Growth, Crisis, Revival and Issues in Macroeconomic Management

Sebastian Morris March 24, 2010

(c) S. Morris, IIMA

Prices

AD (fiscal, monetary Policies, exchange rates, world Demand, investment, sentiment) AS (raw matls, Import price)

Income Y* Yf (structure, technology, Σinv Reform, ethos, governance etc)
(c) S. Morris, IIMA

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 by direct 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
(c) S. Morris, IIMA

Morris.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 high growth) • continuing gulf remittances • nearly open capital account • “supportive” monetary policies ex-post though not ex-ante • Sharp rise in the share of investments (c) S. IIMA .

Morris. IIMA . Pressure on growth but little impact in lowering inflation • Growth had begun to decline even before the subprime crisis (c) S.• 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.

IIMA . Morris.• Concerns • High inflation on food and fuel that was passing through • High asset side prices – esp. in real estate • Employment growth (c) S.

Morris. massive credit crisis in India – Much time wasted in moving to expansionary monetary policy – RBI still worried about inflation!! (c) S.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 – RBI’s mistakes • allowed FIIs to exit vast fall in NFA (15 then 60b $) • FIIs punished but not doubly (1BUS$ coming in in 2004 = 400m going out in 2008 –JRVarma. IIMA .IIMA) • But intervention in exchange market was mistaken should have allowed the rupee to fall temporarily • Massive crunch on liquidity mm*∆NFA.

but housing loans more or less safe? But a little later as IT people lose jobs? • Collapse of commercial real estate as investments fell (c) S. processing.000. export. IT.• 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. textiles. tiles. IIMA . Morris. waste processing industries – Slow down on IT before its sharp decline? Or is there hidden opportunity to cut wage costs and bounce back? – Real estate and construction most badly affected • real estate bubble? 3 times increase in prices overextended developers.

On the mfg side it is very low (c) S.• 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. IIMA . Morris.

Morris.Assessment • The Nature of demand • • • • • • • IT/ BPO spending effects (housing cars. IIMA . 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 ? (c) S.

airlines. Morris. in part power) (c) S. export industries • The Real Side • steep decline in share of public investments from 52% to less than 20% (1. IIMA .• Idle capacity in mfg. telecom. airports. village roads. • Idle capacity in tradables esp. roads in part.2-2% add on) • improvements in the public sector • large rise in productivity of the corporate /large sector about 4+% in labour/ IT shopfloor • TFP rises • Some infrastructural gains (ports.

• • • • • Industrial reorganization DUPs have come down tax. IIMA . delicensing governance improvements • – – – The issue of large capital inflows and making the task of monetary policy 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 (c) S. Morris. rates.

5+)? (c) S. Morris. IIMA .15 (1.5%) – Export led growth to raise elasticity (0.• Can supply side inflation be fought with a demand side pull 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.

Morris.• 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 and IMF proven wrong every year? Yet the adherence to monetarism world wide? (c) S. IIMA .

Concerns • Macroeconomic – Capital outflows. fickle capital inflows. Outward FDI and the “selloffs” • 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 poor’s incomes in many parts (c) S. IIMA . Morris.

Morris.• The mill stone of Planning Commission’s Centrally Sponsored Schemes • Interregional disparities • Public failure in crucial areas of human development and well being: municipal infrastructure. IIMA . drinking water • The constraint of urban areas – sky rocketing real estate prices • The emerging skills constraint? (c) S. education. public health.

Morris. IIMA .Growth Facts GDP and Aggregates (c) S.

15 0.05 0.09 0.02 0.13 0.14 0.07 0.04 0.Ex hibit: Grow th Ra te s Achie ve d by the India n Econom y ove r the Ye a rs (1990-91 Consta nt Price s) 0.08 0.01 0 19 51 19 57 19 60 19 54 19 63 19 69 19 72 19 66 19 81 19 84 19 87 19 78 19 90 19 75 19 93 19 96 19 99 20 02 20 05 20 08 (c) S.06 0.1 Exp % Per A nnum 0.03 0.12 0.11 0. IIMA Gross domestic produc ts by expenditure or demand (at constant 1990-91 Prices) Private final consumption expenditure Government final consumption expenditure Gross capital formation Agriculture & allied . Morris.

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h (c) S. IIMA . Morris.

Growth in GDP and Sectors (1990-91 Constant Price) h 0.25 0.05 -0.15 GDPFC Agri. Morris.& Allied Industry Services 0.15 2000 (c) S. IIMA 2002 2004 2006 2008 2010 YrQ .05 -0.

h (c) S. IIMA . Morris.

12 1990 1994 1998 2002 YrQ 2006 2010 2014 (c) S.Growth Rate IIP Various h 0. Morris.28 IIP (Capital) IIP (Consumer) 0.18 0.08 -0.38 IIP (All) IIP (Mfg) 0. IIMA .02 -0.

h (c) S. Morris. IIMA .

Fiscal Deficit and Govt Exp (c) S. Morris. IIMA .

Morris. IIMA .h (c) S.

Morris. IIMA .Examining the Inflation Story (c) S.

12 0.04 0 1990 1994 1998 2002 2006 2010 Yw Sebastian Morris.16 All Comm. IIMA . IIMA (c) S.Inflation in WPI (w/w). Prim.a) 0. and Role of Primary Artcls and Fuels etc.08 0. (% p. Morris.+Fuel etc 0.

16 All Comm. and Role of Primary Artcls and Fuels etc.Inflation in WPI (w/w).+Fuel etc 0.08 0. (% p.04 0 2004 2008 Yw Sebastian Morris. Prim.a) 0. Morris. IIMA 2012 . IIMA (c) S.12 0.

Inflation in WPI (w/w) (% p. IIMA (c) S.05 1990 1994 1998 2002 2006 2010 Yw Sebastian Morris. Power etc Mfg.35 0. Morris.25 All Commodities Primary Artcls.05 -0. Fuel.15 0. IIMA .a) h 0. products 0.

Products 1994 1998 2002 2006 2010 Yw (c) S.Inflation in WPI (w/w) (% p.17 0. Morris.02 -0. IIMA .+Fuel etc Mfg. IIMA Sebastian Morris.08 0.a) h 0.11 0.05 0.01 1990 Prim.14 0.

Observed and Fitted Inflation in WPI for Mfg (w/w. 52) 0.02 -0.17 0. IIMA OBSERVED Fitted 2002 2006 2010 .05 0.08 0.14 0. Morris.11 0.01 1990 1994 1998 Yf (c) S.

IIMA . Morris.h (c) S.

280 2.Regression InflMfg on InflPrimary and InflFuel Coeff.023 0. t Sign.Cff.013 0.000 0.274 0.028 0.064 0.939 1.993 0. Constant InflFuel(-1) InflPrimary(-1) InflFuel(-7) InflFuel(-11) InflPrimary(-11) R-adj Sq No of Observations F-Ratio (c) S.573 -2.458 767 130.028 6.002 0. St.226 0.071 -0.585 .491 7.274 9.000 0.035 0.088 0.116 0. Morris.028 0. IIMA 0.000 0.045 0.013 0.

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IIMA .Foreign Investments (c) S. Morris.

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IIMA .The External Side (c) S. Morris.

h (Index 1999=1) Nominal Exchange Rates 1.2 Rs/$ Rs/Pound Rs/Euro Rs/Yen 0.9 0. Morris.3 0 1990 1994 1998 Yr 2002 2006 2010 (c) S.6 0.5 1. IIMA .

14 0.1 2003 2004 2005 2006 yr 2007 2008 2009 Portfolio net Direct net h (c) S.1 0.06 0.02 -0.Foreign Investments and Foreign Direct Investments (to GDP) 0. Morris.06 -0. IIMA .02 -0.

Openness 0. Morris.21 0.11 2000 2005 Year (c) S.26 0.31 0.36 (Exp+Imp)/GDPFC (Inv E+I)/GDPFC 0. IIMA 2010 .Trade and -Invisibiles.16 0.

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Comparing with Other Countries (c) S. IIMA . Morris.

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W96 CHN.w102 CHN.W96 IND.W102 1985 Year 1995 2005 . Morris. IIMA IND.Nominal Lending and Real Interest Rates (India and China) 20 15 10 5 0 -5 -10 1975 (c) S.

M3 and Domestic Credit Provided by Banks as % of GDP (India and China) 180 150 120 90 60 30 0 1960 (c) S.M3 IND.DomCredit 1970 1980 1990 2000 2010 Year . Morris. IIMA IND.M3 CHN.DomCredit CHN.

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