Minister of Finance & Corporate Affairs, Mrs. Nirmala Sitharaman tabled the Economic Survey 2018-19 in Parliament today. With the theme of Shifting Gears and “Blue Sky” policy-making, India aims to achieve a sustained growth rate of 8% to become a $5trillion economy by 2025.
Source: Economic Survey 2018-19, Press Information Bureau
Central Banks and Governments aim for same destination through different paths. There is always an unrest between central bank, which is the sole authority for money supply and government, which aims for welfare of people in any nation.
BREXIT refers to the withdrawal of the United Kingdom from the European Union. The European Union is an economic and political union of 28 European countries. It was established in January 1958 and at that time it was known as the European Economic Community. It was started with only 6 countries and the UK became its member in 1973 along with Denmark and Ireland. A majority of 67.2% of the British citizens had voted in favour of joining the EEC when the UK held its first referendum in 1975. In 1986, UK assumed the presidency of the EEC. In 1992, the EEC was renamed as the European Union. In 1999, 19 out of the 28 countries decided to use a common currency, the Euro. The UK was among the remaining 9 countries which stayed with its own currency, the Sterling Pound. EU represented around 24% of the global nominal GDP ($16.220 trillion) for the year 2015. Among other benefits which a country gets by becoming a member of the EU, free movement of capital, goods, services, and labour between the member nations in the Eurozone is the most prominent one.
In 2013, while many other countries were vying to join the EU, the UK citizens were protesting to get out of the EU. Honouring his election promise, PM David Cameron issued a referendum to decide whether it wants to continue membership under EU or not. The results of the referendum came out on 23rd June 2016and surprised everyone in which 52% people voted for BREXIT whereas 48% voted for remaining within the EU. Although the result of the referendum was not binding on Britain’s parliament, the government decided that it will honour the will of the people. Britain is scheduled to formally leave the EU in March 2019.
Among other political and economic implications, the Brexit event set an example of participatory democracy where citizens took a decision which was impacting them despite the presence of politicians. Any major event in history has had both positives and negatives. Brexit is surely one of them.
Pre Brexit-Relations with the UK
The UK is the largest G20 investor and employer in India and has played a substantial role in the growth and development of India. British companies in India have generated around 790,000 jobs and around 32% of the 1.96 million jobs created by FDI are in the services sector – the UK’s strong point (since services make up around 80% of the British economy). The UK services sector would be the main beneficiary of a future free trade agreement (FTA) with India.
British successes like HSBC, Standard Chartered and G4S have played a significant part in driving business growth in India. British Banking and Financial services firm, HSBC, was one of the first firms to bring electronic banking and financial technology to India. It is one of the leaders in the financial services sector of India and employs more than 32,000 people. Similarly, the leading security solutions group in India, G4S, a British firm, has more than 160 branches in India and employs more than 1,30,000 employees throughout India.
There are collaborations between the two countries such as the Joint Economic and Trade Committee, the Joint Trade Review, the UK India Education and Research Initiative, the Newton Bhabha fund, the UK-India Tech Partnership etc. The 2 countries also entered into an agreement in 2017 to set a corpus of 240 million pounds, both contributing 120 million, to fund clean energy projects in India.
In 2017, India sent more immigrants to the UK for work, than the rest of the world put together. In 2017, out of the total work visas issued by the UK, India received 58% of the total. Number of Indians going to the UK for study also grown by 27% in 2017.
Dollar Value appreciation has not been a recent phenomenon. However, the recent appreciation in the value of the dollar has been a piece of breaking news because of several reasons.
The huge jump in the value of the dollar was not expected.
People expected that the Government or the Central Bank would do something to help the Rupee’s condition.
Mechanisms implemented have not been fully successful to bring back the rupee to its previous level.
The fiscal or monetary policies implemented so far has worked well with the inflation targeting in India. However, more or less, the actions to check the fall of the rupees has not been very effective. People sending remittances to the home country, India, in US Dollars must be happy with such appreciation as the converted value would be high. However, it becomes a headache for people who travel outside India where they require US Dollars, as ultimately, they would have to burn more cash to get the same value of dollars.
Economists have been studying various phenomena to identify and implement models that could justify the fall or rise of the value of one currency with respect to the another. There have several economic models that have proposed so far. The models include the Purchasing Power Parity Theorywhich is based on the purchasing powers of the two countries, Interest Rate Parity Theory which is based on the interest rates of the two countries involved, International Fischer Effect which is based on nominal interest rates or inflation rates of the two countries, and Balance of Payments Theorywhich is based on the surplus or deficit of the account, i.e., in order to reach equilibrium, it must be balanced. There are few other theories which include Real Interest Differential Model, Asset Market Model, Monetary Model, and Economic Data model.
The focus of this paper is to discuss models that can provide quantitative methods to estimate future exchange rates. Accordingly, some of the models listed above have been discussed in the subsequent sections.
In this essay, we are mainly going to emphasize how the appreciation of the US Dollar i.e., USD against other currencies would impact different sectors of an economy in the context of India. The growth trajectory of the Indian Economy post the Liberalization, Privatization, and Globalization (LPG) reforms has been stupendous. The CAGR of close to 7% for almost 25 years is extraordinary for any economy and India has been able to sustain this growth for such a long period. This growth was coincidental with the growth of the world economy.
However, the Indian economy has undergone some exceptional phases of macroeconomic developments and growth pattern post the Global Financial Crisis. When the world economy was growing at a very tepid pace, the Indian economy was an exception, growing at nearly 8% compounded annual growth and then Demonetization struck the Indian Economy and Goods and Services Tax (GST) was rolled out without proper planning of its implementation. The growth trajectory took a hit for some time and it’s only recently that India’s growth seems to be picking up once again (the last quarter’s GDP growth has reached close to 8.5 %).