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Home Publications Blogs Beat the Press News for NYT: India's Central Bank Can Affect Its Trade Deficit

News for NYT: India's Central Bank Can Affect Its Trade Deficit

Thursday, 05 September 2013 04:52

A NYT article on Raghuram Rajan, the new head of India's central bank, told readers:

"Some of the biggest problems bedeviling the Indian economy are beyond his control, like the trade and government budget deficits and the crippling shortage of roads and other infrastructure."

Actually the trade deficit is fairly directly under the central bank's control. It can raise or lower the value of the rupee, India's currency. By allowing the rupee's value to fall, Rajan can make India's goods more competitive in the world economy, thereby reducing its trade deficit.

It is worth noting that India's current account deficit (the broadest measure of the trade deficit) is around 5 percent of GDP. This is not obviously too large for a rapidly growing developing country. In fact, it is exactly what textbook economics would predict since capital is supposed to flow from slow growing rich countries to developing countries where it can be put to better use.

Comments (3)Add Comment
written by skeptonomist, September 05, 2013 2:15
Most stories in the media have cast the "cataclysmic" fall of the rupee as bad news, for example


Did the Indian central bank cause the fall, as Dean seems to think? Did some Indian Maestro decide that this was the thing to do despite some real disadvantages (the effect on foreign-denominated debt), or was the fall really a result of factors beyond the control of the central bank?
The fall in the rupee was caused by the rise in U.S. interest rates
written by Dean, September 05, 2013 5:10

that's the conventional wisdom, which sounds reasonable to me.
Written by the WSJ?
written by leo from chicago, September 06, 2013 12:20
Here's the segment on the woes bedeviling India from today's (Friday) 'Morning Edition':


Maybe it's on the mark but so many of the points reminded me of how the editorial board of the WSJ (or the Chicago Tribune for that matter) might handle a similar topic.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.