If the rupee still looks vulnerable, India has three options, none very palatable.

One is to let the currency fall further. In most countries a cheaper currency would boost exports and help close the current-account deficit. But Indias manufacturing industry is too small and too bound in red tape to ramp up quickly. So a turn-around in the balance of payments may take time during which investors could panic. Meanwhile the weaker currency may destabilise the domestic economy by adding to inflation and increasing the governments subsidies on fuel and thus its borrowing. The second option is to do the opposite and increase interest rates to attract more foreign money in, following the path of Indonesia and Brazil. But this would further hammer Indian industry, which is already in poor shape, and probably increase bad debts at banks too. If the economy slowed further as a result, equity investors might begin to worry about corporate earnings declining and pull out their roughly $200 billion of investments in listed shares. Inducing a credit crunch in India might make things even worse. The last option is to lower government borrowing. It is running at 7% of GDP (including Indias states) and has stoked excess demand in the last few years, widening the current-account deficit. The populist political mood doesnt make big spending cuts easy, though, and while it is often accused of epic profligacy, Indias central government has pretty low expenditure relative to GDPabout 15%. There is simply no way it can cut its way to a balanced budget. What India really needs is more tax revenues. But with a narrow tax baseonly 3% of Indians pay income taxthis might mean concentrating tax rises on the formal economy, which is already reeling. For now my sense is that the authorities plan is to let the rupee trade freely but hold out the threat of an interest rate rise or direct intervention in the currency market to try to scare off speculators. At the same time they will squeeze borrowing as much as is possible during an election and use administrative measures, such as higher duties, to try to cap imports. It is a bet that the economy will pick up soon and that growth will make Indias problems fade away. The trouble is that the economy is still decelerating.

Real vs. Nominal GDP

What is GDP? According to Wikipedia, Gross domestic product (GDP) refers to the market value of all final goods and services produced within a country in a given period. But there are two kinds of measurements. One is Real GDP and the other Nominal GDP. So what are they? Nominal GDP is this measurement made in current money (dollars). In other words, if you go to the store and buy something for $20, that adds $20 to the GDP. But if you buy that same thing next year for $22, then the GDP is increased by $22 in that next year, even though it is the same product. If every product experienced the same amount of price increase, then the GDP would increase by 10% without any increase in the amount of products sold. Nominal GDP in this case would not be a good representation of the health of an economy. Real GDP is adjusted for inflation. So if the product price inflated from $20 to $22 in one year, then the GDP contribution of that same product would be a zero percent increase from year to year. If all products did the same, GDP would show no increase (or decrease) as long as the same amount of products were sold. So real GDP is a measure of activity in the economy. If more products are sold, then GDP will go up or if less is sold, then GDP goes down. This is a far better measure of the economy than nominal GDP. (Of course, one has to agree on how to measure inflation.) But of course politicians will use whatever definition that puts them in the best light. In nominal GDP went up 5%, they would crow about how their policies were responsible for a huge growth in the economy. But if the 5% growth was all due to inflation and none was due to increased activity, then this is an empty argument. In fact, by printing more money, inflation can be the result and be totally responsible for any GDP growth. Patting themselves on the back for 5% growth in GDP due to inflation is totally bogus. Inflation is not healthy and is not something for which to be proud. Fortunately, economists who use GDP to tell us when we are in a recession use Real GDP growth. But many of the newspaper accounts of GDP use nominal GDP which tells us very little about the economys health unless we know the amount of inflation.