ECONOMIC SLOWDOWN AND MACROECONOMIC POLICIES
PLAN OF THE PRESENTATION
INTRODUCTION 2008-09 SLOWDOWN POLICY OMISSIONS AND COMMISSIONS CURRENT SLOWDOWN GOVERNMENT POLICIES:
STIMULATING GROWTH OR CURTAILING IT ?
PLAN OF THE PRESENTATION
INTRODUCTION 2008-09 SLOWDOWN POLICY OMISSIONS AND COMMISSIONS CURRENT SLOWDOWN GOVERNMENT POLICIES:
STIMULATING GROWTH OR CURTAILING IT ?
What is economic slowdown
economic slowdown happens when the rate of growth (which is
still positive) decreases.
What are macroeconomic policies
Macro-Economic policy refers to the action that governments
and the central banks take to ensure the economy keeps ticking over Types: -Monetary-Fiscal-Trade-Industrial-
Full employment Price stability External balance Social Welfare
Objectives of Macroeconomic policy
Equity- income distribution stimulate consumption and investment Exchange rate stability Balance of payment equilibrium
When the policies go wrong ! Error errrrrr
I when the economy grows at unsustainable pace Eventually economic imbalances arise and inflation increases Then the errors must be reversed In the process of reversal economy overshoots in the wrong direction and faces a slowdown
Policy Error errrrrr
..
II policymakers fail to immediately react to economic problems like slowdown and the policy implemented afterwards gets effective in lags
PLAN OF THE PRESENTATION
INTRODUCTION Pre Crisis Developments 2008-09 SLOWDOWN POLICY OMISSIONS AND COMMISSIONS CURRENT SLOWDOWN GOVERNMENT POLICIES:
STIMULATING GROWTH OR CURTAILING IT ?
ANALYZING THE SLOWDOWN ECONOMY 2007-2009
GDP
12 10 8 6 4 2 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
OF INDIAN
Notice the decline in GDP growth rate from Q4 2006-07
GDP
Q2
Q3
Q4
Q1
Q2 2008-09
Q3
2004-05
2005-06
2006-07
2007-08
Global Crises surfaced here: in Q2 2007-08
World economic crisis surfaced in August 2007 But contrary to the popular belief, the Indian economy had started slowing down before its outbreak
Pre crisis developments ~ an overview of the economy
Downward trend in Y-O-Y IIP growth rate from Q1 2007-08
bellwether of economic performance- IIP Index sharp downward trend from Q1 2007-08 Growth in secondary and tertiary sectors declined from 10.6 % and 11.2% in 2006-07 to 7.5% and 11.1% in 2007-08.
Growth Debilitating factors
A- Declining trend in private capital formation
In 2006-07, private investment constituted 1/4th of GDP Between 2006-07 and 2007-08 the decline in growth of private investment was 8.9%. This resulted in growth debilitating effect of 3.36 percentage points.
B.
Sharp slowdown in Exports
The most important demand-reducing factor It started decelerating from 3rd quarter 2006-07 From 13.2 %in Q3 to 0.6% in Q1 2007-08 to minus 3.1% in Q2 in 2007-08.
Growth Enhancing Factors
public investment grew by 15.6% in pre crises period government consumption by 0.8 percentage points Agriculture GDP grew by 1.3% points.
PLAN OF THE PRESENTATION
INTRODUCTION Pre Crisis Developments Onslaught of global crisis POLICY OMISSIONS AND COMMISSIONS CURRENT SLOWDOWN GOVERNMENT POLICIES:
STIMULATING GROWTH OR CURTAILING IT ?
Financial Contagion and Indian Economy
[Link] Banks became wary of extending loans. Traders and exporters found it really difficult to secure credit. This adversely affected the consumer durables, exports and real estate sector the most B. FII
FII Inflows
40000 20000 0 -20000
FII outflow starts here
FII Inflows apr jun aug oct dec feb apr jun aug oct dec feb apr jun aug oct dec feb apr jun aug oct dec 2005-06 2006-07 2007-08 2008-09
FII registered a steep fall between October and November 2007 from $3.6 to 2.2 $ billion Bearish trend in the stock market has dampening effect on private propensity to invest
C. FOREIGN TRADE Exports Exports constituted around 22% of GDP. Recessionary tendencies in OECD countries led to a steep decline India s merchandise and service exports.
Imports
International crude oil prices surged and it led to increase in India s crude oil bill from $5.6 billion to $10.96billion between July 2007 and august 2008. The drain from domestic demand on account of oil price increase was about 6% of country s income. Current account deficit reached to 4.3% in 2nd quarter of 2008-09
D. GLOBAL INFLATION Between September 2007 and October 2008 world experienced a stagflationary phase Global inflation was driven by energy and agricultural prices: World food price crisis sharp rise in food price led to fall in demand for industrial products and services and worsened the slowdown
CURRENT ECONOMIC SLOWDOWN
India GDP growth rate trend
What do you notice !?
SIGNS OF SLOWDOWN
GDP growth has slowed consistently from 9.4%
for the quarter ending AprilJune 2010, to 7.7% for the quarter ending April-June 2011 growth in the Index of Industrial Production (IIP) touched lows of 3.8% and 4.1% in recent months, compared to 9.4%in March 2011. According to CMIE data, quarterly investment proposals have reportedly fallen from Rs 7.2 lakh crore in the June 2010 quarter to only Rs 2.6 lakh crore in the September 2011
SECTORAL BREAKDOWN
Supply-side components (Growth, y-o-y %) Q1FY11 Q2FY11 8.8 2.4 9.1 10.6 7.7 7.4 10.4 8.4 5.4 7.1 7.8 6.7 8.0 9.6
Q1FY12 7.7 3.9 5.1 7.2 1.2 1.8 10.0
Q2FY12 6.9 3.2 3.2 2.7 4.3 -2.9 9.3
GDP at factor cost Agriculture Industry Manufacturing Construction Mining & Quarrying Services Trade, Hotels, Transport & Communication Financing, insurance, real estate and business services Community, social & personal services
12.1
10.2
12.8
9.9
9.8 8.2
10.0 7.9
9.1 5.6
10.5 6.6
Demand side components (Growth, y-o-y%)
Q1FY11 Q2FY11 Q1FY12 Q2FY12
GDP at market price Private Consumption Govt. Consumption Fixed Investment Change in Stocks Exports Imports
9.1 9.5 6.7 11.1 9.3 9.8 15.2
8.6 9.0 6.4 10.3 6.5 10.5 11.4
8.5 6.3 2.1 7.9 4.7 24.3 23.6
6.7 5.9 4.0 -0.6 1.5 27.4 10.9
WHAT ARE THE FACTORS BEHIND THE SLOWDOWN IN EACH COMPONENT OF GDP ?????
Rising Interest Rates High Inflation Fiscal Deficit Policy reform lag Global woes India not decoupled yet FII Selling
Fiscal Deficit: It s effect on growth
Represents the borrowing needs of the government India is suffering from rising inflation and a slower rate of
growth because of the government's failure to tackle the country's fiscal deficit The target for FY2012 was 4.6%. However as a thumb rule exceeds 25% by Q2 it becomes a cause of concern. Currently it stand around 75% of the target Fiscal deficit of 4.6 % could have been achieved this fiscal year if the growth had been faster but even the growth rate for Q2 declined to 7.6% government planning to spend Rs 56,850 crore extra. it will borrow nearly Rs 53,000 crore more than the budgeted level
Fiscal deficit:It s effect on growth
To fund the deficit government can do the following : 1) Borrow from the market. This reduces the funds available for private investment. In the medium run Government will have to offer higher interest rates to attract lenders. Debt service costs also increase in the subsequent years 2) Increase the taxes As per Ricardian Equivalence , expenditure in one period is nothing but borrowing from subsequent periods. Therefore current increase in expenditure entails future increase in taxes.
3)
Monetization of Deficit
It means printing money to meet the finanacial needs of the government. This leads to inflation in the economy . Example- Hyperinflation in Germany after the first world war
Subsidy Burden
33% of total subsidies- fertilizers- 1% of GDP 36%- food 26%- Oil- 3 times projected Rs 23000. Petrol prices have been decontrolled. But diesel , kerosene and LPG are heavily subsidized This has led to cumulative under recoveries of 1.32 trillion rupees in the last 8 years. Which will ultimately be subsidized by Oil producing companies or the government
Food Security Bill
Food Security Bill will be implemented in the winter session , 1.2 trillion rupees will go in food subsidy. But in PDS 57 % gets diverted to unintended beneficiaries Food subsidy should be subject to conditions The Food Security act should have a fixed tenure after which it should lapse.
NREGA SCHEME
Boosted consumption and aggregate demand and wages which further fueled inflation. Also : In India, there are three problems: relatively weak fiscal situation. Second, we viewed programs such as NREGS and rural pay as a stimulus whereas actually they are not easily withdraw able third, the revenue component was more than the capital component in the expenditure. All these put together have resulted in fiscal problem
Inflation
Double digit inflation from Aug 2009 to Aug 2010 food inflation dropped from 9.01% on Nov 24 to 8 % on Dec
1, at its slowest pace in nearly 4 months inflation in primary articles category -7.74%, non food items -2.14%, fuel price index 15.53% in the year on November 19 In the previous week, annual fuel inflation stood at 15.49% primary articles price index was up 7.74%, compared with an annual rise of 9.08% a week earlier headline inflation stayed above 9% for the 11th month, despite 13 rate increases by the RBI since March 2010
Inflation
RBI targeting to bring inflation down to some moderate level of 7% by the turn of the current fiscal, if not to the desirable and comfortable level of around 5%
Inflation
India's slowdown is partly its failure to balance the pace of the growth and tame the inflation. [The government's] tight monetary policy has increased the cost of borrowing and thereby slowed down industrial growth by hindering fresh investment
Inflation
Inflation
12 10 8 6 Inflation 4 2 0
Fisher (1993) offered evidence hat 1 percentage point increase in the rate of inflation could cost an economy more than one-tenth of a percentage point of growth.
Primary Articles: 11.40% vs. 11.84% Month on Month Food Articles: 11.06% vs. 9.23% Month on Month Non-Food Articles: 7.71% vs. 14.82% Month on Month Fuel & Power: 14.79% vs. 14.09% Month on Month Manufacturing Products: 7.66% vs. 7.69% Month on Month
Monetary Tightening by RBI
What the government should do?
There is a limitation on fighting inflation through monetary policies if supply side constraints are pre-dominant. the policy priority has to now shift from monetary to complementary policies as emphasized by the RBI. These include improved supply response
for food, storage capacity,cold storage, and public policy intervention
Creation of National Investment and Manufacturing Zones.
They ll eleminiate red tape and infrastructure bottlenecks. Land Acquistion Policy reforms FDI in retail will help in logistics, supply chain and increasing agricultural productivity Increase business confidence by liberalizing investment norms Composition of fiscal deficit [Link] should change from consumption expenditure to investtment expenditure Keep fiscal deficit within limits to prevent crowding out of private investment
Merge fertilizer ministry into agriculture ministry to tackle subsidy burden
High interest rates pulled down manufacturing sector growth to 2.7 per cent in the Q2FY12 from 7.2 per cent in the previous quarter Mining sector contracted by 2.9 per cent in the reporting quarter.
Growth in private final consumption expenditure, the largest component of aggregate demand, moderated further to 5.9 per cent in the Q2FY12 from 6.3 per cent in the previous quarter. The moderation was mainly due to the tapering-off of demand in interest-sensitive sectors and high inflation.
This fiscal lower than-expected collections under small savings schemes such as public provident fund and post office deposits and lower cash surplus has forced the government to issue more bonds and increase borrowings Fiscal deficit of 4.6 % could have been achieved if the growth had been faster. Borrowing by government crowds out private investment, Fiscal deficit is a major issue when most of it is being spent on consumption not investment Increase in md while borrowing and ms while spending Lower liquidity higher interest rate India's slowdown is partly its failure to balance the pace of the growth and tame the inflation. [The government's] tight monetary policy has increased the cost of borrowing and thereby slowed down industrial growth by hindering fresh investment the government is trying to address the fiscal deficit through monetary policies, which is pushing up interest rates. Industry is paying the price of these fiscal imbalances with the agricultural sector also suffering despite a good monsoon this year The situation has been made worse by the problems in the Eurozone considering 20 per cent of India's exports are to the European Union
