Economic Slowdown and Macro Economic Policies

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ECONOMIC SLOWDOWN ANDMACROECONOMIC POLICIES



PLAN OF THE PRESENTATION

INTRODUCTION

2008-09 SLOWDOWN

POLICY OMISSIONS AND COMMISSIONS

CURRENT SLOWDOWN

GOVERNMENT POLICIES:

STIMULATING GROWTH OR CURTAILING IT ?




INTRODUCTION

2008-09 SLOWDOWN


CURRENT SLOWDOWN

GOVERNMENT POLICIES:




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-



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



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




INTRODUCTION

2008-09 SLOWDOWN


CURRENT SLOWDOWNGOVERNMENT POLICIES:


Pre Crisis Developments



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



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



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.



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.



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.




INTRODUCTION

Onslaught of global crisis


CURRENT SLOWDOWNGOVERNMENT POLICIES:


Pre Crisis Developments



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



CURRENT ECONOMIC SLOWDOWN

India GDP growth rate trend

What do you notice !?



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



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



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



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



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



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



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



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.



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



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



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%



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



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



Monetary Tightening by RBI



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



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



Merge fertilizer ministry into agriculture

ministry to tackle subsidy burden



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.

Economic Slowdown and Macro Economic Policies

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