The Exchange Rate Regime in Asia: From Crisis to Crisis

NIPFP Working Paper 69
[PDF]

Ila Patnaik, Ajay Shah, Anmol Sethy and Vimal Balasubramaniam
May 2010

Abstract

Prior to the Asian financial crisis, most Asian exchange rates were de facto pegged to the US Dollar. In the crisis, many economies experienced a brief period of extreme flexibility. A ‘fear of floating’ gave reduced flexibility when the crisis subsided, but flexibility after the crisis was greater than that seen prior to the crisis. Contrary to the idea of a durable Bretton Woods II arrangement, Asia then went on to slowly raise flexibility and reduce the role for the US Dollar. When the period from April 2008 to December 2009 is compared against periods of high inflexibility, from January 1991 to November 1991 and October 1995 to March 1997, the increase in flexibility is economically and statistically significant. This paper proposes a new measure of dollar pegging, the “Bretton Woods II score”. We find that by this measure Asia has been slowly moving away from a Bretton Woods II arrangement.

Urban Governance and Finance in India

NIPFP Working Paper 68
[PDF]

M. Govinda Rao and Richard M. Bird
April 2010

Abstract

Over 330 million people live in India’s cities; 35 cities have a population of over a million and three (Mumbai, Delhi, and Kolkata) of the 10 largest metropolises in the world are in India. India’s cities are large, economically important, and growing. However, neither urban infrastructure nor the level of urban public services is adequate for current needs, let alone to meet growing demands. Dealing with this problem is a formidable challenge. Not only must adequate finance for the provision of services be found but it is critical to ensure that the money spent results in desired outputs and outcomes. To do so, local governance structures also need to be reformed and strengthened. This paper attempts to point the way towards some possible solutions by analysing urban governance and finance in India in the context of lessons drawn from fiscal federalism theory and experiences of governance institutions and financing systems both in India and around the world.

No one system of urban governance is likely to work equally well for all urban local bodies. However, the paper identifies some key reforms required to realise both the constitutional intent to encourage citizen participation in urban governance and the economic and politically desirable goal of ensuring greater accountability of urban governments. For example, the paper draws attention to existing ambiguities in the assignment system and underlines the need to undertake activity mapping to ensure clarity as well as to make independent agencies significantly accountable to elected governments in urban areas.

The paper also discusses a variety of ways of augmenting the resources of the municipal bodies in the country including essential reforms in the property tax system and adequate exploitation of user charges and fees for various services delivered as well as ways of strengthening and improving Central and State transfers to urban local governments. With respect to financing urban infrastructure, development charges should be used more effectively. More should also be done to utilise public lands more effectively. In addition, to a considerable extent capital expenditure requirements will have to be financed through borrowing so further development of the municipal bond market is important, as is more and more effective use of public private partnerships in some areas.

Stabilising the Indian Business Cycle

NIPFP Working Paper 67
[PDF]

Ajay Shah and Ila Patnaik
February 2010

Interstate Distribution of Central Expenditure and Subsidies

NIPFP Working Paper 66
[PDF]

Pinaki Chakraborty, Anit N. Mukherjee and H.K. Amar Nath
February 2010

Graduating to Globalisation: A Study of Southern Multinationals

NIPFP Working Paper 65
[Link]

Dilek Demirbas, Ila Patnaik and Ajay Shah
February 2010

Abstract

FDI by firms in developing countries is a recent phenomenon and demands a study of relationship between firm productivity and different modes of globalization activities. This paper attempts to understand this relationship through ordered probit models, examining two key hypotheses using firm level panel data from India. First, we test whether there are characteristic differences between domestic firms, exporting firms and firms engaging with FDI. Second, we test if FDI is an integral part of the evolution of firms in developing countries. Our results suggest that there are strong differences between domestic firms, exporting firms, and firms that invest abroad, especially in their knowledge investment, indicating the presence of a ladder of quality in graduating to globalisation.

Asia Confronts the Impossible Trinity

NIPFP Working Paper 64
[PDF]

Ila Patnaik and Ajay Shah
January 2010

Abstract

In this paper, we examine capital account openness and exchange rate flexibility in 11 Asian countries. Asia has made slow progress on de jure capital account openness, but has made much more progress on de facto capital account openness. While there is a slow pace of increase in exchange rate flexibility, most Asian countries continue to have largely inflexible exchange rates. This combination - of moving forward with de facto capital account integration without bringing in exchange rate flexibility - has lead to procyclicality of monetary policy when capital flows are procyclical. The paper emphasizes the case for a consistent monetary policy framework.

Why India Choked When Lehman Broke

NIPFP Working Paper 63
[PDF]

Ila Patnaik and Ajay Shah
January 2010

Abstract

India has an elaborate system of capital controls which impede capital mobility and particularly short-term debt. Yet, when the global money market fell into turmoil after the bankruptcy of Lehman Brothers on 13/14 September 2008, the Indian money market immediately experienced considerable stress, and the operating procedures of monetary policy broke down. We suggest that Indian multinationals were using the global money market and were short of dollars on 15 September. They borrowed in India and took capital out of the country. We make three predictions that follow from this hypothesis, and find that the evidence matches these predictions. This suggests an important role for Indian multinationals in India's evolution towards de facto convertibility.