What Explains India's Real Appreciation?

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.Productivity;Real effective exchange rates;inflation, relative price, per capita income, terms of trade, nontradable goods, inflation rates, inflation rate, relative prices, import prices, real exchange rates, exchange rate regime, import liberalization, export growth, price liberalization, tradable goods, import price, accession countries, export share, exchange rate policy, export shares, metal products, trade liberalization, terms of trade shocks, price of imports, transition economies, real output, price level, political economy, transport equipment, gdp deflator, trade reforms, export prices, domestic price, imported inputs, trade shocks, rate of inflation, factor markets, value of exports, impact of trade liberalization, trade performance, price fluctuations, inflation convergence, export sectors, perfect integration, price inflation, oil shock, exchange rate movements, perfect competition, intermediate goods, aggregate consumption, impact of trade, producer price index, increasing competition, value of imports, increasing competitiveness, nontariff barriers, export industries, export price, import duty, domestic production, imported goods, effective exchange rates, monetary union