INDIA could follow Germany for demand and exports...

The recent deceleration in the exports has been a source of concern for the Indian economy when the external environment is not conducive amid slowdown in many parts of the globe, now, including China with falling growth forecasts, and, lower current account deficit on account of the falling crude-prices and healthy reserves buoyed by high FDI inflows has shifted the policy-makers attention away. However, INDIA still needs to look at the sector for double digit growth for which it will have to increase its competitiveness through appropriate monetary, fiscal and international-trade policies. Competitiveness in the international trade could be brought up by either internal devaluation or external devaluation. Economists generally advise external devaluation over internal devaluation because the exchange rate is more flexible than changes in the prices of commodities and services. Nonetheless, evidences show that wages are stickier than commodity prices which might increase real wages and demand when inflation is low. But, the external devaluation reduces domestic demand by increasing inflation and cutting real wages (nominal interest rate minus inflation). Nominal exchange rate too depends upon money-supply, inflation and inflation expectation. Foreign exchange is also an instrument for investment for which inflation and expectation of changes in it matter. Nonetheless, internal-devaluation is also not uncommon and Germany is a live and living example. It has used internal-devaluation, except external devaluation to increase its exports competitiveness and has a considerable trade surplus. Germany recovered fast during the past recessions than other countries in Europe. Low inflation and inflation expectations have kept wage-demand low which has made German exports competitive and although productivity has increased slowly but real wages have been increasing which has also maintained the domestic demand. If INDIA is to fulfill its exports and double-digit growth ambitions then internal devaluation looks more suitable because it would increase both, domestic demand and foreign demand by increasing real wages and real exchange rate (nominal exchange rate minus inflation) by adopting and communicating a low price and inflation policy. Replacing inflation and inflation expectation with low inflation and low inflation expectations might be the better way to go around. Many of the developed countries has actually cut down on real-wages by external-devaluation and depreciation during the past few decades with inflation in order to achieve trade competitiveness which has strangulated and stagnated domestic demand in these countries and they are trying higher inflation and inflation expectations through the Quantitative-Easing and loose monetary-policy which have also reduced real exchange rate and foreign demand. Germany’s internal-devaluation might be a good idea and guide to increase demand than China’s external-devaluation.