UNITS

Part II. Finance Unit 1 a country's economy

LEAD-IN

Work with a partner to discuss the following questions:

1. Could you describe the present economic situation in your country?

2. What factors influence the state of economic development?

3. Why does the inflation play a significant role in the economic development?

4. What kinds of inflation do you know and what effects do they produce?

5. How would you characterize your country’s way of running foreign trade?

6. What is the present situation with the level of investments to the Russian economy?

USEFUL LANGUAGE

rate hike	увеличение ставки
stagnation	экономический застой
assessment	обложение налогом
underground economy	подпольная (теневая) экономика
grace period	льготный период
steady state	состояние стабильности
commodities	сырьевые товары
random walk	случайные колебания
targeting	целевая госполитика
predatory pricing	хищническое ценообразование
nontraded goods	невывозимые товары
surplus	избыточное предложение
national savings	национальные сбережения
current account deficit	дефицит платежного средства
leading indicators	опережающие показатели
GNP (Gross National Product)	валовый национальный продукт
GDP (Gross Domestic Product)	валовый внутренний продукт
allocation of resources	размещение ресурсов
procurement	закупки
adjusted gross income	скорректированный валовый доход
tough decree	жесткий декрет
visible exports/imports	видимый экспорт/импорт

Reading

I. Read the following text and be ready to summarise the main idea.

Text 1. Waiting For The Monsoon

The economy continues to overheat despite a rising currency and recent signs of falling inflation.

Judging by the latest burst of economic euphoria in India you would think that the monsoon had arrived early this year, bringing relief from the country's scorching heat. Indian businessmen and politicians are cheering the latest economic numbers, which appear to show that inflation is falling even as growth remains strong. This, they claim, shows that the risk of the economy overheating has faded. Their glee is premature: India's economy, like Delhi this week, remains far too hot.

India's GDP grew by 9.4% in the fiscal year ending in March, its fastest rate for 18 years and the second strongest on record. JP Morgan estimates that growth in the three months to March accelerated to a seasonally adjusted annual rate of 11.4%. Yet, despite rapid growth, wholesale-price inflation (the measure of prices most closely watched by policymakers) fell to 5.1% in mid-May, down from 6.7% in January and close to the Reserve Bank of India's (RBI) inflation target of 5% for 2007- 08.

Several economic commentators have concluded that the panic earlier this year over rising inflation was exaggerated and it is now safe for the RBI to ease policy - or at least that there is no need for further tightening. Since January 2007 the RBI has raised its overnight lending rate by one and a half percentage points, to 7.75%. And monetary conditions have been further squeezed by the Indian rupee, which has surged by 10% against the dollar since March to a nine-year high.

The jump in the rupee reflects an abrupt change in policy by the RBI. Until March the central bank was intervening heavily to hold the currency down.

But the large amounts of dollars it was forced to buy were fuelling excessive growth in the money supply and hence inflation. To offset this extra liquidity, the bank “sterilised” the increase in foreign reserves by selling securities to banks.

The snag is that sterilisation is expensive because the RBI has to pay much more on the bonds it issues to mop up liquidity than it earns on dollar reserves. A pegged exchange rate also cramped the RBI's room to raise interest rates, because that would attract yet more capital.

The RBI's job had been made even harder by the government, which last year encouraged capital inflows by raising the ceiling on foreign borrowing by firms, allowing Indian companies to take advantage of lower interest rates abroad than at home.

All Asian economies have faced upward pressure on their currencies but India is the only one where the government has foolishly invited more capital inflows. In April the government sought to take some of the steam out of the rupee by allowing Indian firms to make bigger overseas acquisitions. It raised the ceiling for overseas investment to three times an Indian acquirer's net worth, from two times.

By abandoning its attempt to hold the rupee down against the dollar, the RBI is now able to regain control over monetary policy and so focus on containing inflation. But exporters are howling about their loss of competitiveness and a fierce debate is raging among economists over what should be done about the currency.

Chetan Ahya of Morgan Stanley argues that the fall in wholesale-price inflation has been largely caused by three factors: the rise in the rupee, which has trimmed the prices of imported goods; administrative measures, such as a cut in fuel taxes and import duties and a ban on wheat exports; and the “base effect” of some commodity prices being higher a year ago. However, the root cause of inflation is that demand continues to outpace supply.

This is not to deny that India's economic speed limit has increased, to perhaps 7-8%, thanks to stronger investment and economic reforms. But growth has exceeded that limit. The economy still shows alarming symptoms of overheating, such as soaring house prices, credit growth of 28% over the past 12 months and 15%-plus average rises in wages for skilled workers. Industrial capacity utilisation has risen to a record high, and rampant domestic demand sucked in 41% more imports than a year ago in April, pushing the trade deficit to a record level.

India needs a period of slower growth to reduce these excesses and this requires higher interest rates. Constrained by politicians, the RBI's tightening has been timid. In the past year interest rates have risen by less than the rate of inflation has, so rates have fallen in real terms.

Relative to consumer-price inflation, the overnight lending rate of 7.75% is close to zero in real terms. Indeed, India probably has the lowest real interest rates of any major economy, despite having one of the world's fastest growth rates.

Without more tightening, expect the sweltering heat to continue.