Sunday, April 29, 2007

India Reaches Trillion Dollar Economy

Of course, a dollar, and by extension a trillion dollar, is gradually less and less worth due to inflation and depreciation, so becoming a trillion dollar economy is far less worth than it was in the past.

Nevertheless, it is still noteworthy, that India's GDP have now surpassed the trillion dollar level. This was reached a lot faster than expected as the Indian rupee has appreciated sharply during the most recent month.

Unlike the Chinese who have been foolishly dragging their feet and refused to allow any significant appreciation, despite the enormous losses this implies, India have allowed a really sharp appreciation during the recent month. As late as March 19, the dollar costed more than 44 rupees. Now a dollar cost just 40.8 rupee. This implies a 7.5% appreciation in less than six weeks. By contrast, the Chinese yuan appreciated a mere 0.3 % against the dollar during the same period. Indeed, during the entire 21-month period since the traditional 8.28 yuan peg to the dollar was loosened, the yuan has appreciated a mere 6.8%, less than the Indian rupee's gain during six weeks.

India's currency policy is much wiser than China's for reasons that I've explained before. Namely, that it achieves a certain level of monetary tightening by means that enables them to buy foreign goods at a lower price. The traditionally argued disadvantage to a stronger currency, namely job losses in the export sector, is not a real disadvantage as alternative tightening measures would have implied job losses too.

While India's wiser currency policy is not -particularly not in the long term- enough to overcome the other structural disadvantages it has to China, it certainly means that in the short- to medium term outlook I have become more bullish on India relative China, than I used to be.


Anonymous Anonymous said...

The same reasoning for Sweden to?

If the SEK would not have risen so much, interest rates would have been higher?

They are going to rise 1,5% in 2 years anyhow, but the economy is so strong, it can easely take it.
Göran, Sweden

8:30 AM  
Blogger stefankarlsson said...

Well,to some extent yes as a stronger SEK holds down consumer price inflation which in turn means interest rates will rise less.

But the main reason why a stronger currency is a substitute for higher interest rates in the case of China and India is because at the moment particularly China is holding down the value of its currency by accumulating foreign exchange reserves which in turn contributes to higher money supply growth.

So the main reason why a higher value of their currency enables them to raise interest rates less is because it is achieved by accumulating less foreign reserves.

To the extent that other forces pushes up the value of a currency as in Sweden, the effect is much smaller and only indirectly through the effect on import prices.

5:07 PM  
Blogger ankurindia said...

thats kewl news . good for indians except exporters

2:33 AM  
Anonymous Anonymous said...

I think what causes more pain is the 'unexpected' rise in the currency. The ideal situation will be an orderly rise in Rupee of 5-10% every year, so that everyone starts taking this for granted and the exporters start building this in their calculation. It will also have the salutary effect of forcing a 'minimum' increase in productivity just to stay in the same place.
Bhushan Lele, Switzerland

8:54 PM  

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