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

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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.