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Macroeconomic Policy Challenges for India

Macroeconomic Policy Challenges for India. By Dr. Shankar Acharya. Macroeconomic Policy Challenges for India. Foreign Capital Surge of 1993/94 Asian Financial Crisis of 1997/98 Fifth Pay Commission The Employment Challenge Economic Growth: Past, Present and Future.

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Macroeconomic Policy Challenges for India

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  1. Macroeconomic Policy Challenges for India By Dr. Shankar Acharya

  2. Macroeconomic Policy Challenges for India • Foreign Capital Surge of 1993/94 • Asian Financial Crisis of 1997/98 • Fifth Pay Commission • The Employment Challenge • Economic Growth: Past, Present and Future.

  3. Foreign Capital Surge of 1993/94 • Event: $12 billion (4% of GDP) added to foreign exchange reserve between sept.1993 and oct. 1994. • 3 Major Policy Issues • Should nominal exchanges rate be allowed to appreciate (text book)? • How to transform “problem” of capital surge into opportunities for liberalizing external trade and payments. • If reserves were going up sharply, what could authorities do to limit impact on inflation? • Policy Choices Mode • Build-up RBI’s reserves and prevent nominal appreciation of rupee • Undertake number of payments liberalization measures • Undertake partial “Sterilization” of foreign asset accumulation.

  4. Asian Financial Crisis (1) Lessons • Avoid high levels of short-term external debt • Avoid sustained and substantial appreciation of country’s real effective exchange rate (REER) • Avoid massive drawdown of foreign exchange reserves in vain attempt to defend unrealistic exchange rate • Strengthen domestic financial sector, especially banks (capital adequacy, prudential norms, etc) • Prudential limit for exposure of banks to speculative markets (stocks, real estates). • Keep current account deficit of BOP at manageable levels. • Cautious approach to Capital Account Convertibility.

  5. Asian Financial Crisis (2) What India Did • Short–term debt under tight control after 1991 crisis. • Market determined exchange rate managed judiciously in 1993-97. Rupee allowed to depreciate by 16% in “stress period” August-December 1997. • Some use of foreign exchange reserves to put brakes on depreciation, • Substantial banking reforms in period 1992-97. • Bank exposure to stock and real estate markets limited by norms. • Current account deficit contained after 1991 crisis. • Cautions approach to Capital Account Convertibility. • Monetary policy tightened in January 1998.

  6. Pay and Pensions of Employees of Central and State Governments Fifth Pay Commission Sources: Budget documents, CSO and RBI

  7. Employment Challenges

  8. Income, Growth and Population: Major States

  9. Income, Growth and Population: Major States(Contd………………)

  10. Economic Growth: Past, Present and FutureGrowth rate of GDP and Major Sectors Source: CSO; data for 1951/52 to 1999/2000 are at 1993/94 prices and for 2000/01 to 2005/06 at 1999/2000 prices

  11. Growth: Recent and Outlook(%per annum)

  12. Crystal Ball Gazing: A Possible Scenario

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