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What Explains India's Real Appreciation?

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  • Renu Kohli
  • Sudip Mohapatra

    (International Monetary Fund)

Abstract

We examine the evolution of nontradable and tradable prices in the Indian economy over 1980-2002 and find widening differentials: the real exchange rate has been appreciating. This might seem unsurprising, since India''s rapid per capita income growth suggests Balassa-Samuelson factors at play. However, after 1990, the tradable-nontradable labor productivity gap, the driver of real appreciation according to Balassa-Samuelson, virtually disappeared. So what explains the real appreciation? Assessing the role of both demand and supply factors, we find that demand pressures arising from higher income growth accounted for much of the relative price increase during the post-reform period. Falling import prices also contributed significantly, along with an increase in government spending.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Article provided by Global Economy and Development Program, The Brookings Institution in its journal India Policy Forum.

Volume (Year): 5 (2008)
Issue (Month): 1 ()
Pages: 179-244

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Handle: RePEc:bin:indiap:v:5:y:2008:i:2008-1:p:179-244

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Keywords: India; macroeconomics; real exchange rate; RER; tradable goods; productivity growth;

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