indian economy in recent times - updated 2011 2
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Growth, Crisis, Revival andIssues in Macroeconomic
ManagementSebastian Morris
March 24, 2010
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Yf (structure, technology, invReform, ethos, governance etc)
AS (raw matls,Import price)
AD (fiscal, monetary
Policies, exchange rates, worldDemand, investment, sentiment)
Y*
Prices
Income
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The Current Situation
(Immediately foll Crisis) Growth has fallen much less than expected
Large fiscal boost the key to the revival NREGA, Social Sector Expn, Rural Infrast
Tax breaks on indirect and now indirect replaced bydirect tax breaks
Pay commission effects continue
Very lately by exports and exports of services
Remittances help more steady than was expected
World Expansion (US, China, Europe)
Led by manufacturing sector
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Indian Situation Prior to Crisis High growth
kick started by GQ spending revival of US and World Demand Exports (20+
percent)
Tradable services become significant (vey highgrowth)
continuing gulf remittances
nearly open capital account
supportive monetary policies ex-post though notex-ante
Sharp rise in the share of investments
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Response of Monetary policy
tried to resist monetary expansion sterilization
Limits reached
rupee allowed to float upwards negative impact
on exports expected and began CRR (reserve requirements raised) to curb inflation
Large monetary squeeze, Pressure on growth but
little impact in lowering inflation Growth had begun to decline even before the
subprime crisis
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Concerns
High inflation on food and fuel that was passingthrough
High asset side prices esp. in real estate
Employment growth
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RBIs Response to Crisis in India Dollar liquidity problem converted to a rupee liquidity
problem by the RBI Indian financial sector exposure not very large But Indian businesses who had borrowed internationally stood
exposed to dollar rise RBIs mistakes
allowed FIIs to exit vast fall in NFA (15 then 60b $) FIIs punished but not doubly (1BUS$ coming in in 2004 = 400mgoing out in 2008 JRVarma,IIMA)
But intervention in exchange market was mistaken should haveallowed the rupee to fall temporarily
Massive crunch on liquidity mm*NFA; massive credit crisis inIndia
Much time wasted in moving to expansionary monetary policy RBI still worried about inflation!!
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Impact on the real sector steep fall in investments
steep fall in exports
Sympathetic fall in spending is on
Very large job losses diamonds >400,000; tiles, textiles, export, IT, processing; waste
processing industries
Slow down on IT before its sharp decline? Or is there hiddenopportunity to cut wage costs and bounce back?
Real estate and construction most badly affected
real estate bubble? 3 times increase in prices overextendeddevelopers, but housing loans more or less safe? But a little later asIT people lose jobs?
Collapse of commercial real estate as investments fell
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The recent fiscal response
Delayed but came out big Spending increase has been very large
Could have been much more on the investment side
Inflation continues to be high on primary side; On the
mfg side it is very low
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Assessment The Nature of demand
IT/ BPO spending effects (housing cars, other durables) Very large increase in role of traded sector Absolute advantage of the services sector Large role of remittances large labour market flexibility
free imports and falling tariffs quell any local monopoly spending effects of gulf remittances
Step up in investment so Yf is increasing rapidly/can increase rapidly (GCF 37%?) adjusted Investment may be higher than 40%
Large buoyancy in savings s > i ?
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Idle capacity in mfg.
Idle capacity in tradables esp. export industries The Real Side
steep decline in share of public investments from 52% to less
than 20% (1.2-2% add on) improvements in the public sector
large rise in productivity of the corporate /large sector about4+% in labour/ IT shopfloor
TFP rises Some infrastructural gains (ports, airports, telecom, roads in
part, village roads, airlines, in part power)
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Industrial reorganization DUPs have come down tax, rates, delicensing governance improvements
The issue of large capital inflows and making the task of monetarypolicy difficult
itself the result of monetary targeting autonomy on M actually weak without imposing large variations in
credit H = DC+ NFA
Money GDP Ratio can increase increasing transactions intensity idle cash balances financial market uncertainities
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Can supply side inflation be fought with a demand sidepull back? If elasticity for demand for money >1 then ?
The issue of idle reserves from $50b to $150-200b?
a structural problem of shift in economic and trade weight Should the RBI do disequilibrium pricing
Dutch disease on mfg
The issue of rate of growth?
Is any rate below 10% going to be pro-poor emp elasticity 0.15(1.5%)
Export led growth to raise elasticity (0.5+)?
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The contrast with China
interest rate and exchange rate targeting countercyclical fiscal policy
monetary subservience
very high growth pursued moderate inflation nevertheless (investment
42-43%)
Every prediction of global whiz kids, WB andIMF proven wrong every year? Yet theadherence to monetarism world wide?
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Concerns Macroeconomic
Capital outflows, fickle capital inflows, Outward FDI and the sell-
offs Infrastructural policies
energy policies (under investment possibilities) power sector blues continue and deepen
inputs to agriculture especially power and water are major PPP frameworks not ready in many sectors Regulatory framework contributes to risk
The constraint of land acquisition
The agricultural constraint Widening income gaps despite faster growth of poors
incomes in many parts
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The mill stone of Planning CommissionsCentrally Sponsored Schemes
Interregional disparities
Public failure in crucial areas of humandevelopment and well being: municipalinfrastructure, public health, education,drinking water
The constraint of urban areas
sky rocketing real estate prices The emerging skills constraint?
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Growth Facts GDP and Aggregates
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Exhibit: Growth Rates Achieved by
the Indian Economy over the Years (1990-91 Constant Prices)
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
0.1
0.11
0.12
0.13
0.14
0.15
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
E
xp%PerAnnum
Gross domestic products by expenditure or demand (at constant 1990-91 Prices)
Private final consumption expenditure
Government final consumption expenditure
Gross capital formation
Agriculture & allied
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h
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h
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h
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h
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2000 2002 2004 2006 2008 2010
YrQ
-0.15
-0.05
0.05
0.15
0.25
Growth in GDP and Sectors
(1990-91 Constant Price)
GDPFC
Agri.& Allied
Industry
Services
h
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Growth Rate IIP Various
IIP (All)
IIP (Mfg)
IIP (Capital)
IIP (Consumer)
1990 1994 1998 2002 2006 2010 2014
YrQ
-0.12
-0.02
0.08
0.18
0.28
0.38 h
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h
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Fiscal Deficit and Govt Exp
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Examining the Inflation Story
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1990 1994 1998 2002 2006 2010
Yw
0
0.04
0.08
0.12
0.16
Inflation in WPI (w/w), and Role of
Primary Artcls and Fuels etc. (% p.a)
All Comm.
Prim.+Fuel etc
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2004 2008 2012
Yw
0
0.04
0.08
0.12
0.16
Inflation in WPI (w/w), and Role of
Primary Artcls and Fuels etc. (% p.a)
All Comm.
Prim.+Fuel etc
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1990 1994 1998 2002 2006 2010
Yw
-0.05
0.05
0.15
0.25
0.35
Inflation in WPI (w/w)(% p.a)
All Commodities
Primary Artcls.
Fuel, Power etc
Mfg. products
h
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1990 1994 1998 2002 2006 2010
Yw
-0.01
0.02
0.05
0.08
0.11
0.14
0.17
Inflation in WPI (w/w)
(% p.a)
Prim.+Fuel etc
Mfg. Products
h
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1990 1994 1998 2002 2006 2010
Yf
-0.01
0.02
0.05
0.08
0.11
0.14
0.17
Observed and Fitted Inflation in WPI
for Mfg (w/w, 52)
OBSERVED
Fitted
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Regression InflMfg on InflPrimary and InflFuel
Coeff. St.Cff. t Sign.Constant 0.013 0.002 6.280 0.000
InflFuel(-1) 0.064 0.028 2.274 0.023
InflPrimary(-1) 0.274 0.028 9.939 0.000InflFuel(-7) 0.071 0.045 1.573 0.116
InflFuel(-11) -0.088 0.035 -2.491 0.013
InflPrimary(-11) 0.226 0.028 7.993 0.000
R-adj Sq 0.458
No of
Observations
767
F-Ratio 130.585
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The LM side
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Foreign Investments
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The External Side
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1990 1994 1998 2002 2006 2010
Yr
0
0.3
0.6
0.9
1.2
1.5
Nominal Exchange Rates (Index 1999=1)
Rs/$
Rs/Pound
Rs/EuroRs/Yen
h
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2003 2004 2005 2006 2007 2008 2009
yr
-0.1
-0.06
-0.02
0.02
0.06
0.1
0.14
Foreign Investments and Foreign DirectInvestments (to GDP)
Portfolio net
Direct net
h
T d d I i ibil O
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2000 2005 2010
Year
0.11
0.16
0.21
0.26
0.31
0.36
Trade and -Invisibiles- Openness
(Exp+Imp)/GDPFC
(Inv E+I)/GDPFC
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Comparing with Other Countries
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Comparing with Other Countries
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Nominal Lending and Real Interest Rates
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1975 1985 1995 2005
Year
-10
-5
0
5
10
15
20
Nominal Lending and Real Interest Rates
(India and China)
IND.W96
CHN.W96
IND.w102
CHN.W102
M3 and Domestic Credit Provided by Banksas % of GDP (India and China)
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1960 1970 1980 1990 2000 2010
Year
0
30
60
90
120
150
180
as % of GDP (India and China)
IND.M3
CHN.M3
IND.DomCredit
CHN.DomCredit
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Today
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