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0n the Suth of 0ctobei, the F0NC announceu that it will not tapei, keeping the
monthly quantitative easing pace at $8Sb until fuithei eviuence that the iecoveiy
in the 0S is sustainable. While the Feu uiu not go aheau with tapeiing, the
committee noteu that theie aie now less uownsiue iisks since last fall anu
economic activity in the nation has "continueu to expanu at a moueiate pace". The
iesponsibility now falls to }anet Yellen, 0bama's nominee anu Beinanke's
successoi, to unwinu the enoimous asset puichase piogiam.
#/'2 M5--2$NO 0),*'8%,.% ', 01',23/ /%$&'.% /%.7)$
China's non-manufactuiing Puichasing Nanagei's Inuex iose to S6.S in 0ctobei
fiom SS.4 in Septembei, fuithei unueiscoiing that the nation's economic iebounu
is sustainable as top officials attempt to institute iefoim. Top Communist Paity
officials aie expecteu to meet next week to ueteimine policy changes that may
help China expanu sustainably anu sheu its expoit-leu giowth mouel.
PLO L< C$)(/ 27 '7/ *2/7%/7 92.% ', -)$% 712, 71$%% N%2$/
The 0K economy giew at its fastest pace foi moie than thiee yeais in the last
quaitei, logging a u.8% giowth iate, up fiom u.7% in Q2. The main components of
the inuex, piouuction, seivices anu constiuction, iose by u.S%, u.7% anu 2.S%
iespectively. Within piouuction, manufactuiing giew by a healthy iate of u.9%.
The iecoveiy will help to ieuuce Biitain's ueficit by giowing the goveinment's tax
ieceipt. The Bank of Englanu has piomiseu to keep inteiest iates low at u.S% until
unemployment falls below 7%. It is uncleai how the cential bank will ieact to a
jobless iecoveiy. Amiust the positive pictuie, the Laboui opposition points out a
blip, noting that living stanuaius aie still flat uue to piices iising fastei than
wages.

IN
C0LLAB0RATI0N
WITB

PR00BLY
S0PP0RTEB BY

ISSUE 48
11 November 2013
SMU Political-Economic
Exchange
AN SN0 EC0N0NICS INTELLIuENCE CL0B PR0B0CTI0N

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2
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The ultia-easy money policy of Piime Ninistei Shinzo Abe has boosteu the economy of }apan.
Since Abe took office anu caiiieu out his biainchilu, the so-calleu Abenomics, the uomestic
economy enjoyeu thiee consecutive quaiteis of giowth. Noieovei, uuiing the thiiu quaitei of
this yeai, the economy expanueu u.9%, which tianslates into S.8% of annualizeu giowth.
Fuitheimoie, theie was also impiovement in the inflation iate. In August 2u1S, the inflation
iate was at u.91%, the highest in thiee yeais. In auuition, the piice of electiical piouucts also
iose foi the fiist time since 1992. This is a veiy positive sign foi }apan anu iaises hopes that
the nation will exit fifteen yeais of ueflation.
Theie was also an upswing in the laboi maiket with the unemployment iate in August at a
seasonally aujusteu level of 4.1%. Besiues, the job applicant iatio was u.9S%, up fiom u.94%
the piioi month. In geneial, the numbei of unemployeu people in August ueclineu 2.2%
compaieu with last yeai.
With such positive economic inuicatois, the }apanese uoveinment seeks to inciease sale taxes
fiom S% to 8% this yeai. This is a bau uecision anu may tuin the whole economy back to
iecession. 0n the one hanu, the economy is still feeble. 0n the othei, aveiage wages aie still
not iobust enough to sustain an inciease in piice. It is geneially agieeu that without highei
wages, an inciease in taxes will tuin into a huiule foi }apanese economy anu encumbei it.
#+%,)-'.3/ 2$$)(/ -'//%/ '7/ -2$>
In spite of all the achievements, Abenomics was unable to inciease base income of }apanese,
an impoitant factoi leauing to consumei spenuing.
F'C5$% HO T292, Q'/9)/2+6% U%$/),26 A,.)-%

!"#$%&' )$*+,-. /%"-"0,%1


3
As seen on the chait, since 2u11, with the exception of some months, the uisposable income of
the }apanese incieaseu, albeit with gieat oscillations. In contiast, wages in 0S anu ueimany
has been steauiei in theii iise.
Although consumei spenuing has incieaseu, it is still fiagile anu iequiies moie stimulating. In
auuition, with unstable wages, a highei sales taxes will make people save moie anu spenu
less.
F'C5$% VO LM 2,8 B%$-2,N Q'/9)/2+6% A,.)-%

!"#$%&' )$*+,-. /%"-"0,%1
The stagnant wages can mainly be explaineu by the wage stiuctuies anu the high uepenuence
on expoits.
W2C%/ /7$5.75$%/
Bespite the miiacles of Abe's policies, Abenomics faileu to iaise the aveiage base salaiy.
Accoiuing to the monthly iepoit of laboi salaiies suivey conuucteu by the Ninistiy of Laboi,
the aveiage salaiy of }uly 2u1S uippeu u.u4% compaieu to last yeais. But if bonuses aie
auueu, the actual wages weie highei than that of last yeais.


4
While the bonuses might have been be incieaseu in accoiuance with piofitable business
activities, base wages have been stable anu will continue to be so. Foi example, Toyota
announceu that it woulu keep its base salaiy unchangeu foi the fiscal yeai 2u14. The last time
Toyota offeieu its employees a iise in salaiy was five yeai ago. Now, many laige companies in
}apan such as Fuji heavy inuustiy, Panasonic anu Bonua motoi have ueciueu to keep theii
base wage unchangeu. 0nly Seven & I holuing, founuei of 7-11 convenience stoie piomiseu an
inciease in base wage foi the next yeais.
In contiast, the inciease in wages have been mainly uue to bonuses anu, to a lessei extent,
oveitime pays. Foi instance, Toyota planneu to inciease bonuses to 2,8uu 0SB in the yeai of
2u14. Likewise, Bitachi piomiseu to inciease bonus 16u,uuu yen on aveiage while Panasonic
announceu that its bonuses woulu be uepenuent on business iesults. Bowevei, these big
companies intenueu to keep base wage unchangeu.
E1% /7$),C $%627'),/1'9 2-),C/7 %X9)$7/R (2C%/ 2,8 .),/5-%$ /9%,8',C
The ieason why people aie ieluctant to spenu is bonuses, which have a huge impacts on
wages, iely on expoits. Expoits plays a majoi iole in }apanese economy, accounting foi neaily
16% of the uBP, with many laige companies in }apan such as Bitachi, Toshiba oi Panasonic
aie also huge expoiteis.
F'C5$% YO T292,%/% PX9)$7/ 2,8 #&%$2C% S),716N W2C%/


5

!"#$%&' )$*+,-. /%"-"0,%1
As seen on the chait, since 2u11, wages anu expoits ievenue have moveu in the same
uiiection. Bowevei, wages fell moie shaiply then expoits. Bespite laige fluctuation, foim
2u11 to 2u1S, wages iemaineu unchangeu. While expoits also expeiienceu fluctuations, its
size has giown in iecent yeais, causeu by the economic unceitainties of many }apanese's
tiauing paitneis.
The fact that the economy of }apan has ielieu, to laige extent, on expoits, is not a positive foi
uomestic consumei spenuing. Because with such an economic stiuctuie, }apan's uomestic
economy is closely ielateu to any thieats fiom aboaiu. Noieovei, the global economy has now
become moie complex anu unpieuictable. Foi instance, the 0S, one of }apan's laigest tiauing
paitnei, has suffeieu fiom political biinkmanship, with the goveinment just ieopening aftei
16 uays of shutuown. The Chinese also has its faii shaie of pioblems with the goveinment
intenuing to iestiuctuie the economy by keeping its financial sectoi in check. These issues aie
the tip of the icebeig of the pioblems that can be highly uetiimental to }apanese expoits.
Expoits also have the potential to be impacteu by a pooi Sino-}apan ielations. The uispute
ovei the SenkakuBiaoyu islanus has not been iesolves anu it is piobable that this conflict
may escalate. Analyst have positeu that if the conflict intensifies, theie will be a tiaue
uisiuption between the two nations anu will not only haimful to }apanese expoits but also to
the global economy.
In such an unceitain economic anu political enviionment, }apanese's fiims tenu to save moie
money because they neeu financial iesouices to keep businesses afloat in the bau situations.
Theiefoie, companies tenu to give moie bonuses to employees as such bonuses can be
ieuuceu in goou times with less iesistance fiom employees compaieu to ieuucing base pay.
Accoiuing to Yasuo Yamamoto, a senioi economist at the Nizuho Reseaich Institute in Tokyo,
although bonuses iesulteu in salaiy incieases, they have little effects on consumei spenuing.
As bonuses aie given less fiequently than noimal pay, people tenu to save iathei than spenu
the extia income they ieceiveu. Noieovei, caution comes with the fluctuation of wages


6
because people aie unsuie about theii futuie income anu tenu to save to ueal with possible
"iainy uays".
0),.65/'),
The cuiient goveinment buuget ueficit of }apan is ovei 2uu% of its uBP. This numbei is fai
highei than countiies such as the 0S anu China. Theiefoie, getting iiu of the ueficit is
necessaiy because many investois have staiteu to uoubt the ability anu willingness of the
goveinment to pay back the uebt. Noieovei, the high uebt may cause a confiuence ciisis,
ieuucing the level of investment anu haiming }apan in the long iun.
Bowevei, how anu when to iise the sale tax can have huge influence on the economy. The
immeuiate inciease of S% might be intoleiable to the economy. It will be moie favoiable if the
goveinment incieases the tax giauually as such a piactice will not cause shocks to the
economy. Noieovei, by uoing so, the goveinment allows time foi companies anu inuiviuuals
to auapt.


7
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=N S2.$)W27.1 GMPA0KR M',C29)$% S2,2C%-%,7 L,'&%$/'7N

A,7$)85.7'),
China's Yuan, also known as the Renminbi has incieaseu at a iate of u.S% eveiy month. This
contiasts staikly with China's uecision in the 198us to peg the Renminbi value at 8.26 Yuan
pei 0SB to enhance the competitiveness of Chinese expoits. This eventually leu an
impiovement of China's cuiient account balance anu help safeguaiu a huge ieseive. It was
also an impoitant measuie in contiolling inflation in the countiy anu minimizing fluctuations
of the value of Yuan. Noie impoitantly, the ieseive can aiu China in ieuucing the effects of an
economic iecession. All in all, this has impioveu China's economic giowth foi uecaues.
Bowevei, the unueivaluation of the Chinese Yuan has hau numeious auveise effects on
countiies globally. Foi instance, the policy has iesulteu in China's expoits obtaining an unfaii
cost competitiveness ovei othei tiaining nations. As a iesult, many othei countiies incluuing
the 0niteu States anu INF have been piessuiizing China to ievalue the Yuan.
@%/7$5.75$',C )99)$75,'7'%/ ('71 71% 299$%.'27'), ', .5$$%,.N
With the unpegging of the Yuan, China's cuiiency is expecteu to iise against othei countiies'
cuiiencies. With ielatively moie expensive goous, uemanu foi China's low enu piouucts will
fall. This will hence allow China to focus on iestiuctuiing its economy by expanuing in high
enu inuustiies.
Li }iangjun, a ieseaichei with the Inteinational Finance Institute unuei the Bank of China saiu
that "Refiaining fiom using competitive uevaluation measuies is not only conuucive to global
economic giowth, but also to China's economic iestiuctuiing" (Xinhua, 2u1S). The Chinese
Yuan has been incieasing at a steauy iate since its announcement to unpeg the cuiiency in
2uuS.
Figuie 1 shows that the Chinese Yuan has been incieasing ielative to the 0SB, }apanese Yen
anu Koiean Won. ueoffiey Lunt, uiiectoi anu senioi piouuct specialist foi Asian fixeu income
at BSBC ulobal Asset Nanagement stateu that "the uepieciation of the yen, all othei things
being equal, will inevitably weigh on the appieciation momentum of the Yuan."
(Nationmultimeuia, 2u1S). Auuing on, fiom 2uu2 to 2uu8, wages in China's manufactuiing
sectoi uoubleu while Ameiican manufactuiing wages only incieaseu by about 2u% (The
Economist, 2u11). In line with cuiiency appieciation, wages inciement has also contiibuteu
to the inciease in piices of Chinese goous. With iising expectations foi quality piouucts, it
seems that the uepieciation of the }apanese Yen can only woik in }apan's favoi. 0n the
flipsiue, this will also mean that China will be facing iising competition as its cuiiency slowly
incieases against othei cuiiencies.


8
F'C5$% HO 01',%/% 452, &/ LMQR P5$)R 42, 2,8 W),

!"#$%&' 2*$3&4 5&*6,14
In auuition, the majoi impoiteis of China's goous, the Euiopean 0nion anu the 0niteu States
have ieuuceu uemanu foi China's expoits uue the economic slowuown, iesulting in a slowei
giowth in expoits. Bowevei, this may come as an oppoitunity foi China to iebalance its
economy (BBC, 2u1S). Chinese Piesiuent Xi }in Ping alieauy has plans to shift the economy
away fiom a 'giowth-at-any-cost' stiategy. The countiy has since been encouiaging
companies at home to shift theii focus to make theii piouucts moie competitive in othei ways
such as boosting uesign anu maiketing (Bavis. B, 2u1S).
China's uouble uigit giowth iates have been suppoiteu by the suige of Foieign Biiect
Investment (FBI) ovei the past uecaues which was owing to the low expoit piices of Chinese
goous. Bowevei, an appieciating cuiiency is a negative foi China's foieign uiiect investment.
Figuie 2 shows China's FBI fiom 2uuu to 2u1S. Since the unpegging of cuiiency in 2uuS, FBI
in China has been facing laigei fluctuations.


9
F'C5$% VO 01',2 FQA

!"#$%&' )$*+,-. /%"-"0,%1
As one of China's most impoitant economic uiivei, fluctuations in the FBI will be uetiimental
to China's economy. China will hence have to iestiuctuie if it wants to ietain FBI anu iemain
the woilu's expoit giant. Bowevei, policies in place to change the focus of economy has not
yet seen its expecteu effects as "economic uata so fai has shown little eviuence of change in
the unueilying uiiveis of giowth anu expoit-focuseu businesses iemain majoi employeis."
(Sweeney. P, 2u1S). Businesses at home aie also hoping that the cuiiency will not appieciate
fuithei, thieatening expoit uemanus.
The tiansition of China's economic iestiuctuiing seems tough since China's lowly piiceu
goous weie the one of the main ieasons foi huge capital inflows. The success of this tiansition
will uepenu on the policies that China is going to put in place anu how NNCs anu local
businesses ieact to these policies.
#67%$,27'&% (2N/ 7) %2/% +5$8%, )* 95+6'. 8%+7
Public uebt is the total of a nation's uebts, compiising of uebts of local, state anu national
goveinment. It is an inuicatoi of the amount of public spenuing that is financeu by boiiowing
insteau of taxation. In light of the financial ciisis in 2uu8, local goveinments in China iesoiteu
to boiiowing fiom banks with the help of capital anu collateials. This helpeu impiove giowth
in theii cities. Bowevei, many loans have iemaineu unpaiu anu China has to uncovei these
hiuuen uebts quickly. (The Economist, 2u11).
Foi the past five yeais, local goveinments have accumulateu a massive amount of uebt anu
the Cential goveinment's China has tiieu, but in vain, to ieuuce the incieasing uebt. Even
though local goveinments aie technically not alloweu to boiiow, the Cential goveinment has
tuineu a blinu eye aftei Lehman Biotheis inciuent took a hit on the Chinese economy.
Bowevei, the Cential goveinment has iecently oiueieu an auuiting of oveiall public uebt by
the National Auuit 0ffice. This will be the seconu time that an auuit of public uebt is taking
place. In 2u11, the fiist auuit founu 1u.7 tiillion Yuan of outstanuing uebt maue by local
goveinments (Nozui. P, anu 0ilick. T, 2u1S). "With many infiastiuctuie piojects pioviuing
low ietuins, theie is a iisk that some local goveinments will be unable to iepay theii
boiiowing, iaising conceins about bau loans in the banking system. Bank-sectoi expeits


10
woiiy that a big shaie of new loans is alieauy being useu to ioll ovei bau loans" (Nozui. P,
anu 0ilick. T, 2u1S). Stanuaiu Chaiteieu Bank estimateu that local goveinment uebt may go
up to 2u tiillion Yuan. As shown in Figuie S, local goveinments aie estimateu to have the
laigest shaie of China's public uebt, stanuing at about S8%.
F'C5$% YO =)$$)(%8 E'-%

!"#$%&' 7*66 !4$&&4 8"#$-*6
Accoiuing to estimates by Stanuaiu Chaiteieu Bank, China's uebt stanu at 78%, which is in
laige contiast to the Inteinational Nonetaiy Funu (INF)'s estimate of 46% (Wall Stieet
}ouinal, 2u1S).
Nonetheless, China still has a lot of assets to iepay its uebts. Lanus auctions has been one of
the ways local goveinments have been paying off its uebts (Wall Stieet }ouinal, 2u1S).
Fuitheimoie, Fieu Bu, chaiiman of the Beijing investment fiim Piimaveia Capital uioup
believes that a uebt-uBP iatio of 6u% to 6S% is still a comfoitable iange foi China. Be also
auueu that foi a giowing economy, goveinments aie bounu to poui in moie money to finance
foi economic uevelopment (Chen. u, 2u1S)
The issue now lies in how the China goveinment will ueal with this pioblem. The goveinment
may be tempteu to "eithei to allow highei inflation to eat away at the value of its uebt, oi else
to keep the financial system highly iegulateu anu piop up weak boiioweis inuefinitely -
pushing uown efficiency acioss the economy anu leauing towaius stagnation."(Wall Stieet
}ouinal, 2u1S) If the goveinment allows highei inflation, it will ieuuce the puichasing powei
of local consumeis. This will hence make the uesiie to uepenu moie on uomestic consumption
uifficult. If the goveinment auopts a moie stiingent iegulation, it will uetei investois fiom
investing in China anu cause China to expeiience a fall in investments.


11
A-92.7/ )* 452, 299$%.'27'),
F266 ', %X9)$7/
The most uiiect impact of the appieciation of the Yuan will be the uiop in the uemanu foi
China's expoits. China expoiteis will feel the pinch, as China's expoits becomes ielatively
moie expensive than othei expoits, causing consumeis to shift away fiom China's expoits.
In Septembei 2u1S, China's expoits was piojecteu to iise by 6%, but insteau expeiienceu an
unexpecteu ueciease by u.S%. Some analysts say that it may be uue to China's national
holiuays falling in Septembei. Bowevei, economists such as Liu Li uang anu Zhou Bao, both
economists at ANZ Bank, cieuiteu this to the appieciating Yuan. Aftei all, China's Yuan hau
exceeueu 6.1 pei 0S uollai foi the fiist time in 2u yeais in August 2u1S.
Appieciating the Yuan negatively impacts the countiy's ability to expoit. China loses its
competitive auvantage. This fall in expoits uoes not only affect the Chinese expoiteis but its
impacts will extenu to inuustiies that contiibute to the piouuction of expoits, foicing layoffs.
A,/72,72,%)5/ $%85.7'), ', .5$$%,7 2..)5,7 /5$965/
Anothei impact of appieciating the Yuan is 0niteu States' Chinese uebt's iesultant fall in value.
As of }uly 2u1S, China owns a significant amount of $1.S tiillion of 0S uebt, anu appieciating
the Yuan will iesult in the ueciease in ieal value of the uebt. As a iesult, China will ieceive less
than what they have lent to the 0niteu States. In auuition, since the bonus that China bought
aie uollai-uenominateu, the inteiest payments that aie maue aie in 0S uollai. Thus, the
appieciation of the Yuan woulu mean that the Yuan ieceiveu aftei conveision fiom uollai to
Yuan woulu be less valuable.
L,%-96)N-%,7
Appieciating the Yuan will likely impact shoit-teim unemployment. As the Yuan become moie
expensive in uollai anu euio teims, China might inevitably see an inciease in unemployment
in the countiy's economy. Accoiuing to INF economists Ruo Chen anu Nai Bao, a 1u%
inciease in the value of the Yuan, aujusteu foi inflation, woulu ieuuce employment giowth by
u.4% to 1.4%.
Nonetheless, this ueciease in employment giowth is pieuicteu to have minimal effect on the
agiicultuie sectoi. This infoimation is veiy ielevant because China cuiiently piouuces 7u%
moie than the entiie agiicultuial output of the Euiopean 0nion, 1Su% moie than Inuia anu
2uS% moie than the 0S. In fact, of China's 1.S billion population, ovei 9uu million live in iuial
aieas. This ieflects the tiemenuous size of the agiicultuial sectoi in China's economy, anu its
ability to have a significant influence in its economic sectoi.
With that saiu, expoits incluues a iange of seivices, incluuing banking, tianspoit, ietailing anu
eneigy, which inuicate that theie might be a possible spillovei effect of its expoit sectoi on the
many othei vaiious aspects of the economy. Bence, a contiaction will not only affect the
unemployment in the tiauable sectoi, but in the non-tiauable sectois as well, inuicating a
gieatei potential outieach uespite the piesence of China's laige agiicultuial sectoi.
Bowevei, in the long iun, the inciease in puichasing powei causeu by the appieciation of the
Chinese consumeis will in tuin cieate a uemanu foi goous anu seivices in othei aieas of the
economy, cieating job oppoitunities. In fact, some economists aigue that China woulu be
bettei off ielying on uomestic companies, iathei than expoit companies whose economy is


12
highly unpieuictable uue to its stiong ielations with the 0.S. economy. But like all countiies,
China woiiies moie about shoit-teim unemployment effects iathei than long-teim
iestiuctuiing benefits.
0),.65/'),
Theie aie many ieasons China can think of to uetei them fiom appieciating theii cuiiency.
Bowevei, if China wants to show the woilu that it is committeu to being a global tiaue
paitnei, it neeus to iisk political anu uomestic suppoit anu take seiious steps in auuiessing its
unueivalueu Yuan. Foi one, the lawmakeis in the 0niteu States will stop pushing foi taiiffs to
be imposeu on China's aitificially cheap goous. Theie will also be less piessuie on Woilu
Tiaue 0iganization (WT0) to push foi sanctions on China. Natuially, theie will be bettei
ielations with China's global tiaue paitneis anu woilu leaueis alike. Eyes aie on China to
whethei they aie willing to be a faii tiaue paitnei befoie we can even consiuei them a
genuine auvocate foi globalization.
Peihaps, when China is officially gianteu the full maiket economy status in 2u16, the woilu
can look at China in a uiffeient light.


13
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=N U$'N2 U2,/%R M',C29)$% S2,2C%-%,7 L,'&%$/'7N

Inuia's infamous twin ueficit is ceitainly nothing new, but Reseive Bank of Inuia (RBI)'s latest
goveinoi, Ni Raghuiam u Rajan, ceitainly is the new kiu on the block to face this situation.
The foimei chief economist at the Inteinational Nonetaiy Funu hau waineu global cential
bankeis of a financial ciisis back in 2uuS, which Lawience Summeis quickly uismisseu. Thiee
yeais latei, we all know what happeneu anu only then was uoveinoi Rajan piaiseu foi the
pieuiction. If Lawience Summeis uiu not pull out of the iace to be the next Feu Chaiiman anu
hau he won, we might have seen some cential banking uiama between Inuia anu Ameiica.
Spaiing that, uoveinoi Rajan has enough spice in his Inuian cuisine to uigest: a cuiient
account ueficit, a fiscal buuget anu uouble-uigit inflation all of which aie facing Inuia
simultaneously. This aiticle aims to bieak uown the geneial causes of each of these ueficits in
a simplistic fashion.
05$$%,7 #..)5,7 Q%*'.'7 G0#QK
Inuia's CAB ieacheu a iecoiu high of 6.7% of its uBP in the quaitei enueu Becembei 2u12.
While having a CAB is nothing new to Inuia, its unhealthy sustainability is incieasingly
becoming a huge cause of concein. A healthy impoit appetite foi oil anu golu, anu a slowuown
in expoits have causeu the countiy's cuiient account ueficit (CAB) to swell ovei the past few
yeais. Looking beyonu this ueficit ieveals Inuia's incieasing uemanu foi golu - both black &
yellow, as seen below in Figuie 2.
F'C5$% HO 05$$%,7 #..)5,7 Q%*'.'7 GLMQK


14
F'C5$% VO E)726 A-9)$7/ GLMQK

Ciuue oil is the biggest impoit component foi Inuia, accounting foi S4% of its impoits.
Without natuial oil ieseives anu in a biu to abiue by caibon emission iules, Inuia uoes not use
much of its natuial coal ieseives anu has to impoit the moie expensive oil that is settleu in the
Ameiican uollai. 79% of this impoiteu ciuue is useu foi uomestic consumption such as
tianspoitation anu home usage. 0n the inuustiial siue, inefficient usage of this black golu has
often iesulteu in heavy consumption without the efficiency in piouuction.
uolu impoits aie the seconu biggest in impoit content foi Inuia, anu the stoiy heie is again
not as glitteiy as it ought to be. Foi an aveiage consumei, the uemanu foi golu peaks uuiing
yeai-enu which coinciues with the national festival of Biwali, anu moie golu impoits aie
iequiieu to fill this uemanu. Bowevei, at othei times of the yeai, the uemanu foi golu is
fuelleu by a lack of faith in the Inuian financial system anu also a uesiie to keep physical
money to possibly evaue Inuia's high taxation. With the majoiity of tiansactions in Inuia
occuiiing via cash, it makes tiacking of income haiu anu many small business owneis
oppoitunistically conveit theii eainings into golu which they see as moie valuable anu stable,
compaieu to ueposits in what is peiceiveu to be an unieliable banking system that exposes
them to taxation. By not ueclaiing such income, Inuia not just collects lessei tax ievenues,
banks uo not collect as much ueposits which iesults in the financial system being stiesseu foi
liquiuity anu also iesults in highei inteiest iates in oiuei to attiact these ueposits. This is one
of the ieasons why Inuia's shoit enu iates aie highei than its longei enu iates, i.e. Inuia's
inveiteu yielu cuive that enables Inuia to still attiact the funus to suppoit the economy.
Finally, Inuia's waning expoits have also hau influenceu the CAB. As a iesult of the financial
ciisis, the iising tienu of home-giown piouucts, as well as the inefficiencies in coipoiate
Inuia, the expoit sectoi has been hit haiu. Inuia has been moving away fiom an agiicultuie-
leu inuustiy to a seivices-baseu inuustiy. Bowevei, the value of expoiting seivices as
compaieu to goous has tiauitionally iemaineu lowei, unless Inuia is able to move towaius
expoiting of high-enu value-auueu seivices - this peispective potentially builus the case foi
how Inuia woulu nevei "take ovei" China, but insteau be a seivice poweihouse of the iegion.
0veiall, with impoits exceeuing expoits yeai-on-yeai, Inuia has to continually funu the gap by
buying the Ameiican uollai anu selling the Rupee. This has contiibuteu to a continual
uepieciation of the iupee with the iupee hitting an all-time low in 2u1S at 68.8S. It has also


15
contiibuteu to Inuia's buigeoning exteinal uebt, leauing to continual boiiowing to seivice
this.
0ne ieason why the ballooning CAB has not been a huge iisk to the nation is because Inuia's
net Balance of Payments position gets netteu off with the huge influx of FIIFBI flows that
Inuia captuies. To take auvantage of the highei inteiest iates, Inuia benefits fiom hot money
inflows. Bowevei, this is a ielatively volatile foim of funus as such funus aie also the fiist to
leave the nation shoulu theie be fuithei iisk. FBI, on the othei hanu is a moie stable foim of
investment. Inuia's sectois, which pieviously hau tight iegulations ovei foieign paiticipation,
have slowly been opening up to foieign investment ovei iecent yeais. 0nfoitunately, political
giiulocks aie stil hinueiing much of the actual FBI flows into the nation, anu once this is
iesolveu, the flow of FBI shoulu be a veiy ciitical step in shaping Inuia's futuie.
F'/.26 Q%*'.'7
Inuia's fiscal ueficit has iisen to 4.9% of uBP ovei the yeais which is a concein foi cieuit
iating agencies as it shows Inuia's inability to iepay its uebts. Cuiiently, Inuia's iating stanus
at BBB-, anu any fuithei uowngiaue woulu cause it to lose its investment-giaue stanuing,
tiiggeiing huge FII outflows anu negatively impacting its B0P position.
Bigh goveinment spenuing, anu lowei ievenue aie among some of the main factois that
contiibute to the fiscal ueficit. Taxes aie the main way thiough which goveinment ievenue is
eaineu anu in Inuia, collection of taxes has been a national issue, uue to the wiuespieau
occuiience of white (ueclaieu) anu black (unueclaieu) money.
Foou subsiuies anu oil subsiuies have been an incieasing expenuituie component, anu also a
contentious political topic. The latest foou bill that passeu the pailiament is the woilu's laigest
foou piogiam that aims to subsiuize the cost of giains to feeu the pooi. Bowevei, the way
thiough which it is being auministeieu is leauing to uebates as to how much benefit Inuia's
pooi will actually ieceive. Recently, the RBI extenueu a foiex swap facility to state-owneu oil
maiketing companies to meet theii uaily uollai iequiiement. Such measuies can be seen to
fuithei ueteiioiate Inuia's fiscal position.
A fiscal ueficit has iesulteu in inteiest iates being uiiven up in Inuia. Since the goveinment
abilities to iepay its uebt aie uoubteu uue to its inciease in boiiowings to funu its
expenuituies, any fuithei loans aie given at highei inteiest iates. 0n one hanu, the
goveinment boiiows because it uoes not have enough money, anu on the othei hanu, it has to
pay moie foi boiiowing money. Bence, fiscal ueficit leaus to a slow piogiess of the nation.
Also, when we bieakuown the components of the ueficit, 76% stems fiom a puie ievenue
ueficit while only 24% aiises fiom net expenuituies on the cieation of auuitional piouuctive
capacity. To iely on this 24% to geneiate enough ietuins to seivice the entiie fiscal ueficit
may not be iealistic. As a iesult, Inuia is foiceu to boiiow moie anu the vicious cycle iepeats.
When talking about Inuia, we cannot miss out talking about the 1u.7S% inflation iate that the
nation is expeiiencing as of August 2u1S. Being a net impoitei, Inuia suffeis fiom impoiteu
inflation anu a uepieciating cuiiency makes the situation even moie unfoitunate foi the
nation. Sustaineu inflation has also been causing people to switch fiom financial to physical
assets such as golu anu ieal-estate as a heuge against low oi negative ietuins on savings.


16
F)$(2$8 C5'82,.%
When eveiyone expecteu Inuia to lay low, uoveinoi Rajan ueciueu to suipiise maikets in his
fiist evei meeting by a slew of measuies in Septembei 2u1S that leveiages a winuow of
oppoitunity that Ben Beinanke in the States openeu up to emeiging Asian economies by not
tapeiing. While the shoit-teim iate enviionment is likely to stay subuueu till cleai economic
uata points to an Ameiican iecoveiy, Inuia incieaseu its key inteiest iate by 2S basis points to
cuitail the iising inflation, insteau of a loweiing the iate which woulu have been seen as a
move to fuel giowth. uoveinoi Rajan has ceitainly maue his guiuance to the maikets cleai
that he views inflation as a key thieat which neeus to be auuiesseu fiist befoie moving on to
Inuia's sluggish giowth. Bowevei to soften the impact of the iate hike, he also maue it cheapei
foi financial institutions to boiiow by uiopping the Naiginal Stanuing Facility iate by 7S basis
points, hence allowing the cost of finance to be loweieu, a pio-giowth measuie.
Whethei oi not uoveinoi Rajan is able to giauually pull Inuia out of its twin ueficits is laigely
uepenuent on the timing of the tapeiing in the States. While uoveinoi Rajan was quick to
utilise this winuow of oppoitunity that was piesent, we all still neeu to biace ouiselves foi a
negative impact fiom the imminent tapeiing.


17
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0)$$%/9),8%,7/ O

veia Soh (vice Piesiuent, Publication)
veia.soh.2u11economics.smu.euu.sg
Singapoie Nanagement 0niveisity
Singapoie

Ng }ia Wei (vice Piesiuent, 0peiations)
jiawei.ng.2u12economics.smu.euu.sg
Singapoie
Samuel 0ng (Publications Biiectoi Euitoi)
samuel.ong.2u1ubusiness.smu.euu.sg
Singapoie

Yingyu Zeng (Liaison 0fficei)
yingyu.zeng.2u1ueconomics.smu.euu.sg
Singapoie

Ng Yongxiang (Naiketing Biiectoi)
yx.ng.2u11accountancy.smu.euu.sg
Singapoie
Baiien uoh Xian Yong (Euitoi)
uaiien.goh.2u1ubusiness.smu.euu.sg
Singapoie

Phoon Pei }ing (Wiitei)
0nueigiauuate
School of Economics
pjphoon.2u12economics.smu.euu.sg
Binh Thai An (Wiitei)
0nueigiauuate
School of Economics
thaian.uinh.2u1Seconomics.smu.euu.sg

Piiya Panse (Wiitei) Beena Baniel Nok (Wiitei)
0nueigiauuate
School of Accountancy
piiyagp.2uu9accountancy.smu.euu.sg
0nueigiauuate
School of Economics
ueena.mok.2u12economics.smu.euu.sg

Zhuang Baohong
0nueigiauuate
School of Economics
bh.zhuang.2u12economics.smu.euu.sg

Kow Rui Qi
0nueigiauuate
School of Economics
iuiqi.kow.2u12economics.smu.euu.sg

}ian Kangyue
0nueigiauuate
School of Economics
kangyuejian.2u12economics.smu.euu.sg

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