Cea State Of The Economy August 2008

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


Figure 1: Three Phases of Growth(Phase III Result of radical reform)


-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


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


Fig 2:Growth Acceleration-Gdp


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


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


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


Fig 6: Investment Led


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


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


Investment: Total, Fixed & Private (ratio to GDP)


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%.


FDI : Inward and outward


0

5

10

15

20

25

30

35

FDI

(

US

$

billion)

FDI Inbound FDI Outbound

Sources of Growth


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


Drivers of Growth


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).


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


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


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)


Global Cost Push?


-10%

0%

10%

20%

30%

40%

50%

60%

70%

All Food

Global Supply: Edible Oil(Palm)


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


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


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


-20%

0%

20%

40%

60%

80%

100%

PironOre Poil

Contribution to change in WPI


-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


Inflation in India (WPI) and USA(PPI)


-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


-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


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


Monetary Accommodation?


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


-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!


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


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


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)


-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


-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)


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


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


Cea State Of The Economy August 2008

Technology

Transcript of Cea State Of The Economy August 2008