economic slowdown and macro economic policies
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ECONOMIC SLOWDOWN ANDMACROECONOMIC POLICIES
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PLAN OF THE PRESENTATION
INTRODUCTION
2008-09 SLOWDOWN
POLICY OMISSIONS AND COMMISSIONS
CURRENT SLOWDOWN
GOVERNMENT POLICIES:
STIMULATING GROWTH OR CURTAILING IT ?
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PLAN OF THE PRESENTATION
INTRODUCTION
2008-09 SLOWDOWN
POLICY OMISSIONS AND COMMISSIONS
CURRENT SLOWDOWN
GOVERNMENT POLICIES:
STIMULATING GROWTH OR CURTAILING IT ?
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What is economic slowdown
economic slowdown happens when the rate of growth (which isstill positive) decreases.
What are macroeconomic policies
Macro-Economic policy refers to the action that governmentsand the central banks take to ensure the economy keepsticking over
Types:
-Monetary-
-Fiscal--Trade-
-Industrial-
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Objectives of Macroeconomic
policy Full employment
Price stability
External balance
Social Welf are
Equity- income distribution
stimulate consumption and investment
Exchange rate stability
Balance of payment equilibrium
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When the policies go wrong !
Error errrrrrI when the economy grows at unsustainable
pace
Eventually economic imbalances arise and inf lation increases
Then the errors must be reversed
In the process of reversal economy overshootsin the wrong direction and f aces a slowdown
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PLAN OF THE PRESENTATION
INTRODUCTION
2008-09 SLOWDOWN
POLICY OMISSIONS AND COMMISSIONS
CURRENT SLOWDOWNGOVERNMENT POLICIES:
STIMULATING GROWTH OR CURTAILING IT ?
Pre Crisis Developments
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ANALYZING THE SLOWDOWN OF INDIAN
ECONOMY 2007-2009
0
2
4
6
8
10
12
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2004-05 2005-06 2006-07 2007-08 2008-09
GDP
GDP
World economic crisis surfaced in August 2007But contrary to the popular belief, the Indianeconomy had started slowing down before its outbreak
Notice the decline in GDPgrowth rate f rom Q4 2006-07
Global Crises surf aced
here: in Q2 2007-08
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Pre crisis developments
~ an overview of the economy
bellwether of economic performance- IIP Index sharp downward trend f rom Q1 2007-08
Growth in secondary and tertiary sectors declined f rom 10.6 % and 11.2% in
2006-07 to 7.5% and 11.1% in 2007-08.
Downward trend inY-O-Y IIP growth rate f rom Q1 2007-08
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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.
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B. Sharp slowdown in Exports
The most important demand-reducing f actor
It started decelerating f rom 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.
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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.
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PLAN OF THE PRESENTATION
INTRODUCTION
Onslaught of global crisis
POLICY OMISSIONS AND COMMISSIONS
CURRENT SLOWDOWNGOVERNMENT POLICIES:
STIMULATING GROWTH OR CURTAILING IT ?
Pre Crisis Developments
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C. FOREIGN TRADE
Exports
Exports cons
tituted
around 22% of G
DP. Recession
ary
tendencies in OECD countries led to a steep decline Indias
merchandise and service exports.
Imports
International crude oil prices surged and it led to increase in Indias crude oil billf rom $5.6 billion to $10.96billion between July 2007 and august 2008. The drain
f rom domestic demand on account of oil price increase was about 6% of countrys 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 stagf lationary phase Global inf lation was driven by energy and agricultural prices:
World food price crisis
sharp rise in food price led to f all in demand for industrialproducts and services and worsened the slowdown
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CURRENT ECONOMIC SLOWDOWN
India GDP growth rate trend
What do you notice !?
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SIGNS OF SLOWDOWN
GDP growth has slowed consistently f rom 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 investmentproposals have reportedly f allen f rom Rs 7.2 lakh
crore in the June 2010 quarter to only Rs 2.6 lakh
crore in the September 2011
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SECTORAL BREAKDOWN
Supply-side components (Growth, y-o-y %)
Q1FY11 Q2FY11 Q1FY12 Q2FY12
GDP at factor cost 8.8 8.4 7.7 6.9
Agriculture 2.4 5.4 3.9 3.2
Industry 9.1 7.1 5.1 3.2
Manuf acturing 10.6 7.8 7.2 2.7
Construction 7.7 6.7 1.2 4.3
Mining & Quarrying 7.4 8.0 1.8 -2.9
Services 10.4 9.6 10.0 9.3
Trade, Hotels,
Transport &
Communication 12.1 10.2 12.8 9.9
Financing, insurance,
real estate and
business services 9.8 10.0 9.1 10.5
Community, social
& personal services 8.2 7.9 5.6 6.6
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Demand side components (Growth, y-o-y%)
Q1FY11 Q2FY11 Q1FY12 Q2FY12
GDP at market price 9.1 8.6 8.5 6.7
Private Consumption 9.5 9.0 6.3 5.9
Govt. Consumption 6.7 6.4 2.1 4.0
Fixed Investment 11.1 10.3 7.9 -0.6
Change in Stocks 9.3 6.5 4.7 1.5
Exports 9.8 10.5 24.3 27.4
Imports 15.2 11.4 23.6 10.9
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WHAT ARE THE FACTORS BEHIND
THE SLOWDOWN IN EACHCOMPONENT OF GDP ?????
Rising Interest Rates High Inflation
Fiscal Deficit
Policy reform lag Global woes India not decoupled yet
FII Selling
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Fiscal Deficit: Its effect
on growth
Represents the borrowing needs of the government
India is suffering f rom rising inf lation and a slower rate of
growth because of the government's f ailure 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 fiscalyear if the growth had been f aster but even the growth rate for Q2 declined to 7.6%
government planning to spend Rs 56,850 crore extra. it willborrow nearly Rs 53,000 crore more than the budgeted level
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Fiscal deficit:Its effect
on growthTo f und the deficit government can do the following :
1) Borrow f rom the market.
This reduces the f unds 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 f rom subsequentperiods. Therefore current increase in expenditure entails f uture increase in taxes.
3) Monetization of Deficit
It means printing money to meet the finanacial needs of the government. This leads to inf lation in the economy .
Example- Hyperinf lation in Germany af ter the first world war
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Subsidy Burden
33% of total subsidies- fertilizers- 1% of GDP
36%- food
26%- Oil- 3 times pro jected 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. Whichwill ultimately be subsidized by Oil producingcompanies or the government
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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 af ter which it should lapse.
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NREGA SCHEME
Boosted consumption and aggregate demand and wages which f urther f ueled inf lation. 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 puttogether have resulted in fiscal problem
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Inflation
Double digit inf lation f rom Aug 2009 to Aug 2010 food inf lation dropped f rom 9.01% on Nov 24 to 8 % on Dec 1, at its slowest pace in nearly 4 months
inf lation in primary articles category -7.74%, non food items-2.14%, f uel price index 15.53% in the year on November 19
In the previous week, annual f uel inf lation stood at 15.49%
primary articles price index was up 7.74%, compared withan annual rise of 9.08% a week earlier
headline inf lation stayed above 9% for the 11th month,despite 13 rate increases by the RBI since March 2010
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Inflation
RBI targeting to bring inf lation 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%
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Inflation
India's slowdown is partly its f ailure to balance the pace of the growth and tame
the inf lation. [The government's] tight monetary policy has increased the cost of
borrowing and thereby slowed down industrial growth by hindering f reshinvestment
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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
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Monetary Tightening by RBI
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What the government should
do? There is a limitation on fighting inf lation
through monetary policies if supply side
constraints are pre-dominant. the policy priority has to now shif t f rom
monetary to complementary policies as
emphasized by the RBI.
These include improved supply response
for food, storage capacity,cold storage, and
public policy intervention
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Creation of National Investment and Manuf acturing Zones.Theyll eleminiate red tape and inf rastructure bottlenecks.
Land Acquistion Policy reforms
FDI in retail will help in logistics, supply chain and increasing agricultural productivity
Increase business confidence by liberalizing investmentnorms
Composition of fiscal deficit matters.It should change f rom consumption expenditure to investtment expenditure
Keep fiscal deficit within limits to prevent crowding out of private investment
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Merge fertilizer ministry into agriculture
ministry to tackle subsidy burden
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High interest rates pulled down manuf acturing sector growth to 2.7 per cent in the Q2FY12 f rom 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 f urther to 5.9 per cent in the Q2FY12 f rom 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 inf lation.
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