Arvind Virmani (views are personal)

INTRODUCTION
Trends vs. Cycles: Tendencies Short Term Cyclical fluctuations (Project) => Trend Classify every uptrend as cyclical (overheating) Long Term Trends
Medium Term Performance: 2003-04 to 2007-08 Short Term: Inflation Global cost push Role of Policy reform: Sustaining growth Raising productivity/ offsetting cost increases
02 August 2008 General: AV 2

Economic Growth Perspective

Phase I: 1950-1 to 1979-80 Two sub-phases (50to 65; 66 to 79) Phase II: 1980-81 to 1993-4 Start: Policy regime change End (a) Crises year(1990-91). (b) Reform initiation 19912 (c) Adjustment/recovery (1992-3 to 1993-4) Phase III: 1994-5 to ? 1994-95: Statistical significant growth break Rising trend growth
02 August 2008 General: AV 3

Figure 1: Three Phases of Growth (Phase III Result of radical reform)

9%

7%

5%

3%

1%

1955

1957

1959

1969

1971

1973

1983

1985

1987

1995

1997

1999

2001

2009

-1%

-3% GdpmpGr
-5%

GdpGrTrend

GdpTndHpf

02 August 2008

General: AV

2011

1951

1953

1961

1963

1965

1967

1975

1977

1979

1981

1989

1991

1993

2003

2005

2007

Recent Developments:
Past five years ( 2003-4 to 2007-8)
Growth Acceleration GDP Average Income / Per capita GDPmp (PcGdp) Avg. Private Consumption (PvtCons) Aggregate Growth drivers Supply side Demand Side Sector drivers of growth

02 August 2008

General: AV

Growth acceleration:
( 2003-4 to 2007-8)
In the next three figures: Cyclical movement around Rising trend HP filtered trend GDPmp: Avg. growth of 8.9% Per Capita gdp growth has doubled To 7.3% (from 3.7% in 1980-1991) Average income will double in ten years Avg. Private Consumption Gr rt: Almost doubled

02 August 2008

General: AV

Fig 2:Growth Acceleration-Gdp

10%
GdpmpGr GdpGrTrend GdpTndHpf

9%

8%

7%

6%

5%

4%

3% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

02 August 2008

General: AV

Fig 3: Per Capita Income

Per Capita Income (PcGdpmp)
9% 8%
PcGdp

G r o w t h r a t e

PcGma5y

7%

6%

5%

4%

1999-00

1993-4

1996-7

1998-9

2001-2

2004-5

2006-7

02 August 2008

General: AV

2007-8

1992-3

1994-5

1995-6

1997-8

2000-1

2002-3

2003-4

2005-6

(
%

)
3% 2%

Fig 4: Per Capita Consumption

7%

Per Capita Consumption

PcPfce Linear (PcPfce)

6% G r o 5% w t h 4%
r 3% a t e 2% ( % ) 1% 0% 1992-3 1993-4 1994-5 1995-6 1996-7 1997-8 1998-9 2000-1 2001-2 2002-3 2003-4 2004-5 2005-6 2006-7 1999-00 2007-8

02 August 2008

General: AV

Aggregate Demand Growth Dynamics: Investment Led growth

Growth of Demand Investment growth rate doubled Pvt consumption & imports accelerated Govt. Consumption-slowed Role of private Consumption important but declined

below that of Investment for first time External : Short period of positive contribution (low oil prices) over Govt Consumption: Lower contribution
02 August 2008 General: AV 10

Fig 6: Investment Led

40%
Gdcf/Gdp MaGdcf/gdp

Gdcf - GDP ratio & moving avg (%)

35%

30%

25%

20%

15%

02 August 2008

General: AV

11

Fig 5: Investment Led Growth

20% 18%
16%

Gdpmp

GDCF

PFCEdm

GFCE 18.0%

14% 12% 10% 8% 6.1% 6% 4% 2% 0%

91-2to97-8 98-9 to 02-3 03-4to07-8 5.0%

9.5%

9.2%

8.9% 7.0%

6.2% 5.3%
4.7%

5.6% 4.5%

02 August 2008

General: AV

12

CONTRIBUTION TO DEMAND
70% 60% 50% 40% 30% 20% 11.6% 10% 0% 92-3to97-8 -10% -20% PFCEdm -7.6% GDCF GFCE Net exports -14.7% 97-8 to 02-3 02-3to07-8 55.0% 57.7% 60.1% 47.8%

34.0% 26.9%

13.6% 12.0% 5.4%

02 August 2008

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13

Supply Side: Investment & Savings

Investment growth led by Fixed investment i.e. not inventory build up Private Investment i.e. Profitable Increase in productive capacity of the economy
Savings rate also rose: Private & Public sectors Saving rises with income/investment Lag during sharp acceleration

02 August 2008

General: AV

14

Investment: Total, Fixed & Private (ratio to GDP)

40%
GCF/GDP GFCF/GDP IKpvt/Gdp

35%

Investment- Ratios (% of GDP)

30%

25%

20%

15%
2005-6@ 2006-7*

2001-2

2004-5

02 August 2008

General: AV

2007-8

2002-3

2003-4

15

Supply Side: Savings

Savings rate also rose by 9.8% (2003-4 to 2007-8) Avg. 33.3% of GDP from 23.6% in previous 5 yrs Private and Public Increment (4 yrs) 5.1% & 3.4% respectively Contributed(60:40) Saving Rate: 36.1% of GDP in 2007-8
Maintenance of Investment and Saving Rate at 2007-8

levels enough to give average growth 0f around 9%

Possible with deceleration in gr of profits, saving &

investment to 9%.
02 August 2008 General: AV 16

FDI : Inward and outward

35 30
F D I

FDI Inbound 25

FDI Outbound

02 August 2008

U S 20 $ b 15 i l l i 10 o n
)
5

General: AV

17

02 August 2008
4.0%

0.0%
1980 1981

1.0%

2.0%

3.0%

5.0%

6.0%

7.0%

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

NDP/Lhp

Sources of Growth

General: AV 18

Kstock/Lhp TFPGhp

Sector Drivers
Manufacturing GDP/Value Added Investment: GCF, GFCF Communication Competition and efficiency Trade, Agriculture, Construction Labor intensive

02 August 2008

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19

Drivers of Growth
Contribution to Growth (2002-3 to 2007-8)
transport by other means 6%

Rest 10% manufacturing 16%

other services 7%

trade 14%

banking & insurance 8%

communication 11%
real estate,ownership of dwellings & business services 8%

construction 10%

agriculture(crop) 10%

02 August 2008

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20

Sector Drivers of Growth

Acceleration in Value Added: Increase in growth rate Highest for Manufacturing and construction Followed by storage & agriculture. Investment Growth: Manufacturing 30.5% per year
Capital stock (end 2007-8 over end 2002-3). Construction(1.92 times) Manufacturing (1.75 times), rade, Hotels & Restaurants (1.62 times).

02 August 2008

General: AV

21

Efficiency of Investment
.
1992-3 to 2003-4 2004-5 2005-6 2006-7 2003-4 to Change

ICOR

2002-3

(act)

(act)

(rev)

(est)

2007-8

Manufacturing

11.1

8.6

9.5

10.5

8.3

9.2

-1.9

Construction
1.5 1.3 1.0 1.0 1.4 1.2 -0.4

Telecommunication
2.2 0.5 0.6 0.6 0.4 0.5 -1.7

02 August 2008

General: AV

22

Summary: Medium term gr trend

Growth has accelerated in last five years While Consumption growth remained robust, the

acceleration was Investment led External sector was a drag on demand because of oil (and other) price increases Private investment particularly corporate is leading investment and growth Domestic Saving rate has increased inline with I Telecom, Construction, Manufacturing were the leading sectors 11th Plan target of 9% average growth will be met
General: AV 23

02 August 2008

INFLATION: Global effects

Kemal Dervis Exim lecture(18/3/08): Global Cost push

Global Commodity Price Shock All commodity index Food price Index

Edible oil (Palm): Net Importer Effect on India: Primary food & edible oils

Iron Ore: Net exporter

Mineral Oil: Net Importer

Impact on Indian Inflation Comparison: India(Wpi), USA(Pppi), UK(Ppi Manf)

02 August 2008 General: AV 24

Global Cost Push?

70%
All Food

60%

50%

40%

30%

20%

10%

0%

-10%

02 August 2008

General: AV

25

1,050

1,150

750

850

350

450

550

650

950

02 August 2008
2005M4

2005M5
2005M6 2005M7

2005M8
2005M9 2005M10

2005M11
2005M12 2006M1

Global Supply: Edible Oil(Palm)

General: AV
2006M2
2006M3 2006M4

2006M5
2006M6

2006M7
Palm oil

2006M8
2006M9

2006M10 2006M11
2006M12

2007M1
2007M2 2007M3

World Price of Palm Oil ($/MT)

2007M4
2007M5 2007M6

2007M7
2007M8 2007M9

2007M10
2007M11 2007M12

2008M1
2008M2

2008M3 2008M4
2008M5

2008M6

26

90

120

130

100

110

140

150

60

70

80

02 August 2008
2005M4

2005M5
2005M6 2005M7

2005M8
2005M9 2005M10

2005M11
2005M12 2006M1

Global Supply Shock: Iron Ore

General: AV
2006M2
2006M3 2006M4

2006M5
2006M6
PironOre

2006M7 2006M8
2006M9

2006M10 2006M11
2006M12

2007M1
2007M2 2007M3

World Price of Iron Ore(cents/MT)

2007M4
2007M5 2007M6

2007M7
2007M8 2007M9

2007M10
2007M11 2007M12

2008M1
2008M2

2008M3 2008M4
2008M5

2008M6

27

180

200

100

120

140

160

220

240

260

02 August 2008
2005M6
2005M7 2005M8 2005M9 2005M10 2005M11 2005M12 2006M1

2006M2 2006M3 2006M4 2006M5

2006M6 2006M7 2006M8 2006M9 2006M10 2006M11

Global Supply Shock: Oil Price

General: AV
2006M12 2007M1 2007M2 2007M3 2007M4
2007M5 2007M6 2007M7 2007M8 2007M9 2007M10
Poil

Global Oil Price Index (IMF)

2007M11 2007M12 2008M1 2008M2 2008M3

2008M4 2008M5 2008M6

28

Rate of Growth: Iron Ore & Oil

100%
PironOre Poil

80%

60%

40%

20%

0%

-20%

02 August 2008

General: AV

29

11

13

-1 1 3 5 7 9

02 August 2008

Pman

Contribution to change in WPI

General: AV 30

Pfl Pprf Pprnf Pmnrl

03.04 03.06 03.08 03.10 03.12 04.02 04.04 04.06 04.08 04.10 04.12 05.02 05.04 05.06 05.08 05.10 05.12 06.02 06.04 06.06 06.08 06.10 06.12 07.02 07.04 07.06 07.08 07.10 07.12 08.02 08.04 08.06

Acceleration in Inflation during 2008 H1 over 2007 H1: Contribution of different commodities
WPI Inflation during H1 2007 (i.e. from December

2006 end to June 2007 end) was 2.7%. Inflation during H1 2008 (i.e. from December 2007 end to June 2008 end) was 9.9%(est). Of the 7.2% increase in inflation this year, 2/3rd was due to 3 sets of commodities:
Edible oils (including) oils seeds and oil cakes)

Iron and Steel (including iron ore)

Mineral Oils and refinery products
02 August 2008 General: AV 31

02 August 2008
10%

12%

14%

16%

-2% 4%

0%

2%

6%

8%

2007.01 2007.02
2007.03 2007.04

Inflation in India (WPI) and USA(PPI)

General: AV
2007.05 2007.06
2007.07

IndiaWpi

2007.08 2007.09
2007.10

UsaPpi

2007.11

2007.12 2008.01
2008.02 2008.03

2008.04 2008.05
2008.06

32

Inflation: India-WPI Manf, UK-PPI Manf, USA PPI Ind

16%

UsPpiInd 14%

UkPpiMnf

IndWpiMf

12%

10%

8%

6%

4%

2%

0%
2007.01 2007.02 2007.05 2007.06 2007.08 2007.09 2007.12 2008.01 2008.04 2008.05
2007.03 2007.04 2007.07 2007.10 2007.11 2008.02 2008.03 2008.06

-2%

02 August 2008

General: AV

33

Inflation Convergence: US & India

13
India Ppfce US Pcons

I n f l a t i o n
(

11
Diff:India-US Poly. (Diff:India-US)

19th Junel 2008

1 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

-1

-3

Mumbai Isec: AV

34

11%

13%

1%

7%

9%

3%

5%

19th Junel 2008

CPI(unme) & Gdp Pvt Cons deflator

Mumbai Isec: AV 35

CPI unml Pfce def

97q1 97q2 97q3 97q4 98q1 98q2 98q3 98q4 99q1 99q2 99q3 99q4 00q1 00q2 00q3 00q4 01q1 01q2 01q3 01q4 02q1 02q2 02q3 02q4 03q1 03q2 03q3 03q4 04q1 04q2 04q3 04q4 05q1 05q2 05q3 05q4 06q1 06q2 06q3 06q4 07q1 07q2 07q3 07q4 08q1

Monetary Policy and Inflation

Cost Push and Monetary accommodation! Monetary Policy includes exchange rate policy Important only for its effect on objectives Monetary Policy Objectives Production/Growth & Inflation emphasis varies Socio-Political Tolerance level of Inflation Primary Focus Today- Inflation & Expectations Capital flows main driver of RM gr. (prt. Q4 2007-8) M3 gr. exceeded peaks of 92.10 (98.10) in 07.10 M3ma gr. exceeded peaks of 95.04 and 98.04 in 07.01
02 August 2008 General: AV 36

02 August 2008
94.05 94.10 95.03 95.08 96.01 96.06 96.11 97.04 97.09 98.02 98.07 98.12 99.05 99.10 2000.03 2000.08 2001.01 2001.06 2001.11 2002.04 2002.09 2003.02 2003.07 2003.12 2004.05 2004.10 2005.03 2005.08 2006.01 2006.06 2006.11 2007.04 2007.09 2008.02 2008.07 ( )

M 3

G r o w t h 11% 13% 15% 17% 19% 23%

M o n 21% e y

Monetary Accommodation?

General: AV
0% 2% 4% 6% g r o w t h 8% 10% 12% r e a l 14% 16%

M3 M3rlc
18%

20% M o n e y

37

Real Interest Rate Convergence: US-India

8
US1yr India364d Dif:Ind-Us Poly. (Dif:Ind-Us)

I n t e r e s t
r a t e

1993

1995

1997

2000

2002

2004

2006

1992

1994

1996

1998

1999

2001

2003

2005

-2

-4

19th Junel 2008

Mumbai Isec: AV

2007

(
%

38

Inflation & Interest rates

Inflation Trajectory Medium Term: Down to normal level in a year Short Term: Depends on Oil prices Real Interest rates Short term: Decline Medium Term: U shaped pattern to normal in a year Aggregate Inflation: Who is hurt Poor- unskilled wage lag. Every one cannot be hurt unless GDP declines!
02 August 2008 General: AV 39

Growth/Production objective: Policy and Institutional Reform

March 2008 Forecast: 8% to 9% (8.5 -/+ 0.5) Oil shock and Production(IIP) data: Revised forecast: 7.75% to 8.75% (8.25% -/+ 0.5) Productivity enhancing reforms can help moderate

cyclical downturn and inflation upturn. Motivation for revisiting/reviving pending reforms
Energy Sector: Oil shock
Investment Environment

02 August 2008

General: AV

40

Medium-Long term implications

Natural Resources Non-renewable (Oil, selected minerals): Rising relative price => Need for User efficiency, Technical change Renewable : Land-intensive agriculture crops (cereals)

Extensive margin (e.g. forest clearing) constrained by climate and environment concerns. Race between productivity and global demand. Relative prices could stabalise at higher levels

02 August 2008

General: AV

41

Balance of Payments
Capital Flows Trends and Volatility (FDI, FII, ECB) Current year: Below trend- FII (Global risk/liquidity preference vs. liquidity). Medium Term: Surplus capital flows/reserve accum. Current Account Invisibles: Non-factor services (software) & prviate remittances low volatility around rising trend Exports (G&S) to Oil/natural resource exporters will increase, perhaps with a lag. CAD : U-shape
02 August 2008 General: AV 42

Excess Capital Flows-over CAD (% of GDP)

7% C a p i t a l F l o w s
(

Excess Capital flow Linear (Excess Capital flow)

Portfolio (FII) Linear ( Portfolio (FII))

6%

5%

4%

3%

% G D P
)

2%

1%

0% 1994 -1% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

02 August 2008

General: AV

43

Current Act and Goods & Services Deficit

4%

P a y m e n t s B a l a n c e
(

3%

2%

1%

0%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

% G D P
)

-1%

-2% Goods &Services Def Poly. (Goods &Services Def) -3% Curnt Act Def Poly. (Curnt Act Def)

02 August 2008

General: AV

44

Long Term: Sustaining Growth

Reforms essential for sustaining 9% for two decades.
Policy Reform Structural change: Labor market flexibility Competition: Decontrol, free entry

Industry(sugar, fertilizer), mining(coal), infrastructure (electricity - open access), financial services.

Education and Skills: Regulated (transparency, rating)

entry (freer), controls (minimal) Urban Land policy (land use, supply, development, utilities)
02 August 2008 General: AV 45

Sustaining Growth: Institutional reform

Public and Quasi-Public goods & services National Networks: Drinking Water, Waste (solid and liquid) Universal Primary education-outcome (not enrolment) Civic/Urban services Social service delivery: Empowerment Debit/credit (smart card): PC WP 2002 Multi-application smart card (UID): 2005, 2006, 2007

02 August 2008

General: AV

46

References
Precursor:
Indias Economic Growth: From Socialist Rate of Growth to Bharatiya Rate of

Growth, Working Paper No. 122, ICRIER, February 2004. Two Phases (4 sub-phases), Third phase statistically insignificant.

Heuristic Theory and Empirics!

Policy Regimes, Growth and Poverty in India: Lessons of Government Failure and

Entrepreneurial Success!, Working Paper No. 170, ICRIER, October 2005. The Dynamics of Competition: Phasing of Domestic and External Liberalisation in India, Working Paper No. 4/2006-PC, Planning Commission, April 2006. Propelling India from Socialist Stagnation to Global Power: Growth Process, Vol. I (Policy Reform, Vol. II), Academic Foundation, New Delhi, 2006. Maco-economic Management of Indian Economy: Capital Flows, Interest Rates and Inflation, Working paper No. 2/2007-DEA, Ministry of Finance, November 2007. Economic Survey, 2007-8, February 2008

02 August 2008

General: AV

47