Journal Article

Rebalancing and structural policies—an Indian perspective

Parthasarathi Shome

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 28, issue 3, pages 587-602
Published in print January 2012 | ISSN: 0266-903X
Published online September 2012 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/grs036
Rebalancing and structural policies—an Indian perspective

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The global economic crisis of 2008–9 followed by the euro area sovereign debt crisis of 2011–12 has revealed the need for global rebalancing. Economies with current account surpluses need to increase domestic demand, while deficit countries need to reduce their deficits by boosting exports through productivity gains. India falls within the deficit category, having suffered both current account and fiscal deficits that have persisted over recent years. A dearth of adequate structural reform underlies India’s macroeconomic imbalances. Analysis reveals that current account surplus economies tend to experience comparative advantage in their goods sector while deficit countries have comparative advantage in the services sector. The question posed is whether liberalizing the services sector would reap dynamic benefits by enhancing services exports and containing India’s deficit. Opening up the services sector could, however, have opposing effects. On the one hand, it would support greater export of services, thereby reducing the current account deficit. On the other, the probable rise in foreign participation would translate to an increase in imports. The paper argues that the former effect is likely to prevail since structural reform in the services sector has the potential to reduce inefficiencies created by trade and capital flow restrictions. Reform would improve resource allocation, increase investment opportunities and enhance economic growth. Further, while the initial phase of foreign entrants would imply increased imports, in the medium term, successful joint ventures are likely to spread out internationally with positive ramifications for exports. Solutions in India are to be found in liberalizing, among others, the financial—including banking and insurance—sector, as well as retail trade, though its achievement will not be easy.

Keywords: consumption; saving; wealth; trade; economic integration; current account adjustment; short-term capital movements; E21; F1; F15; F32; F40

Journal Article.  5986 words.  Illustrated.

Subjects: International Trade ; Macroeconomics: Consumption, Saving, Production, Employment, and Investment ; Macroeconomic Aspects of International Trade and Finance ; International Finance

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