impacted by a set of policy options. Depreciation of Ruppee (with fall in capital flows) increases inflation and disadvantages certain people e.g., who consume a lot of petroleum products, kids wanting to go overseas for education, people whose incomes are fixed, etc. <br /><br />Q for the author -- 5 people are earning Rs 20 each (Rs 100). As a result of a policy, 4 people start earning Rs 15 each and one starts earning 50 (total of 110). Overall impact is an increase in income of 110. However, 4 are negatively impacted and 1 benefits. Should the policy be implemented or not ? <br /><br />Another question for the author -- if CAD was to increase to say 100% of the economy, no capital would flow. Question for you what is a comfortable level of CAD ?<br /><br />Actually the reverse happens in Petro states -- Countries export oil and use the earnings to fund expenditure. When prices for oil fall -- people's income come and down and puts a huge pressure on the economy. This happenned to esrtwhile Soviet Union. We are opposite, relying on capital flows -- whenever it falls (we are squeezed).<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-56758892291876181292013-10-03T10:40:07.244+05:302013-10-03T10:40:07.244+05:30You are distorting one of the basic economic ident...You are distorting one of the basic economic identities to suit your arguments. I challenge if this can go beyond mere a "blog" entry and stand up to scrutiny of any decent journal. But then the purpose here is to influence/fool the general public.<br />If a country is running current account deficit then that's needs to financed by capital account surplus which is nothing but "selling" of domestic assets either held abroad or inside the country's boarders.<br />If the capital was freely flowing, as you make it to be, without any "ownership" or any "nationality" attached to it then we would not be discussing any current and capital account in the first place. <br />The trick employed by apologists of foreign ownership of domestic assets like you (in the form of "CAD is such a good thing") is you completely camouflage the ownership angle as if whether the Indian assets are owned by Indians or foreigners doesn't matter at all.<br />But the cake will take the "accountability" argument. It's like arguing that if I own a house I will not be accountable for it's maintenance but if I take a house on rent I will always be accountable to the owner of the house and that's such a good thing!!<br /> Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-38910599502201562362013-10-02T16:19:12.790+05:302013-10-02T16:19:12.790+05:30A sharp rupee depreciation offers a possibility th...A sharp rupee depreciation offers a possibility that INR has overshot. If so, a speculator who comes in to buy INR will get a good return in a short time when the rupee comes back closer to fair value.<br /><br />Walking is controlled falling.Ajay Shahhttps://www.blogger.com/profile/03835842741008200034noreply@blogger.comtag:blogger.com,1999:blog-19649274.post-22240033906633862532013-10-02T13:01:40.581+05:302013-10-02T13:01:40.581+05:30Quite remarkable. Please try and get this publishe...Quite remarkable. Please try and get this published somewhere, such as American Economic Review. This is the stuff that makes our academics in our great public institutions such great economists, universally lauded for their insights worldwide. I enjoyed it immensely. Such wisdom is rare. Thanks.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-19649274.post-4581310255738675262013-10-02T10:14:51.902+05:302013-10-02T10:14:51.902+05:30When rupee depreciates, indian assets earning rupe...When rupee depreciates, indian assets earning rupees won't change profitability.<br />If asset price goes down in dollar terms, earnings also go down in dollar terms.<br />So how does rupee depreciation make assets cheaper for outsiders?<br />Are we confusing currency calls with asset valuations?<br />Or I have a vacuum somewhere in the way I have understood it?RMBhttps://www.blogger.com/profile/16947900262969927714noreply@blogger.com