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Transcript of Arvind Virmani (views are personal). INTRODUCTION Trends vs. Cycles: Tendencies Short Term Cyclical...
Arvind Virmani(views are personal)
INTRODUCTIONTrends vs. Cycles: Tendencies
Short Term Cyclical fluctuations (Project) => Trend
Classify every uptrend as cyclical (‘overheating’)Long Term TrendsMedium Term Performance: 2003-04 to 2007-08Short Term: Inflation – Global cost pushRole of Policy reform:
Sustaining growth Raising productivity/ offsetting cost increases
02 August 2008 2General: AV
Economic Growth PerspectivePhase I: 1950-1 to 1979-80
Two sub-phases (50to 65; 66 to 79) Phase II: 1980-81 to 1993-4
Start: Policy regime changeEnd (a) Crises year(1990-91). (b) Reform
initiation 1991-2 (c) Adjustment/recovery (1992-3 to 1993-4)
Phase III: 1994-5 to ?1994-95: Statistical significant growth breakRising trend growth
02 August 2008 3General: AV
Figure 1: Three Phases of Growth(Phase III Result of radical reform)
02 August 2008 4General: AV
-5%
-3%
-1%
1%
3%
5%
7%
9%
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
GdpmpGr GdpGrTrend GdpTndHpf
Recent Developments: Past five years ( 2003-4 to 2007-8)
Growth Acceleration GDPAverage Income / Per capita GDPmp (PcGdp)Avg. Private Consumption (PvtCons)
Aggregate Growth driversSupply sideDemand Side
Sector drivers of growth
02 August 2008 5General: AV
Growth acceleration: ( 2003-4 to 2007-8)
In the next three figures:-Cyclical movement around Rising trend
HP filtered trendGDPmp: 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 6General: AV
Fig 2:Growth Acceleration-Gdp
02 August 2008 7General: AV
3%
4%
5%
6%
7%
8%
9%
10%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
GdpmpGr GdpGrTrend GdpTndHpf
Fig 3: Per Capita Income
02 August 2008 8General: AV
2%
3%
4%
5%
6%
7%
8%
9%19
92-3
1993
-4
1994
-5
1995
-6
1996
-7
1997
-8
1998
-9
1999
-00
2000
-1
2001
-2
2002
-3
2003
-4
2004
-5
2005
-6
2006
-7
2007
-8
Growth
rate
(
%)
Per Capita Income (PcGdpmp)
PcGdp
PcGma5y
Fig 4: Per Capita Consumption
02 August 2008 9General: AV
Aggregate Demand Growth Dynamics: Investment Led growth
Growth of Demand Investment growth rate doubledPvt consumption & imports acceleratedGovt. 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 10General: AV
Fig 6: Investment Led
02 August 2008 11General: AV
15%
20%
25%
30%
35%
40%
Gd
cf -
GD
P r
atio
& m
ovi
ng
avg
(%
)
Gdcf/Gdp MaGdcf/gdp
Fig 5: Investment Led Growth
02 August 2008 General: AV 12
6.1%5.3%
8.9%9.5% 9.2%
18.0%
5.0% 4.7%
7.0%6.2%
5.6%
4.5%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
91-2to97-8 98-9 to 02-3 03-4to07-8
Gdpmp GDCF PFCEdm GFCE
CONTRIBUTION TO DEMAND
02 August 2008 General: AV 13
55.0%57.7%
47.8%
34.0%
26.9%
60.1%
11.6% 12.0%
5.4%
-7.6%
13.6%
-14.7%-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
92-3to97-8 97-8 to 02-3 02-3to07-8
PFCEdm GDCF GFCE Net exports
Supply Side: Investment & SavingsInvestment 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/investmentLag during sharp acceleration
02 August 2008 14General: AV
Investment: Total, Fixed & Private (ratio to GDP)
02 August 2008 15General: AV
15%
20%
25%
30%
35%
40%
2001-2
2002-3
2003-4
2004-5
2005-6@
2006-7*
2007-8
Inve
stm
ent-
Rat
ios
(% o
f G
DP
)
GCF/GDP GFCF/GDP IKpvt/Gdp
Supply Side: SavingsSavings rate also rose by 9.8% (2003-4 to 2007-8)
Avg. 33.3% of GDP from 23.6% in previous 5 yrsPrivate and Public
Increment (4 yrs) 5.1% & 3.4% respectivelyContributed(60:40)
Saving Rate: 36.1% of GDP in 2007-8Maintenance 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 16General: AV
FDI : Inward and outward
02 August 2008 17General: AV
0
5
10
15
20
25
30
35
FDI
(
US
$
billion)
FDI Inbound FDI Outbound
Sources of Growth
02 August 2008 18General: AV
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%19
80
1981
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 Kstock/Lhp TFPGhp
Sector DriversManufacturing
GDP/Value AddedInvestment: GCF, GFCF
CommunicationCompetition and efficiency
Trade, Agriculture, ConstructionLabor intensive
02 August 2008 19General: AV
Drivers of Growth
02 August 2008 General: AV 20
manufacturing16%
trade14%
communication11%
agriculture(crop)10%
construction10%
real estate,ownership of dwellings & business
services8%
banking & insurance8%
other services7%
transport by other means
6%
Rest10%
Contribution to Growth (2002-3 to 2007-8)
Sector Drivers of GrowthAcceleration 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
Construction1.5 1.3 1.0 1.0 1.4 1.2 -0.4
Telecommunication2.2 0.5 0.6 0.6 0.4 0.5 -1.7
02 August 2008 22General: AV
Summary: Medium term gr trendGrowth has accelerated in last five yearsWhile Consumption growth remained robust, the
acceleration was Investment ledExternal sector was a drag on demand because
of oil (and other) price increasesPrivate investment particularly corporate is
leading investment and growthDomestic Saving rate has increased inline with ITelecom, Construction, Manufacturing were the
leading sectors11th Plan target of 9% average growth will be
met
02 August 2008 General: AV 23
INFLATION: Global effectsKemal Dervis Exim lecture(18/3/08): Global Cost pushGlobal Commodity Price ShockAll commodity indexFood price Index
Edible oil (Palm): Net Importer Effect on India: Primary food & edible oils
Iron Ore: Net exporterMineral Oil: Net ImporterImpact on Indian InflationComparison: India(Wpi), USA(Pppi), UK(Ppi
Manf)
02 August 2008 General: AV 24
Global Cost Push?
02 August 2008 General: AV 25
-10%
0%
10%
20%
30%
40%
50%
60%
70%
All Food
Global Supply: Edible Oil(Palm)
02 August 2008 General: AV 26
350
450
550
650
750
850
950
1,050
1,150
2005
M4
2005
M5
2005
M6
2005
M7
2005
M8
2005
M9
2005
M10
2005
M11
2005
M12
2006
M1
2006
M2
2006
M3
2006
M4
2006
M5
2006
M6
2006
M7
2006
M8
2006
M9
2006
M10
2006
M11
2006
M12
2007
M1
2007
M2
2007
M3
2007
M4
2007
M5
2007
M6
2007
M7
2007
M8
2007
M9
2007
M10
2007
M11
2007
M12
2008
M1
2008
M2
2008
M3
2008
M4
2008
M5
2008
M6
World Price of Palm Oil ($/MT)
Palm oil
Global Supply Shock: Iron Ore
02 August 2008 General: AV 27
60
70
80
90
100
110
120
130
140
150
2005
M4
2005
M5
2005
M6
2005
M7
2005
M8
2005
M9
2005
M10
2005
M11
2005
M12
2006
M1
2006
M2
2006
M3
2006
M4
2006
M5
2006
M6
2006
M7
2006
M8
2006
M9
2006
M10
2006
M11
2006
M12
2007
M1
2007
M2
2007
M3
2007
M4
2007
M5
2007
M6
2007
M7
2007
M8
2007
M9
2007
M10
2007
M11
2007
M12
2008
M1
2008
M2
2008
M3
2008
M4
2008
M5
2008
M6
World Price of Iron Ore(cents/MT)
PironOre
Global Supply Shock: Oil Price
02 August 2008 General: AV 28
100
120
140
160
180
200
220
240
260
2005
M6
2005
M7
2005
M8
2005
M9
2005
M10
2005
M11
2005
M12
2006
M1
2006
M2
2006
M3
2006
M4
2006
M5
2006
M6
2006
M7
2006
M8
2006
M9
2006
M10
2006
M11
2006
M12
2007
M1
2007
M2
2007
M3
2007
M4
2007
M5
2007
M6
2007
M7
2007
M8
2007
M9
2007
M10
2007
M11
2007
M12
2008
M1
2008
M2
2008
M3
2008
M4
2008
M5
2008
M6
Global Oil Price Index (IMF)
Poil
Rate of Growth: Iron Ore & Oil
02 August 2008 General: AV 29
-20%
0%
20%
40%
60%
80%
100%
PironOre Poil
Contribution to change in WPI
02 August 2008 General: AV 30
-1
1
3
5
7
9
11
13
03.0
403
.06
03.0
803
.10
03.1
204
.02
04.0
404
.06
04.0
804
.10
04.1
205
.02
05.0
405
.06
05.0
805
.10
05.1
206
.02
06.0
406
.06
06.0
806
.10
06.1
207
.02
07.0
407
.06
07.0
807
.10
07.1
208
.02
08.0
408
.06
Pman Pfl Pprf Pprnf Pmnrl
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
Inflation in India (WPI) and USA(PPI)
02 August 2008 General: AV 32
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%20
07.0
1
2007
.02
2007
.03
2007
.04
2007
.05
2007
.06
2007
.07
2007
.08
2007
.09
2007
.10
2007
.11
2007
.12
2008
.01
2008
.02
2008
.03
2008
.04
2008
.05
2008
.06
IndiaWpi UsaPpi
Inflation: India-WPI Manf, UK-PPI Manf, USA PPI Ind
02 August 2008 General: AV 33
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%20
07.0
1
2007
.02
2007
.03
2007
.04
2007
.05
2007
.06
2007
.07
2007
.08
2007
.09
2007
.10
2007
.11
2007
.12
2008
.01
2008
.02
2008
.03
2008
.04
2008
.05
2008
.06
UsPpiInd UkPpiMnf IndWpiMf
Inflation Convergence: US & India
19th Junel 2008 34Mumbai Isec: AV
-3
-1
1
3
5
7
9
11
13
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Inflation
(
%)
India Ppfce US Pcons
Diff:India-US Poly. (Diff:India-US)
CPI(unme) & Gdp Pvt Cons deflator
19th Junel 2008 35Mumbai Isec: AV
1%
3%
5%
7%
9%
11%
13%
97q
197
q2
97q
397
q4
98q
198
q2
98q
398
q4
99q
199
q2
99q
399
q4
00q
100
q2
00q
300
q4
01q
101
q2
01q
301
q4
02q
102
q2
02q
302
q4
03q
103
q2
03q
303
q4
04q
104
q2
04q
304
q4
05q
105
q2
05q
305
q4
06q
106
q2
06q
306
q4
07q
107
q2
07q
307
q4
08q
1
CPI unml Pfce def
Monetary Policy and InflationCost Push and Monetary accommodation!
Monetary Policy includes exchange rate policyImportant only for its effect on objectives
Monetary Policy ObjectivesProduction/Growth & Inflation – emphasis variesSocio-Political Tolerance level of InflationPrimary 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 07.10M3ma gr. exceeded peaks of 95.04 and 98.04 in
07.01
02 August 2008 General: AV 36
Monetary Accommodation?
02 August 2008 General: AV 37
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
11%
13%
15%
17%
19%
21%
23%
94.0
594
.10
95.0
395
.08
96.0
196
.06
96.1
197
.04
97.0
998
.02
98.0
798
.12
99.0
599
.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
Money
(
real)
growth
Money
(
M3)
Growth
M3 M3rlc
Real Interest Rate Convergence: US-India
19th Junel 2008 38Mumbai Isec: AV
-4
-2
0
2
4
6
8
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Interest
rate(
%)
US1yr India364d Dif:Ind-Us Poly. (Dif:Ind-Us)
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
yearAggregate 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 ReformMarch 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 shockInvestment Environment
02 August 2008 General: AV 40
Medium-Long term implicationsNatural 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 PaymentsCapital 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-shape02 August 2008 General: AV 42
Excess Capital Flows-over CAD (% of GDP)
02 August 2008 43General: AV
-1%
0%
1%
2%
3%
4%
5%
6%
7%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Capital
Flows
(
%GDP)
Excess Capital flow Portfolio (FII)
Linear (Excess Capital flow) Linear ( Portfolio (FII))
Current Act and Goods & Services Deficit
02 August 2008 44General: AV
-3%
-2%
-1%
0%
1%
2%
3%
4%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Pay
ments
Balance(
%GDP)
Goods &Services Def Curnt Act Def
Poly. (Goods &Services Def) Poly. (Curnt Act Def)
Long Term: Sustaining GrowthReforms essential for sustaining 9% for two
decades.Policy Reform
Structural change: Labor market flexibilityCompetition: 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 reformPublic and Quasi-Public goods & services
National Networks: Drinking Water, Waste (solid and liquid)
Universal Primary education-outcome (not enrolment)
Civic/Urban servicesSocial service delivery: Empowerment
Debit/credit (smart card): PC WP 2002Multi-application smart card (UID): 2005, 2006,
2007
02 August 2008 General: AV 46
ReferencesPrecursor:
India’s 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 47General: AV