TOI2018 ⁽¹⁴⁾

Read full article Abstract: It was with great sadness that I woke up to the news of resignation by RBI governor Urjit Patel this Monday morning. Urjit has been a friend for more than two decades and I have greatly admired him for his brilliance, professionalism, integrity, conviction and friendship. With his departure, India has lost a committed public servant. It is a rarity that a resignation, tendered amid policy differences with the government, elicits such a warm response from none other than the PM. In an unusual gesture, not only did Prime Minister Narendra Modi extol the governor for his thorough professionalism and integrity but also applauded him for steering “the banking system from chaos to order”. Patel earned this high praise through sheer hard work and principled policy making. He inherited from his predecessor an extremely fragile banking system. Years 2008 to 2014 had seen an unfettered expansion of credit by public sector banks (PSBs), with the RBI failing to deliver on its key regulatory mandates.

Read full article Abstract: Some influential commentators have argued that the time of manufacturing as the engine of growth is now passé. In their view, India must and can race to prosperity on the strength of its services sector alone. I have steadfastly argued, instead, that we must walk on two legs, manufacturing and services. While we must exploit our strengths in services, we also need to significantly accelerate growth in manufacturing, especially labour-intensive manufacturing. Agriculture, which currently employs nearly 45% of the workforce, is obviously not to be neglected. The point, instead, is that those currently deriving their incomes from agriculture would greatly benefit from accelerated growth in manufacturing. Nearly half of India’s farms are less than half hectare, a size too small to yield adequate living standard for a family of five. Owners of these farms will benefit directly if one or more of their family members found good jobs in manufacturing and services. Those continuing to cultivate will benefit from increased land per farmer as some farmers migrate to manufacturing and services. Those who argue that India…

Read full article An episode from the 1950s illustrates that a failure to use the exchange rate as an instrument of macroeconomic adjustment can be costly. With the exchange rate fixed at 4.76 rupees per dollar during the 1950s, the rupee was overvalued relative to foreign currencies. This made India’s goods expensive relative to foreign goods and resulted in the import bill consistently exceeding export revenues. The gap had to be covered by running down scarce foreign exchange reserves. By early 1958, the reserve almost ran out. Rather than devaluing the rupee to properly align the prices of domestic and foreign goods, the then government resorted to what is known as foreign exchange budgeting. Beginning with the second half of 1958, every six months the finance ministry began preparing a detailed budget of how the expected foreign exchange revenues over the following six months would be allocated across different ministries. That process multiplied the complexity and cost of investment licensing: No licence for investment in a project could now be given unless the finance ministry allocated foreign exchange necessary to…

Read full article Abstract: The multilateral trade regime which saw trade flourish for seventy years following the Second World War faces an existential threat today. A trade war has broken out between the two largest economies, the United States and China. From being the principal architect of the system, the US has come to view itself a victim of it. Therefore, in the medium run, we are likely to be left with regional trade agreements as the only game in town. This fact makes a successful conclusion of the Regional Comprehensive Economic Partnership (RCEP) agreement among its sixteen partner countries critically important. For reasons I explain below, India has much to gain from the agreement. India is often criticised, even vilified, for its tough stance in trade negotiations. But all major nations with bargaining power negotiate hard to maximise access for their exports in return for the access they give to imports in their markets. The criticisms must therefore be heavily discounted.

Read full article Abstract: A trade war is now in progress on two fronts. The United States opened the first front by imposing a 25% tariff on steel imports and 10% tariff on aluminium imports from a large number of its trading partners. That led many damaged parties to take retaliatory actions. China was the first to respond with a 25% tariff on $3 billion worth of food imports from the US. Mexico, Turkey, European Union and Canada followed suit once it became apparent that the US would not grant them the exemption from tariff they had sought. On the second front, the US has exclusively targeted China by slapping 25% tariff on a wide variety of imports worth $34 billion from it. China hit back in this instance as well, imposing 25% tariff on $34 billion worth of imports from the US. The US has threatened China with 25% tariff on another $200 billion worth of imports. China has said it will respond in kind. Imposition of tariffs by members of the World Trade Organization (WTO) is not unusual.