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REER MOVEMENTS AFFECT TRADE SHARES REALLY? Surjit S Bhalla Comment on Chinoy- Jain What Drives Indias Exports presented at India Policy Forum, New Delhi, July 11, 2018 REER MOVEMENTS AFFECT TRADE SHARES REALLY? The paper by

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REER MOVEMENTS AFFECT TRADE SHARES – REALLY?

Surjit S Bhalla Comment on Chinoy-Jain “What Drives India’s Exports…” presented at India Policy Forum, New Delhi, July 11, 2018

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  • The paper by Chinoy-Jain (2018) is comprehensive and on a much talked about topic

– what is happening to Indian exports, and the relationship of the same with economic growth. They make two major claims about their research:

  • First – “Why have Indian exports slumped in recent years and failed to materially

respond to accelerating global growth over the last year?”

  • Second, importantly – “Our model can explain a significant slowing of exports in

recent years, thereby confirming both global demand and exchange rate dynamics have posed meaningful headwinds to exports in recent years, rather than the presumed temporary factors such as demonetization and GST.”

REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 2

REER MOVEMENTS AFFECT TRADE SHARES – REALLY?

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  • Their model is a straightforward export growth model (function of prices proxied by

the real exchange rate, and global GDP and/or trade growth).

  • No problems with their specification except I have some concerns.
  • First, the definition of REER – the definition is just with price changes with a basket
  • f currencies (RBI’s REER36 or the more comprehensive BIS definition, REERBIS).

However, this definition excludes any Balassa-Samuelson effects. (See Bhalla(2012), Rajan(2015)).

REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 3

REER MOVEMENTS AFFECT TRADE SHARES – REALLY?

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  • There are also problems with the time-period of analysis – from 2005 onwards. While

REER36 only started in 2005, the BIS series goes much farther back. Why not estimate with quarterly data from 1996 onwards? Especially since REERBIS yields a higher price elasticity than REER36?

  • Note there are similar problem with RBI’s 2017 study relating quarterly data with fiscal
  • deficits. RBI’s estimation also starts from 2005, but once earlier data was incorporated

into the specification, the result got changed from a significant positive effect from fiscal deficits to inflation, to no effect whatsoever!

  • This points to the fragile nature of relationships with small sample size – all the more

reason to extend the analysis to 1996.

REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 4

STRANGE RESULTS WITH COMPLICATED ECONOMETRICS AND SMALL SAMPLE SIZES – RBI AND FISCAL DEFICITS; C-J AND EXPORT SHARES

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  • We also have a problem in obtaining a negative elasticity for REER. For most

specifications, we obtain a positive, but not significant, coefficient for REER. For world income (or trade) growth, we obtain elasticities (above 2) as obtained by Chinoy-Jain (2018).

  • Simple old-fashioned annual data can yield important insights – e.g. REER (RBI or

BIS) has zero explanatory power for explaining export movements; maybe true REER – corrected for productivity (see Devaluing to Prosperity) will work better!

  • But let pictures tell the true story!

REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 5

REER MOVEMENTS AFFECT TRADE SHARES – REALLY?

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INVESTMENT SHARES – NOMINAL AND REAL

REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 6

20 22 24 26 28 30 32 34 36 38 40 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

in % Fiscal Year

Importance of Deflator - Investments Share in GDP

Gross Investment/GDP (Current Prices) Gross Fixed Capital Formation/GDP (Constant 2010 Prices)

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  • But India has performed well, very well, in export growth.
  • Look at trade shares – Chinoy-Jain (2018) make much of this echoing the pink media

lamenting Indian export performance over the last few years. Indeed, Chinoy-Jain

  • ffer it as key evidence - “both global GDP growth and global exports growth have slowed

much less dramatically than India’s exports have. In particular, global exports growth averaged 3.8% (in real terms) between 2004 and 2011, and 2.6% over the last six years – a drop off of 30% in growth rates. It is clear, therefore, that India has underperformed global exports over the last 6 years.”

REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 7

HAVE INDIAN EXPORTS UNDERPERFORMED? – SHOW ME THE EVIDENCE

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The Importance of Deflators

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80 85 90 95 100 105 110 5 10 15 20 25 30 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

BIS- Real effective exchange rate (2010 = 100) in % Year

Trends in Indian Goods & Services Exports (as a % of GDP)

Goods & Services Goods Services REERBIS

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  • Price of world manufacturing exports has stayed the same since 2007 – was 89.1 then

and was 91.1 in 2017. For the first few months in 2018, this OECD price index has increased by 6 % to 96.9. Note that this index averaged 99 2011 to 2014!

  • Increase in REERBIS during boom time (2004 to 2007) – perhaps this is the reason we

get a positive co-efficient for REER on Exports.

REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 9

POSITIVE CORRELATION BETWEEN EXPORTS AND REER

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BOOM TIME FOR INDIAN EXPORTS AND REER 1999-2007

Year Non-Oil Export Growth REER Real Dollar REER36 BIS (Y-o-Y in %) 1999 13.4 8.9

  • 90

2005 20.9 19.5 102 96.6 2007 5.7 20.6 108 102.1 2011 17.3 21.4 111.6 102.4 2014

  • 0.7
  • 2.1

106.7 92.8 2015

  • 3.7
  • 7.1

112.2 100 2016 4.8 2.9 113.3 101 2017 1.5 7.5 119.2 105.4 REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 10

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BASIC STATS ON EXPORT GROWTH (CONTINUED)

Year Non-Oil Export Growth World Manufacturing Deflator ∆Manufacturing Deflator Real Dollar India World (Y-o-Y in %) 1999 13.4 8.9

  • 3.3
  • 2005

20.9 19.5

  • 4.8
  • 2007

5.7 20.6 89.1 5 7.6 2011 17.3 21.4 99.9 7.6 8.1 2014

  • 0.7
  • 2.1

98.4 3

  • 0.2

2015

  • 3.7
  • 7.1

88.8

  • 0.3
  • 9.7

2016 4.8 2.9 87.8 1

  • 1.1

2017 1.5 7.5 91.1 2.9 3.8 REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 11

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Indian Exports (G&S) share in World Trade Up- REER Up

11/07/2018 REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 12

80 85 90 95 100 105 110 0.5 1 1.5 2 2.5 3 3.5 4 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

BIS- Real effective exchange rate (2010 = 100) in % Year

Trends in Indian Goods & Services Exports (as a % of World's GDP)

Goods & Services (Constant 2010 Prices) Goods Services REERBIS

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EXPORT SHARES DECLINING – MAYBE TAXATION ?

Exports/GDP in 2016 Change in export share 2007-2016 Profit Retained (after taxes & wages, in %) Country Share Rank Share Rank Share Rank (lowest=1) Vietnam 94 7 22 2 61 40 Korea 45 24 2 19 67 54 Bangladesh 16 75

  • 1

25 66 52 India 20 69

  • 1

26 45 13 Thailand 70 11

  • 1

29 73 70 Sri Lanka 22 61

  • 5

39 45 14 Indonesia 18 71

  • 8

45 70 63 Philippines 27 51

  • 9

46 57 31 China 22 62

  • 16

56 32 7 Malaysia 72 10

  • 37

62 60 38 REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 13

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1.

Small sample size yields dangerous results – extend quarterly data till 1996 (statutory warning – won’t change results).

2.

REER movements behave perversely – largest appreciation of REER (not corrected for productivity) associated with largest increases in export shares

3.

Decline in Export Shares (as % GDP) not much of an indicator of export performance between 2007-2016; India rank 26th among developing economies (population >5 mil).

4.

Most of investment share decline explained by lower increases in investment deflator

5.

Indian share in world exports (constant 2010$) at peak 2.6 % in2014-2016, vs. 1.8 % in 2007

6.

Share of exports in own GDP at 19.1 % in 2016; was 20.4 % in 2007; peak was 24.5 in 2011 when REERBIS was also at its peak prior to 2017

7.

Looking for explanation of “bad” export performance in all the wrong places; only 45 % of profits retained in India (after payment of wages and taxes); in Bangladesh, Vietnam, Korea, Indonesia, Thailand – between 60 and 73 %

REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 14

MAJOR TAKE-AWAYS ON EXPORT GROWTH AND REER

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So what explains Growth – Rael Interest Rates?

11/07/2018 REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 15

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0.0 5.0 10.0 15.0 GDP growth for demonetization sector (in %) 0.0 5.0 10.0 15.0 Lagged real interest rate (in %) The demonetization sector is defined as GDP minus mining minus manufacturing minus public administration and defence

Chart 1: Are interest rates relevant in affecting economic growth? Yes

DEM Coefficient = -0.49 t-statistic = 4.15 R2 = 0.26

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Looking for Evidence? Constant Inequality in India for 30 years

0.363 0.326 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 1983 1993/94 1999/00 2004/05 2009/10 2011/12 GINI COEFFICIENT Per Capita Nominal Consumption Per Capita Real Consumption

11/07/2018 REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 16

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REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 17

REFERENCES

  • Bhalla, Surjit S. Devaluing to Prosperity: Misaligned Currencies and Their Growth
  • Consequence. Peterson Institute, 2012.
  • Rajan, Raghuram G. India in the Global Economy. No. id: 10374. 2016.
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Investment Share Decline – It is (almost) all in the deflator

11/07/2018 REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 18

5 10 15 20 25 30 35 40 45 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

in % Fiscal Year

Investment Share – Current and Constant Prices

Gross Investment/GDP (Current Prices) Gross Fixed Capital Formation/GDP (Constant 2010 Prices)

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REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 19

Year Non-Oil Export Growth World Manufacturing Deflator ∆Manufacturing Deflator Real Dollar India World (Y-o-Y in %) (Y-o-Y in %) 1998 4.3

  • 4.5
  • 5.2
  • 1999

13.4 8.9

  • 3.3
  • 2000

15.5 15

  • 4.3
  • 2001

0.5

  • 2.4
  • 3.9
  • 2002

19.7 17.5

  • 1.9
  • 2003

6.8 16.7

  • 4.7
  • 2004

25.9 24.3

  • 6.7
  • 2005

20.9 19.5

  • 4.8
  • 2006

15.6 16.2

  • 5.6

2007 5.7 20.6 89.1 5 7.6 2008 19.3 22.3 96 7.5 7.8 2009

  • 13.4
  • 11.5

90.8 1.1

  • 5.2

2010 24 34.2 92.5 6 1.9 2011 17.3 21.4 99.9 7.6 8.1 2012

  • 0.1
  • 5.2

97.8 6.2

  • 2.1

2013 5.3 6.2 98.6 3.7 0.8 2014

  • 0.7
  • 2.1

98.4 3

  • 0.2

2015

  • 3.7
  • 7.1

88.8

  • 0.3
  • 9.7

2016 4.8 2.9 87.8 1

  • 1.1

2017 1.5 7.5 91.1 2.9 3.8

BASIC STATS ON EXPORT GROWTH

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Year Non-Oil Export Growth REER Real Dollar REER36 BIS (Y-o-Y in %) 1998 4.3

  • 4.5
  • 91.5

1999 13.4 8.9

  • 90

2000 15.5 15

  • 94.2

2001 0.5

  • 2.4
  • 96.2

2002 19.7 17.5

  • 92.8

2003 6.8 16.7

  • 92.7

2004 25.9 24.3

  • 93.6

2005 20.9 19.5 102 96.6 2006 15.6 16.2 100.7 95.8 2007 5.7 20.6 108 102.1 2008 19.3 22.3 101.8 97.1 2009

  • 13.4
  • 11.5

101.1 91.6 2010 24 34.2 111.7 102.3 2011 17.3 21.4 111.6 102.4 2012

  • 0.1
  • 5.2

105.6 95.9 2013 5.3 6.2 104.5 91.4 2014

  • 0.7
  • 2.1

106.7 92.8 2015

  • 3.7
  • 7.1

112.2 100 2016 4.8 2.9 113.3 101 2017 1.5 7.5 119.2 105.4

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2003-2007 – Boom Time for REER and Exports

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REER MOVEMENTS AFFECT TRADE SHARES – REALLY? SURJIT BHALLA 11/07/2018 21

EXPORT SHARES DROP FOR MOST – LOOK FOR TAXATION?

Exports/ GDP in 2016 Δ (Exports/ GDP) 2007-2016 Profit Retained (after taxes & wages, in %) 2016 Country Share (in %) Rank Share (in %) Rank Share (in %) Rank Vietnam 94.1 7 22.2 2 60.6 40 Cambodia 66.4 12 10.9 8 79 74 Korea 44.5 24 2.1 19 66.8 54 Lao P.D.R. 27.1 52 1 21 74.7 71 Bangladesh 16 75

  • 0.7

25 65.6 52 India 19.6 69

  • 0.8

26 44.5 13 Thailand 70 11

  • 1.1

29 73.2 70 Hong Kong 238.2 1

  • 3

36 77.2 72 Nepal 12.2 79

  • 3.9

37 70.5 65 Myanmar 21 64

  • 4.4

38 66.9 55 Sri Lanka 21.7 61

  • 4.9

39 44.8 14 Pakistan 9.9 81

  • 5.4

40 67.1 57 Indonesia 18.4 71

  • 8.3

45 70.3 63 Philippines 27.4 51

  • 8.6

46 57.1 31 China 21.6 62

  • 15.9

56 32.1 7 Papua New Guinea 36.9 35

  • 17.6

59 60.7 41 Malaysia 71.5 10

  • 37

62 60 38