Journalism of Courage
Recovery will need sustained,broadbased increase in industrial production. First,RBI must cut rates
News of positive growth in industry,exports and car sales,a small decline in inflation,and changes in the regulations for foreign investors,has rekindled some optimism on the Indian economy. This week,RBI Governor Raghuram Rajan will announce his first monetary policy. Expectations are that he will reverse the interest rate measures taken by his predecessor to defend the rupee. Rajan must give a further push to growth to keep the momentum and positive sentiment alive.
Trade data shows that rupee depreciation has been good for the economy. The improvement in the trade balance can be attributed to four factors. One,the US economy is recovering. A change in world demand is one of the strongest determinants of Indian exports. Two,there has been a sharp rupee depreciation. This is the second most important determinant of export demand. Three,a slowdown,and in some cases,a contraction in the domestic industrial sector,has reduced the demand for imports. Four,rupee depreciation has added to the price of imports,thus creating a substitution effect where people move away from buying a foreign good to a home produced good. Thus,a combination of the improvement in the US economy,slowdown in the Indian economy and rupee depreciation are at work. A reduction in the current account deficit at this stage,caused not by imposing across-the-board duties on imports,but by a price adjustment that simultaneously impacts exports and imports,is very good news. In the absence of such news,in this season of bad ideas,there was a danger that higher import duties on some so-called luxury goods would have been brought back.
