Author: Ashima Goyal, IGDRI

The cyclical post-reform period movement in Indian food stocks has been an important element of food price stabilisation.

The average level of food stocks rose from 10.1 million tonnes (mt) in the 1970s to 13.8 mt in the 1980s and 17.4 mt in the 1990s.In July 2002, it peaked at 63 mt; 2010 was another peak at 35 mt. Shocks from liberalisation seem to have aggravated the existing dysfunctionality in the system, although correct polices offer new ways to stabilise the situation. Read more…

Author: Ashima Goyal, IGIDR

India’s exchange rate regime has evolved considerably over the reform years. In the current official view, it is a managed float. The market discovers the rupee value and the RBI intervenes only to reduce volatility. Excessive exchange rate volatility will hurt the Indian economy, which is increasingly dependant on international commerce. So what level of exchange rate flexibility should the RBI allow?

Until 2008, changes in the nominal rate kept the real exchange rate more or less constant. But the guiding hand behind the markets has weakened. In the past two years swings in nominal and real exchange rates exceeded 10 per cent. Read more…

Author: Ashima Goyal, IGIDR

Change is afoot in the area of Indian financial regulation. A Delhi-based body (the proposed Financial Stability and Development Council) is set to supplant existing the existing regulator, the High-Level Coordination Committee. This follows a series of committee reports that sought to shift power away from Reserve Bank of India (the RBI) towards market development.

These twin shifts are a mistake. They ignore the performance of the RBI during the global financial crisis. They also place greater power in the hands of elected officials, which is problematic. Read more…

Author: Ashima Goyal, IGIDR

The expected spread of food price inflation in India to more industrial categories has provoked a crescendo of calls for sharp monetary tightening. Such a response would be appropriate if excess demand were driving inflation.

But the current high wholesale price index (WPI) inflation follows prolonged cost shocks and a period of very low inflation. This low base overstates inflation. Policy should rather reduce inflationary expectations without hurting the supply response. Read more…

Author: Ashima Goyal, IGIDR

The Direct Tax Code proposes to cut through the maze of tax laws, starting on a new slate towards overall objectives of growth and equity. The core idea is to expand the tax base to increase the tax to GDP ratio, even while keeping per capita tax liability low. The tax base should rise as compliance costs, exemptions, and resulting arbitrage-induced inefficiencies fall. Clear simple writing should reduce ambiguity and litigation.

A sharp shifting up of tax slabs is the carrot provided to swallow the stick of vanishing exemptions. The Code which will be applied as of 2011, has been put out for comments. It has a chance if discussions succeed in hammering a new social contract. Low rates and minimum exemptions would work if everyone pays, and the State also delivers.

Read more…

Author: Ashima Goyal, IGIDR

India’s pragmatic muddling through in financial reforms has served it well, protecting its financial sector from the extreme collapse seen in the western system. That collapse does not mean we should stop deepening our markets, but it does offer some lessons for the way forward. The focus must be on financial inclusion, development of domestic markets, and their contribution to the real sector.

The cautious stance on capital account convertibility must continue. Our strategy of liberalising equity flows while restricting debt flows has worked well since equity shares in the risk, but debt repayments are heavier in bad times. Emerging markets with a heavy dependence on foreign loans have suffered badly in this and in past financial crises. But there are pressures to further liberalise debt inflows to help develop debt markets and meet government and corporate financing requirements. So the question is, can domestic debt markets be developed without more active participation from foreign investors?

Read more…