Transcript Presentation

Global Crisis and the Indian EconomyOn a Few Unconventional Assertions
Sugata Marjit
Centre for Studies in Social Sciences, Calcutta
July,2009
MOTIVATION




How Global Recession has impacted Indian Economy
at a Macro Level?
Looking at the issue of Industrial Recession and its
relationship with overall GDP growth.
Argue that Pre recession excessive liquidity growth
was fuelling bubbles and putting pressure on
monetary policy of the RBI. Thus a check on liquidity
flow had a positive effect as well.
Does recession in the organized sector spill over to
the unorganized sector?
Certain Stylized Facts



GDP has grown at 6.7% in 2008-09.
Industry and Exports have been hit hard. Grew
nonetheless on a yearly basis. Rates dropped
significantly.
Service Sector has done reasonably well.
Key Indicators
Item
Units
1. GDP and related indicators
GDP (current market prices)Rs. crore
Growth rate
%
GDP (current market prices)Rs. crore
Growth rate
%
Growth of GDP
(factor cost, constant prices)
%
Savings Rate
% of GDP
Capital formation (rate)
% of GDP
Per cap NNP
(factor cost & current prices)
Rs.
2. Production
Foodgrains
Mill tonne
Index of Industrial production
(growth)
Per cent
Electricity generation
(growth)
Per cent
3. Prices
Inflation (WPI) (52-week average)
%change
Inflation CPI (IW)
%change
4. External sector
Export growth ( US$)
%change
Import growth (US$)
%change
Current account deficit (CAD)/GDP
Per cent
Foreign exchange reserves US$ bn.
Average exchange rate
Rs./ US$
5. Money and credit
(M ) (annual) 3
%change
Scheduled commercial bank credit
(growth)
%change
6. Fiscal indicators (Centre)
Gross fiscal deficit
% of GDP
Revenue deficit
% of GDP
Primary deficit
% of GDP
7. Population
Million
2003-04
2004-05
2005-06
2006-07
2007-08
2754620
3149407
3586743
4129173
4723400
12.2
2402727
2602065
13.9
2844942
15.1
3120029
8.3
9.3
9.7
8.5
29.8
27.6
7.5
31.7
32.1
9.5
34.2
35.5
9.7
35.7
36.9
23198
26003
5321753
14.4
3402716
8.4
20871
1072
14.3
2008-09
29524
RE
12.7
3609425
9.1
6.1
9.
37.7 na
39.1 na
33283
6.7
37490
213.2
198.4
208.6
217.3
230.8
7.
8.4
8.2
11.6
8.5
2.6
5.1
5.1
5.2
7.3
6.3
2.7
5.5
3.9
6.5
3.8
4.4
4.4
5.4
6.7
4.7
6.2
8.4
9.1
21.1
27.3
2.3
113.
45.95
30.8
42.7
-.4
141.5
44.93
23.4
33.8
-1.2
151.6
44.27
22.6
24.5
-1.1
199.2
45.28
28.9
35.4
-1.5
309.7
40.26
16.8
12.3
17.
21.3
21.2
18.4
15.2
30.7
37.
28.5
22.3
17.5
4.5
3.6
0.0
4.
2.5
0.0
4.1
2.6
.4
3.5
1.9
-.2
2.7
1.1
-.9
1089
1106
R E GDP figures for 2008-09 are Revised Estimates
na not yet available / released for 2008-09
^^ for 2008-09 the figures are the 3rd Advance Estimates
^
CAD to GDP ratio for 2008-09 is for the period Apr-Dec 2008
@ as of March 31, 2009
## fiscal indicators for 2008-09 are based on the provisional actuals for 2008-09
1122
1138
229.9 ^^
3.6
14.4
-4.1 ^
252. @
45.99
6.2 ##
4.6 ##
2.6 ##
1154
Query 1:
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To what extent Industrial Recession is reflected in
Slowdown of GDP Growth Rate?
To what extent Sectoral Slowdown is supposed to be
reflected in overall GDP Growth Rate?
Given shares of each sector in GDP, overall growth
rate of GDP is unlikely to respond substantially to a
significant slowdown in the industrial sector.
Consider two pessimistic scenarios a 3% drop or a
4% drop from 9% ( done before the 08-09 results
were announced) .
Table: 1 Sectoral Growth Rate Analysis
Growth Rate
Sector
Growth rate of gdp at
6%
Agriculture (keeping
growth rate of Industry &
Services unchanged)
-12.40
Industry (keeping growth
rate of Agriculture &
Services unchanged)
-7.40
Services (keeping growth
rate of Agriculture and
Industry unchanged)
5.89
Growth rate of gdp at
5%
-18.03
-12.56
4.30
Table 2: Sectoral Growth Rate Analysis
Growth rate of GDP at 6%
Growth rate of gdp at 5%
Sectors
1st case:
Growth rate
of Services
unchanged
2nd case:
Growth rate of
Agriculture
unchanged
3rd case:
Growth rate of
Industry
unchanged
1st case:
Growth rate
of Services
unchanged
2nd case:
Growth rate
of Agriculture
unchanged
3rd case:
Growth rate
of Industry
unchanged
Agriculture
-3.95
4.5
-3.95
-6.77
4.5
-6.77
Industry
0.34
0.34
8.1
-2.24
-2.24
8.1
Services
10.7
8.28
8.28
10.7
7.48
7.48
Table 3: Sectoral Growth Rate Analysis
Sectoral Growth Rate
2008-09(AE) GDP
estimated to grow at
around 7%
Growth rate of
GDP at 6%
Growth rate of
GDP at 5%
Growth rate of
GDP at 4%
Agriculture
3.1
1.79
0.89
-0.01
Industry
3.7
-0.09
-2.82
-5.55
Services
9.6
9.18
8.68
8.18
Sectors
Source: Summary of Estiates of GDP at Constant (1999-00) Prices, CentralStatistical Organisation
Macroeconomic and Monetary Development, Reserve bank of India
Table 4: Quarterly Growth Rates of Different Sectors
2007-08
2008-09
Q1
Q2
Q3
Q1
Q2
Q3
Agriculture
4.4
4.4
6.9
3
2.7
-2.2
Industry
8.5
7.5
7.6
5.2
4.7
0.8
Services
10.7
10.7
10.1
10.2
9.6
9.5
GDP at factor cost
9.1
9.1
8.9
7.9
7.6
5.3
Source: Macroeconomic and Monetary Development, RBI
Query 2:

Excess Liquidity and Bubbles
Just before Global Recession became operational, for
quite some time RBI had to face the problems of
Excessive Liquidity Growth, sharp increase in Money
Supply Growth Rate and related problems. Therefore,
in a way Liquidity Shortage gave RBI and Monitoring
Authority some breathing space.
Casual Hypothesis
Hypothesis
Excess Liquidity may lead to bubbles.
If it can not be contained, then Recession induced
Shortage of Liquidity brings the Asset Prices in line
with the fundamentals.
But how to check for bubbles in share or asset prices
such as real estate?
If there are bubbles, do they respond to the regime of
Excess liquidity. Can we look for structural breaks?
Difficult proposition to prove, but a worthwhile query.
Two examples

The Stock Market scenario –
A Simple method to track Bubbles –
Relationship between Adjusted Closing Price and
EPS with a three period lead. High share price today
must be in expectation of high EPS in future.
Relationship between the price and performance.
There are anomalies for quite a few shares , but we do
not know (yet) that such deviations are sensitive to
the pressure of excess liquidity ( need to work out)
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Excess Liquidity may increase distortion in Real
Returns –
If liquidity growth is uniformly distributed ( from
aggregate demand side ) across sectors relative
real return to capital in different sectors will
remain the same. Over longer run returns should
move towards each other, but if liquidity is
unevenly distributed through policy the gap may
continue to widen, distortions may increase.
Expectations play a role. Too much emphasis on
real estate lending could be the cause of
distortion. Liquidity shortage may cure this to
some extent.
Query 3:
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The role of Unorganized Sector which absorbs more
than 90% of work force –
How resilient is this one to recession?
Data are yet to be available
But is formal and informal highly related?
Possibly not.
-20.0
Formal
Inf ormal
India
Pondicherry
Daman & Diu
Goa
Delhi
Dadra & Nagar
Chandigarh
West Bengal
Kerala
Karnataka
India
Pondicherry
Daman & Diu
Goa
Delhi
Dadra & Nagar
Chandigarh
West Bengal
Uttar Pradesh
Tripura
Tamil Nadu
Rajasthan
Punjab
Orissa
Nagaland
Maharashtra
Madhya Pradesh
State s
Uttar Pradesh
State s
Tripura
Tamil Nadu
Formal
Rajasthan
Punjab
Orissa
Nagaland
Maharashtra
Madhya Pradesh
Kerala
Karnataka
Himachal Pradesh
Haryana
Gujarat
Bihar
Assam
Andhra Pradesh
-20.0
Himachal Pradesh
Haryana
Gujarat
Bihar
Assam
Andhra Pradesh
Percentage
Growth Rate
70.0
Statew ise Average Grow th Rate of GVA of the years 199495 to 2000-01 in Formal and Informal
Sectors
60.0
50.0
40.0
30.0
20.0
10.0
-10.0
0.0
Inf ormal
State s w is e Ave r age Gr ow th Rate of GV A for the ye ar s 2000-01 to 2005-06 in For m al and Infor m al
Se ctor
50.0
40.0
30.0
20.0
10.0
0.0
-10.0
-15.0
Formal
Inf ormal
India
Pondicherry
Daman & Diu
Goa
Delhi
Dadra & Nagar
Chandigarh
West Bengal
Uttar Pradesh
States
Tripura
Tamil Nadu
Rajasthan
Punjab
Orissa
Nagaland
Maharashtra
Madhya Pradesh
Kerala
Karnataka
Himachal Pradesh
Haryana
Gujarat
Bihar
Assam
Andhra Pradesh
Growth Rate
Statewise Average Growth Rate of Wages per Worker of the years 1994-95 to 2000-01 in Formal
and Informal Sectors
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
-5.0
-10.0
-10.0
Formal
States
Informal
India
Pondicherry
Daman & Diu
Goa
Delhi
Dadra & Nagar
Chandigarh
West Bengal
Uttar Pradesh
Tripura
Tamil Nadu
Rajasthan
Punjab
Orissa
Nagaland
Maharashtra
Madhya Pradesh
Kerala
Karnataka
Himachal Pradesh
Haryana
Gujarat
Bihar
Assam
Andhra Pradesh
Percentage
Statew ise Average Grow th Rate of Wages per Worker for the years 2000-01 to 2005-06 in Form al and
Inform al Sector
20.0
15.0
10.0
5.0
0.0
-5.0
Correlation Coefficient of the growth rates of different variables
between formal and Informal Sector:
1994-95 to 2000-01
Fixed assets
outstanding loan
gross value added
Wages per worker
Correlation Coefficient ®
-0.187
0.027
0.231
-0.376
p-values
0.373
0.896
0.270
0.0637*
*Significant at 10% level of significance
2000-01 to 2005-06
Fixed assets
outstanding loan
gross value added
Wages per worker
Correlation Coefficient
-0.033
-0.052
0.311
0.210
p-values
0.875
0.806
0.131
0.316