StatsGuru-18-August-2013

Govt seems to have overreacted to stem capital outflow

The markets are rolling with concern over the actions of the government and the central bank to control capital outflows. Are North Block and Mint Road overreacting? Would foreign investors sour so much on the India story? As Table 1 shows, India continues to deliver higher growth than many of its competitor emerging markets, though it has been overtaken by some, such as Indonesia and the Philippines. But, as Table 2 points out, the real problem is the current account deficit, which is larger than most. Here, too, the scale of the problem is not immediately evident when seen with the size of India's reserves, shown in Table 3. Otherwise vibrant Indonesia's current account deficit, for example, is half of India's; but its reserves are only a third of India's. South Africa is in an even worse position than India. Therefore, concern over the rupee might be overdone. As Table 4 demonstrates, it is not the worst performer over most relevant periods of analysis. While it lacks the stability of, say, Philippines' currency, it is comparable to Indonesia's, for example. In addition, as Table 5 reveals, while India does have extremely high retail inflation, this is not out of the ordinary. Recent emerging-market stars Indonesia and Turkey have comparable levels of inflation. India also has among the highest fiscal deficits in the emerging-market world - but, again, it is not an outlier, with South Africa and Malaysia showing comparable numbers, as Table 6 shows. And export growth, which has been negative in India, is even more strongly negative in most of the other countries - only in Philippines is it positive, as is visible in Table 7. The real outlier is Indian manufacturing. As Table 8 shows, every other competitor emerging-market has at least managed to get positive industrial growth, whereas India's IIP continues to shrink. (Click here for tables)