iim interview pi 2013

7/30/2019 IIM Interview PI 2013

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Issues for IIM PI Process http://www.essaysforIIM.co.in

http://www.essaysforIIM.co.in

SOME IMPORTANT TOPICS FOR IIM INTERVIEW PROCESS

FISCAL CLIFF AND ITS IMPACT

What is the fiscal cliff?

The fiscal cliff is the phrase thats become associated with the combination of $500 billion in spending cuts

and tax increases that are scheduled to automatically start at the start of 2013 in the United States.

Tax Increases:

The Bush-era income-tax rates, which have been extended once already under President Barack Obama,will expire at the end of the year for all taxpayers.

Also ending is a payroll-tax holiday, which means a tax increase for workers of as much as twopercentage points.

In addition, some 26 million additional people face the alternative minimum tax, or AMT, which wouldraise their taxes liability sharply unless Congress acts.

Spending Cuts:

Across-the-board cuts in domestic and, particularly, defense spending would be triggered, including a $55billion, 9% cut in the defense budget next year and another $55 billion in cuts to domestic programs,

including a 2% cut to Medicare providers.

Whats the economic impact of going over the cliff?

If the said measures are taken, the Congressional Budget Office has projected the economy wouldcontract 1.3% in the first six months of 2013, with the economy stabilizing in the second half and

eventually achieving an annual growth rate of 0.5%. Joblessness would rise to 9.2% at the end of 2013 if

Congress didnt act.

But alternately, it has been argues that the budget cutting that would automatically take place willeventually boost growth by putting the government on a firmer and more sustainable financial footing.

The counter argument is that going over the cliff would cause a) investor panic and b) consumer panicand fundamentally derail whats already a weak economic recovery.

"The US fiscal cliff represents the single biggest near-term threat to a global economic recovery," theFitch ratings agency said recently.

The dramatic fiscal tightening implied by the fiscal cliff could tip the US and possibly the global economyinto recession. At the very least it would be likely to halve the rate of global growth in 2013.

The IMF has warned that even the uncertainty raised by the fiscal cliff has hit global investment and jobcreation.

What is the likely impact on India?


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Reserve Bank of India cited World Bank research that predicted only a modest impact on India:Economic growth in South Asia would fall by 0.2 percentage points while the current account deficit

would improve by 0.1 percentage points of gross domestic product. But the central bank seems worried

enough to add: a sharp fiscal contraction may have a deleterious impact on global growth.

Commodity prices will ease off and oil prices will stay significantly lower than in the recent past. In fact,fear of the fiscal cliff has already drove down commodity prices, starting in October.This will mean that

Indias inflation rate may come down fast enough for the central bank to cut interest rates more quickly

than anticipated to stimulate growth. Lower crude oil prices could also ease some of the current

pressure on the balance of payments (BoP).

Trade: However, there could be potentially adverse impact on the Indian economy from reduced tradeand investment. Indias merchandise exports now account for nearly 16% of Gross Domestic Product,

while total exports account for approximately 24% of GDP. With Indias major trading partners in

trouble, exports are expected to take a hit.

Capital flows will also be affected as the global recession that may result, even if the fiscal cliff isavoided, will lead investors to safe havens. That means rising demand for gold and dollar-denominatedassets and capital will move away from risky assets (both equity and currency) of emerging markets,

including India.

Equities: If we look at the correlation of returns of EM equities, they are positively correlated to globalequities. Hence any fall in global equity markets due to a fiscal cliff could cause a fall in all emerging stock

markets including India..

The fundamentals of the Indian economy are far weaker than they were at the end of 2008, which meansthat the ability of policymakers to intervene effectively is less than before. One indication of this is the

level of foreign exchange reserves with the central bank relative to monthly imports. Such import cover

has nearly halved in the past four years, from 12 months to six months.

At an International Monetary Fund meeting in Nov 2012, FM P. Chidambaram said that the issues offiscal cliff and the lifting of the debt ceiling in the U.S. also need to be resolved. The need is to put in

place a medium-term fiscal plan while avoiding excessive fiscal correction in the short run. Should the

economic situation in the U.S. worsen, its impact on emerging market economies will be much

more severe than in the case of the situation in the euro area.

INDIAN ECONOMY IMPORTANT INDICATORS

NATIONALINCOME

Domesticsavingratehasdeclinedto30.4%in2011/12 CAD 4.2%ofGDP;merchandisetradedeficitat~10%ofGDP;capitalflows:3.7%ofGDP FiscaldeficitfortheCentrewas5.89%ofGDPinRE2011/12;Consolidated:8.2percentofGDP Employmentelasticityfallingfrom0.43(9904)toprojected0.25in201116 Current:Policyratios:repo:8%,reverserepo:7%,MSF:9%;Reserveratios:CRR4.25%;SLR23%,

USDINR:54.83

WPI:Primarygoodscarryaweightof20.12%,'fuelandpower'14.91%andmanufacturedproducts64.97%.


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INDUSTRY

NationalManufacturingPolicyGoals: Increasemanufacturinggrowthto1214%;Shareofmanufacto25%ofgdpby2022;create100mjobsby2022

MSME:MSMEsegmentconstitutesabout26millionunits,contributionof8%inGDP,ashareof45%oftotal industrialoutput,over8000productsmanufactured,40%ofexport,employmentof60

millionpeoplehavingapotentialofcreating1.3millionjobseveryyearfurtherensuringbalanced

regionalandinclusivegrowth

AGRICULTURE

GDPshare:30%in9091toVolatile6xthanGDPoverall BRICSexperiencethat1%gagriis23xmoreeffectivethanreducingpovrtythannonagrig; ~52%ofworkforceisstillemployedbyfarmsector(NSS66thRound); averagesizeofoperationalholdingshasdiminishedprogressivelyfrom2.28hain197071to1.55ha

in199091to1.23hain200506(Agricensus200506);Marginalholdings(lessthan1ha)65%

GCFagri:Reversalintrendfrom9thplan increaseinGCFto13.9%in10th 18.7%in1st3yrsof11th.

TRADE

Servicestrade: Exportsgrewat20.6%cagrin200411;Sizesoftware42%share;Importscagr20.2%;

Totaltradeinclservices50%ofgdpin201011(25%in9798)

Goodstrade:

Exports Imports

Value 45b$(2001)to303b$(2012) 50b$(2001)to488b$(2012)

CAGR 19.5%indecade 25%indecade(2000s)

ShareinglobalX/M 0.7% >1.5%[20002010] 0.8% >2.2%[20002010]

Inthetop100importsoftheworldin2010,Indiahasonly15itemswithashareof2%andabove.[Showslowexportdiversification]

shareofAsiaandASEANintotaltradeincreasedfrom33.3%in20001to57.3%in1sthalfof201112,

EuropeandAmericafellfrom42.5%to30.8% IndiastradedeficitasapercentofGDPat9.9percentin2012,isoneofthehighest. In the2yrs200910 to201112,net gold imports incrby28b$or1.5%ofGDP >HAD ITbeen

constantCADwudbeamanageable2.7%insteadofthedaunting4.2%

LINKAGE:


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o Tradeopenness(goodsandservicestrade)increasedsubstantiallywiththetradeGDPratiodoublingsince19992000.[17.2%(9091)to29.2%(0102)to53.7(0809)]

o ratioof totalexternal transactions (grosscurrentaccount flowsplusgrosscapitalaccountflows)

to

GDP

an

indicator

of

both

trade

and

financial

integration

was

112%

in

2008

09

upfrom44%in199899.

LEVESONINQUIRY ImportantasroleofmediahasbeeninlimelightinIndiatoo

WhatwastheLevesonInquiry?

Itwasapublic,judgeled inquirysetupbyPrimeMinisterDavidCamerontoexaminetheculture,practiceandethicsofthepress.Itwasestablishedinthewakeofthephonehackingscandalatthe

nowdefunctNewsoftheWorldtabloid.

Whatdiditlookat?

It looked at the relationship between the press and the public, including phonehacking and other

potentially illegalbehaviour,andat the relationshipsbetween thepressand thepoliceand thepress

andpoliticians.

WhatdidLordJusticeLevesonrecommend?

Hemadebroadandcomplexrecommendationsrelatingtohowthepressisregulated:

Newspapersshouldcontinuetobeselfregulated andthegovernmentshouldhavenopoweroverwhattheypublish.

Therehadtobeanewpressstandardsbodycreatedbytheindustry,withanewcodeofconduct Thatbody shouldbebackedby legislation,whichwouldcreateameans toensure the regulation

wasindependentandeffective

Thearrangementwouldprovidethepublicwithconfidencethattheircomplaintswouldbeseriouslydealtwith andensurethepressareprotectedfrominterference.

Whydidherecommendreworkingpressregulation?

The current system,where the press is selfregulated voluntarily through the Press ComplaintsCommission (PCC), iswidely agreed to be doomed the PCC itself has agreed tomove into a

"transitionalphase"untilalongtermreplacementcanbeestablished.

Thechairmanof thePCC,LordHunt,wantsanew"tough, independent regulatorwith teeth".Hetold theLeveson inquiry therewasawillingnessamongpublications fora"fresh startandanew

body"basedonlegallyenforceablecontractsbetweenpublishersandthenewbody.


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TheFreeSpeechNetwork,whichrepresentsmanyeditorsandpublishers, isvigorouslyopposedtoanystate involvement inpressregulation.Itsaysthepressexiststoscrutinisethoseinpositionsof

power,anditcouldnotdothatifthoseitwasscrutinisinghadauthorityoverit.

NATIONALMANUFACTURINGPOLICYseekstoachieveinclusivegrowthoftheIndianeconomybyimplementingcohesivepolicymeasuresfor

creating stateofthe art manufacturing facilities aimed at making India the next manufacturing

destination.

Throughvariouspolicyinstrumentslike

a) creationofNationalInvestmentandManufacturingZones(NIMZs),b) rationalization/simplificationofbusinessregulations,c) provisionofexitmechanismsforsickunits,d) creationoffinancialandinstitutionalmechanismsfortechnologydevelopment,e) implementingindustrialtrainingandskillupgradationmeasures,f) providingincentivesforSmallandmediumenterprises(SMEs)NMPseekstoachievethefollowingbroadobjectives:

a) IncreasetheshareofmanufacturinginGDPto25%by2022;b) Create100millionadditionaljobsby2022;c) Creationofappropriateskillsetsamongtheruralmigrantandurbanpoortomakegrowthinclusive;d) Increasedomesticvalueadditionandtechnologicaldepthinmanufacturing;e) EnhanceglobalcompetitivenessofIndianmanufacturingthroughappropriatepolicysupport;andf) Ensuresustainabilityofgrowth,particularlywithregardtotheenvironmentg) NMPhasalsooutlinedcertainfocusindustries primarilycomprise

a) employmentintensiveindustries;b) capitalgoodsindustry;c) industrieswithstrategicsignificance(likeaerospace;shipping;IThardwareandelectronics;

telecommunicationequipment;defenceequipment;andsolarenergy);

d) industrieswhereIndiaenjoysacompetitiveadvantage;e) SMEsandf) Publicsectorenterprises(PSU).

Need:

1. Thereareattendantsocioeconomicmanifestationsintermsofoverdependenceofalargesectionof the population on agriculture for its livelihood, disguised unemployment and urban

unemployment. India has a favourable demographic profilewith over 60% of population in the

workingagegroupof1559years.Foracountrywiththelargestyoungpopulationintheworld,this

creates a challenge of significantmagnitude. Over the next decade, India has to create gainful

employmentopportunities fora large sectionof itspopulation,withvaryingdegreesof skillsand


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qualifications.Thiswillentailcreationof220millionjobsby2025inordertoreapthedemographic

dividend. Themanufacturing sectorwould have to be the bulwark of this employment creation

initiative. Every job created in manufacturing has a multiplier effect of creating two to three

additional

jobs

in

related

activities.

Therefore,

a

thrust

on

manufacturing

is

integral

to

the

inclusive

growthagendaofthegovernment.

2. Besidestheemployment imperative,thedevelopmentofthemanufacturing sector iscriticalfromthe point of view of ensuring that the growthmodel of India is sustainable by providing value

additiontoournaturalandagriculturalresources, addressingourstrategicneeds,anddeveloping

newtechnologiesforthewelfareofourcitizens.

3. Finally,thegrowthofthemanufacturingsectorhastobemadesustainable, particularlyensuringenvironmentalsustainabilitythroughgreentechnologies,energy efficiency,andoptimalutilization

ofnaturalresourcesandrestorationofdamaged/degradedecosystems.

Inordertoachievethesegoals:

1. Foreign investmentsandtechnologieswillbewelcomedwhile leveraging thecountry'sexpandingmarket formanufactured goods to induce the buildingofmore manufacturing capabilities and

technologieswithinthe country;

2. Competitiveness of enterprises in the country will be the guiding principle in the design andimplementationofpoliciesandprogrammes;

3. Complianceburdenonindustryarisingoutofproceduralandregulatory formalitieswillbereducedthroughrationalizationofbusinessregulations.

4. Innovationwillbeencouragedforaugmentingproductivity,quality,and growthofenterprises;and5. Effective consultativemechanismwith all stake holderswill be instituted to ensuremidcourse

corrections.

CHANGINGROLEOFPLANNINGCOMMISSION Over theyears, the Indianplanning systemhasmoved fromcentralized investmentplanning toa

more directional planning methodology. Today the Planning Commission concerns itself with

evolving a longterm strategic vision of the economy, decides on priorities andworks out the

sectoraltargetsconsistentwiththestrategicvisionandpriorities.Italsoindicatestheinitiativesthe

government needs to take both in terms of investments and policy changes to realize these

objectives.

Integrativeroleinthedevelopmentofaholisticapproachtopolicyformulationincriticalareasofhumanandeconomicdevelopment,speciallywhereboththeCentreandtheStateshavearoleto

play. In the social sector, schemeswhich require coordination and synthesis, coordinated policy

formulation.

Emphasisonmaximizingtheoutputoftheeconomybyusingourlimitedresourcesoptimally.


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righttobail,therighttoaspeedytrial,immunityagainstcruelandunusualpunishment,the

right to dignified treatment in custodial institutions, the right to legal aid in criminal

proceedingsandabovealltherighttolivewithbasichumandignity.

oThrough

the

PIL,

the

court

has

expanded

the

idea

of

rights.

Clean

air,

unpolluted

water,

decent livingetc.Arerightsfortheentiresociety.Therefore, itwasfeltbythecourtsthat

individualsaspartsofthesocietymusthavetherighttoseekjusticewhereversuchrights

wereviolated.

ThereishoweveranegativesidetothelargenumberofPILsandtheideaofaproactivejudiciary.o Inthefirstplaceithasoverburdenedthecourts.o Secondly,judicialactivismhasblurred the lineofdistinctionbetween theexecutiveand

legislatureontheonehandandthejudiciaryontheother.Thecourthasbeeninvolvedin

resolvingquestionswhichbelongtotheexecutive.Thus,forinstance,reducingairorsound

pollutionor

investigating

cases

of

corruption

or

bringing

about

electoral

reform

is

not

exactly thedutyof the Judiciary.These arematters tobehandledby the administration

underthesupervisionofthelegislatures.

o Therefore,somepeoplefeelthatjudicialactivismhasmadethebalanceamongthethreeorgans of government very delicate.Democratic government isbased on each organ of

government respecting thepowersandjurisdictionoftheothers.Judicialactivismmaybe

creatingstrainsonthisdemocraticprinciple.

MoreaboutJudicialActivism

Judicial activism is a philosophy ofjudicial decisionmakingwherebyjudges allow their personalviews

about

public

policy,

among

other

factors,

to

guide

their

decisions.

It

can

be

narrowly

defined

asoneormoreofthreepossibleactions:overturninglawsasunconstitutional,overturningjudicial

precedent,andrulingagainstapreferredinterpretationoftheconstitution.(Forinstancewidening

therighttolifetoincluderighttofreelegalaid,righttoprivacy,righttohealthyenvironmentetc)

The chief instrument through which judicial activism has flourished in India is Public InterestLitigation (PIL). Innormal courseof law,an individualcanapproach the courtsonly ifhe/shehas

beenpersonallyaggrieved.ButinthecaseofPIL,thecaseisfilednotbytheaggrievedpersonsbut

byothersontheirbehalf.Manypublicspiritedcitizensandvoluntaryorganisations (eg.Centerfor

PIL CPIL representedbyPrashantBhushanandShantiBhushan) soughtjudicial intervention for

protectionof

existing

rights,

betterment

of

life

conditions

of

the

poor,

environment

etc.

Detractors of judicial activism charge that it usurps the power of the elected branches ofgovernmentorappointedagencies,damaging the ruleof lawanddemocracy.Theyargue thatan

unelectedorelectedjudicialbranchhasno legitimategrounds tooverrulepolicychoicesofduly

electedorappointedrepresentatives,intheabsenceofarealconflictwiththeconstitution.Insome

instances,governmentregulationbyappointedofficers ingovernmentagenciesareoverturnedby

electedjudges.


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Defenders of judicial prerogatives say that many cases of so called "judicial activism" merelyexemplifyjudicial review,and that courtsmustupholdexisting lawsand strikedownany statute

thatviolatesasupersedinglaw.

Some

recent

instances

of

Judicial

Activism

can

be

o DistributionoffoodunderPublicDistributionSystemfreetopoorinsteadoflettingitrotingodowns

o The SC ordered the Delhi Government not to demolish night shelters in Delhi for thehomeless in themidstofwintersas it isagainst the right to life.Thecourthad takensuo

motocognizancefromnewspaperreports

o ThebrawlontheappointmentofCVCPCThomas In India, even as PrimeMinisterManmohan Singh frowned upon judicial overreach, Supreme

Court former chiefjustice KG Balakrishnan hadwelcomed its outcome as a desirable tension

betweenthejudicialandthelegislativeandexecutivebranches.Thesourceofthetension,however,

liesin

the

vacuum

created

by

the

lapses

of

both

the

legislative

and

executive

branches.

Thejudiciaryisgivingtheimpressionofsteppingintofillthevacuumbyoftenforcingtheexecutiveto takeaction (against theprivileged sonsofpoliticians,as in the Jessica Lal case)or compelling

Parliament to enact laws (for example, to curb sexual harassment at workplaces). This has

encouraged the Indianurbanmiddleclass to repose its faith in thenewfoundconceptofjudicial

activism, and towish that thejudiciary replaces the corrupt legislature and bureaucracy as the

benevolentauthority.Butthereisacatchinthiswishfulbelief.Barringafewrecentcasesofjudicial

intervention,whichhavehadsomepositiveeffectongovernance,theIndianjudiciaryonthewhole

hasnotdisplayedanyspontaneouswilltoactonbehalfofthecommonpeople.

Eventhoughthisphenomenonhasbeenwelcomedbymany,ithasmanynegativeso Ithasoverburdenedthecourtsleadingtodelayedjusticefornormalcaseso It has blurred the line of distinction between the legislature on the one hand and the

judiciaryontheother.

o Ithasmadethebalanceamongthethreeorgansofgovernmentverydelicate.Democraticgovernmentisbasedoneachorganofgovernmentrespectingthepowersandjurisdictionof

theothers.Judicialactivismmaybecreatingstrainsonthisdemocraticprinciple.

Even though Judicial review is essential to maintain the fundamental rights of citizens, theconstitutionclearlydefinesthelegislatureasthelawmakingbody.Anyaberrationineitherofthese

willbe against the spiritof the constitution. The twoparts should try towork togetherwithout

steppingintothejurisdictionofeachotherforthebenefitofthenationscommonman.

IMPACT OF RUPEE DEPRECIATION

There are three important effects:

1. Some people had borrowed in dollars, and left it unhedged since they were speculating that the INRwould appreciate. They get hurt in the process. But this is fine as in a market economy, many people


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place bets about future fluctuations of financial prices, and half the time the speculator loses money. (If

the rupee had not depreciated sharply, these speculators would have been gained).

2. When the rupee depreciates, imports become costlier and India's exports become more competitive. Soexports (X) gradually start going up and imports (M) gradually start going down. The net gain in X-M isincreased demand in the local economy. Hence, INR depreciation is good for aggregate demand

(and conversely INR appreciation pulls back demand). However, we have to bear in mind that these

effects are small and take place with long lags.

3. Many things in India are tradeable. It is important to focus on the things that are tradeable and not juston the things that are imported. As an example, there are many transactions between a domestic

producer of steel and a domestic buyer of steel. The buyer and seller are both in India. But the price at

which they transact is the world price of steel (which is quoted in dollars) multiplied by the INR/USD

exchange rate. This is called `import parity pricing'. Through this, the domestic prices of tradeables

goes up when the rupee depreciates.

OPTIONS BEFORE RBI AGAINST A FALLING RUPEE

Problem:The falling rupee is worrying policymakers, not least because a steady drop in the countrys foreign

exchange reserves and a worsening current account deficit make it vulnerable in a tough global environment.

Why the problem arose:

1. The Euro zone crisis has triggered risk-aversion among investors and slowed capital inflows2. pressure on the economy and the currency from a slowing economy, a widening trade deficit amid high

contractual repayment obligations.

3. Dollar liquidity crunch globally in the wake of downgrades by ratings agencies of European countries andbanks.

Measures Taken: The government has already taken measures to boost capital inflows. These include

raising the foreign institutional investment limit in government securities and corporate debt, raising

borrowing limits for banks and companies and asking companies to quickly bring back home funds raised

overseas.

Measures which are being considered:

1. Imposing restrictions on overseas investments by local companies2. Curbing pre-payments of foreign loans3. Enforcement or revision of prudential limits on currency positions4. Strong communication to cool markets5. Steps to curb speculation6. Ease overseas borrowings for corporates and banksLong term measures

1. Assess preparedness to deal with any financial crisis2. Freeze the contours of the proposed Crisis Management Group with more clarity on its role and powers


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INFLATIONS IMPACT ON ECONOMY

Inflation has an adverse impact on the real economy. The following points are worth noting

1. High and persistent inflation imposes significant socio-economic costs. Given that the burden ofinflation is disproportionately large on the poor, high inflation by itself can lead to distributional

inequality. Therefore, for a welfare-oriented public policy, low inflation becomes a critical element for

ensuring balanced progress.

2. High inflation distorts economic incentives by diverting resources away from productive investment tospeculative activities.

3. Inflation reduces households saving as they try to maintain the real value of their consumption.Consequent fall in overall investment in the economy reduces its potential growth.

4. As inflation rises and turns volatile, it raises the inflation risk premia in financial transactions. Hence,nominal interest rates tend to be higher than they would have been under low and stable inflation.

5. If domestic inflation remains persistently higher than those of the trading partners, it affects externalcompetitiveness through appreciation of the real exchange rate.

6. As inflation rises beyond a threshold, it has an adverse impact on overall growth.7. RBI's current assessment suggests that the threshold level of inflation for India is in the range of 4-6%. If

inflation persists beyond this level, it could lower economic growth over the medium-term.

Hence there is a need for a monetary policy response by the Central Bank to control inflation

PIIGS DEMYSTIFYING THE CRISIS

[This is an overview of the genesis of the crisis; What is happening currently in Europe is covered

separately]

Portugal, Ireland, Italy, Greece and Spain share a currency and an acronym PIIGS. Each lost cost

competitiveness after 1999, seeing prices and wages rise more rapidly than the Euro area average. As

members of the Euro zone, theycannot devalue their currencies, making the struggle out of recession

harder. Thus they need internal devaluation which means falling wages, and falling GDP (Due to fiscal

consolidation). But, as GDP falls, the tax collections will drop too and the deficit will not get reduced as

much, thus a further fall in GDP is necessitated.

As the trouble brewed, the symptoms varied in each country. Greece and Spain sucked in cheap imports and

ran-up huge current account deficits. They at least enjoyed prosperity for a while unlike Portugal and Italy

whose economies were held back by high wage costs and poor productivity. Irelands export-led success gave

way to a bubble economy built on low interest rates.


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Details:

Portugal It seemed to have exhausted the benefits of Euro even before it was launched. Its boom in the

second half of 1990s was fed by a sharp decline in borrowing costs, based on the mere prospect of Euro

membership. Rapid wage inflation eventually made it harder for local firms to compete with foreign rivals. By

2000, Portugals current account deficit had widened to a deficit of 10% of GDP. The emerging economies of

Eastern Europe and Asia have further dulled Portugals appeal as a low-cost producer. Its poor education

system keeps it trapped in low-skilled work, which can be done more cheaply by others.

Ireland Ireland had a more ruinous credit boom that even America or Britain. Bank lending was heavily

tilted towards mortgages and construction. One legacy is the bad commercial-property loans that have

crippled its banks. Another is the stockpile of household debt, mostly mortgages that exceeded 100% of

GDP. The regulation of banks was also an issue. There was huge and wasteful investment in real estate

sector, financed by banks by borrowing from non residents and capital markets. At one time, 60% of bank

assets = 250% of nominal GDP = loans to real estate sector. (Infact, it had a current account surplus so

that was not part of the problem)


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The government guaranteed all liabilities of Irish banks including private sector banks against defaults. But,

those banks were not facing a liquidity problem but a solvency crisis. Thus, the problem could not be solved.

Finally, IMF and EU bailout became necessary. The bailout was of Eur 85 bn.

Ireland seeks to return to export-led growth that was once its key to success. To do so, it must lower itswages relative to its trading partners in euro area. For many households, that means wages will fall, making

debt looms larger. One salve is that mortgage rates in Ireland are linked to the European Central Banks main

interest rate, which is set to remain low.

Italy- Italy had a nasty recession but unlike others was not pulled out of shape by a big credit boom or

housing boom. Between 2002 and 2007, Italys current account deficit averaged less than 2% of GDP

compared with between 7% and 9% of Greece, Spain and Portugal. Yet Italy suffers many of the same

problems. Like Spain, its productivity growth is dismal. Like Greece, it has huge public debts and trouble

collecting taxes. That is in part due to the countrys vibrant North that the levies raised there help pay for the

many failures of the poorer south.

Spain- Spains economic trouble is closely tied to its housing bust. The unemployment rate is close to 20%

and many of the newly idle had been construction workers. Spains poor productivity growth is partly the

result of the housing mania.(construction booms are labour-intensive). Yet much of the fault lies with Spains

labour market rules. Wages are set centrally and most jobs are protected, making it hard to shift skilled

workers from dying to blooming industries. (Most job losers were low skilled temporary workers, who are

hard to reemploy). Recession revealed how dependent public finances had been on housing-related tax

revenues. House prices have further to fall. On one measure, the ratio of house prices to rent, Spanish

property is more than 50% above its face value.

Greece- Public finances are in a mess in most rich European countries, but Greece is in by far the worst

shape. There was fiscal and financial irresponsibility resulting in ultra loose fiscal policy and a huge

Current account deficit. In 2009, the government ran a budget deficit of 13.6% of GDP. Greeces debt

stood at 115% of GDP in 2009. Among OECD countries, only Japan has a higher burden. Public spending

was 51% of GDP bloated by the standards of America, but broadly in line with the average for Euro area

countries. Greeces main fiscal problem is collecting revenues. Tax evasion is endemic, contributing to

Greeces low tax/GDP ratio of 31%. Among Euro area counties, only Irelands figures are lower.

All this necessitated a record 110 bn euro ($147 bn) bailout for debt-stricken Greece after Athens committed

itself to years of painful austerity. It is a three-year package of emergency loans. In exchange for by far the

largest bailout ever assembled for a country, Greece announced further spending cuts and tax increases

totaling 30 billion euros over three years on top of tough measures already taken.

Telling angry Greeks to choose between the painful rescue or economic collapse, the government now aimsto bring its towering budget deficit back to the EU limit by 2014, two years later than originally promised.

iim interview pi 2013

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