Global Crisis and the Indian Economy-

On a Few Unconventional Assertions

Sugata MarjitCentre for Studies in Social Sciences, Calcutta

July,2009

MOTIVATION

How Global Recession has impacted Indian Economy at a Macro Level?

Looking at the issue of Industrial Recession and its relationship with overall GDP growth.

Argue that Pre recession excessive liquidity growth was fuelling bubbles and putting pressure on monetary policy of the RBI. Thus a check on liquidity flow had a positive effect as well.

Does recession in the organized sector spill over to the unorganized sector?

Certain Stylized Facts

GDP has grown at 6.7% in 2008-09. Industry and Exports have been hit hard. Grew

nonetheless on a yearly basis. Rates dropped significantly.

Service Sector has done reasonably well.

Item Units 2003-04 2004-05 2005-06 2006-07 2007-08 2008-091. GDP and related indicators

GDP (current market prices)Rs. crore 2754620 3149407 3586743 4129173 4723400 5321753 REGrowth rate % 12.2 14.3 13.9 15.1 14.4 12.7GDP (current market prices)Rs. crore 2402727 2602065 2844942 3120029 3402716 3609425Growth rate % 8.4 8.3 9.3 9.7 9.1 6.1Growth of GDP(factor cost, constant prices)% 8.5 7.5 9.5 9.7 9. 6.7Savings Rate % of GDP 29.8 31.7 34.2 35.7 37.7 naCapital formation (rate) % of GDP 27.6 32.1 35.5 36.9 39.1 naPer cap NNP(factor cost & current prices)Rs. 20871 23198 26003 29524 33283 37490

2. ProductionFoodgrains Mill tonne 213.2 198.4 208.6 217.3 230.8 229.9 ^^Index of Industrial production(growth) Per cent 7. 8.4 8.2 11.6 8.5 2.6Electricity generation(growth) Per cent 5.1 5.1 5.2 7.3 6.3 2.7

3. PricesInflation (WPI) (52-week average)%change 5.5 6.5 4.4 5.4 4.7 8.4Inflation CPI (IW) %change 3.9 3.8 4.4 6.7 6.2 9.1

4. External sectorExport growth ( US$) %change 21.1 30.8 23.4 22.6 28.9 3.6Import growth (US$) %change 27.3 42.7 33.8 24.5 35.4 14.4Current account deficit (CAD)/GDPPer cent 2.3 -.4 -1.2 -1.1 -1.5 -4.1 ^Foreign exchange reserves US$ bn. 113. 141.5 151.6 199.2 309.7 252. @Average exchange rate Rs./ US$ 45.95 44.93 44.27 45.28 40.26 45.99

5. Money and credit (M ) (annual) 3 %change 16.8 12.3 17. 21.3 21.2 18.4Scheduled commercial bank credit(growth) %change 15.2 30.7 37. 28.5 22.3 17.5

6. Fiscal indicators (Centre)Gross fiscal deficit % of GDP 4.5 4. 4.1 3.5 2.7 6.2 ##Revenue deficit % of GDP 3.6 2.5 2.6 1.9 1.1 4.6 ##Primary deficit % of GDP 0.0 0.0 .4 -.2 -.9 2.6 ##

7. Population Million 1072 1089 1106 1122 1138 1154

Key Indicators

R E GDP figures for 2008-09 are Revised Estimatesna not yet available / released for 2008-09 ^^ for 2008-09 the figures are the 3rd Advance Estimates^ CAD to GDP ratio for 2008-09 is for the period Apr-Dec 2008@ as of March 31, 2009## fiscal indicators for 2008-09 are based on the provisional actuals for 2008-09

Query 1:

To what extent Industrial Recession is reflected in Slowdown of GDP Growth Rate?

To what extent Sectoral Slowdown is supposed to be reflected in overall GDP Growth Rate?

Given shares of each sector in GDP, overall growth rate of GDP is unlikely to respond substantially to a significant slowdown in the industrial sector.

Consider two pessimistic scenarios a 3% drop or a 4% drop from 9% ( done before the 08-09 results were announced) .

Table: 1 Sectoral Growth Rate Analysis

Sector

Growth Rate

Growth rate of gdp at 6%

Growth rate of gdp at 5%

Agriculture (keeping growth rate of Industry &

Services unchanged)-12.40 -18.03

Industry (keeping growth rate of Agriculture &

Services unchanged)-7.40 -12.56

Services (keeping growth rate of Agriculture and Industry unchanged)

5.89 4.30

  Growth rate of GDP at 6% Growth rate of gdp at 5%

Sectors 

1st case: Growth rate of Services unchanged

2nd case: Growth rate of

Agriculture unchanged

3rd case: Growth rate of

Industry unchanged

1st case: Growth rate of Services unchanged

2nd case: Growth rate

of Agriculture unchanged

3rd case: Growth rate of Industry unchanged

Agriculture-3.95 4.5 -3.95 -6.77 4.5 -6.77

Industry0.34 0.34 8.1 -2.24 -2.24 8.1

Services10.7 8.28 8.28 10.7 7.48 7.48

Table 2: Sectoral Growth Rate Analysis

Table 3: Sectoral Growth Rate Analysis

  Sectoral Growth Rate

Sectors

2008-09(AE) GDP estimated to grow at

around 7%

Growth rate of GDP at 6%

Growth rate of GDP at 5%

Growth rate of GDP at 4%

Agriculture3.1 1.79 0.89 -0.01

Industry3.7 -0.09 -2.82 -5.55

Services9.6 9.18 8.68 8.18

Source: Summary of Estiates of GDP at Constant (1999-00) Prices, CentralStatistical Organisation Macroeconomic and Monetary Development, Reserve bank of India

Table 4: Quarterly Growth Rates of Different Sectors

Source: Macroeconomic and Monetary Development, RBI

  2007-08 2008-09

Q1 Q2 Q3 Q1 Q2 Q3

Agriculture 4.4 4.4 6.9 3 2.7 -2.2

Industry 8.5 7.5 7.6 5.2 4.7 0.8

Services 10.7 10.7 10.1 10.2 9.6 9.5

GDP at factor cost 9.1 9.1 8.9 7.9 7.6 5.3

Query 2:

Excess Liquidity and Bubbles

Just before Global Recession became operational, for quite some time RBI had to face the problems of Excessive Liquidity Growth, sharp increase in Money Supply Growth Rate and related problems. Therefore, in a way Liquidity Shortage gave RBI and Monitoring Authority some breathing space.

Casual Hypothesis

Hypothesis Excess Liquidity may lead to bubbles.If it can not be contained, then Recession induced

Shortage of Liquidity brings the Asset Prices in line with the fundamentals.

But how to check for bubbles in share or asset prices such as real estate?

If there are bubbles, do they respond to the regime of

Excess liquidity. Can we look for structural breaks?

Difficult proposition to prove, but a worthwhile query.

Two examples

The Stock Market scenario – A Simple method to track Bubbles –

Relationship between Adjusted Closing Price and EPS with a three period lead. High share price today must be in expectation of high EPS in future. Relationship between the price and performance.

There are anomalies for quite a few shares , but we do not know (yet) that such deviations are sensitive to the pressure of excess liquidity ( need to work out)

Excess Liquidity may increase distortion in Real Returns –

If liquidity growth is uniformly distributed ( from aggregate demand side ) across sectors relative real return to capital in different sectors will remain the same. Over longer run returns should move towards each other, but if liquidity is unevenly distributed through policy the gap may continue to widen, distortions may increase. Expectations play a role. Too much emphasis on real estate lending could be the cause of distortion. Liquidity shortage may cure this to some extent.

Query 3:

The role of Unorganized Sector which absorbs more than 90% of work force –

How resilient is this one to recession?

Data are yet to be available But is formal and informal highly related? Possibly not.

Statewise Average Growth Rate of GVA of the years 199495 to 2000-01 in Formal and Informal Sectors

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Andhra P

radesh

Assam

Bih

ar

Guja

rat

Haryana

Him

achal P

radesh

Karnata

ka

Kerala

Madhya P

radesh

Maharashtr

a

Nagala

nd

Oris

sa

Punja

b

Raja

sth

an

Tam

il N

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Trip

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Uttar P

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West B

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Chandig

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Dadra &

Nagar

Delh

i

Goa

Dam

an &

Diu

Pondic

herry

India

States

Gro

wth

Rate

Formal Informal

Stateswise Average Growth Rate of GVA for the years 2000-01 to 2005-06 in Formal and Informal Sector

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

Andhra P

radesh

Assam

Bih

ar

Guja

rat

Haryana

Him

achal P

radesh

Karnata

ka

Kerala

Madhya P

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Maharashtr

a

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Raja

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Goa

Dam

an &

Diu

Pondic

herry

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States

Percen

tag

e

Formal Informal

Statewise Average Growth Rate of Wages per Worker of the years 1994-95 to 2000-01 in Formal and Informal Sectors

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Andhra

Pra

desh

Assam

Bih

ar

Guja

rat

Hary

ana

Him

achal P

radesh

Karn

ata

ka

Kera

la

Madhya P

radesh

Mahara

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a

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nd

Orissa

Punja

b

Raja

sth

an

Tam

il N

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Tripura

Uttar

Pra

desh

West B

engal

Chandig

arh

Dadra

& N

agar

Delh

i

Goa

Dam

an &

Diu

Pondic

herr

y

India

States

Gro

wth

Rate

Formal Informal

Statewise Average Growth Rate of Wages per Worker for the years 2000-01 to 2005-06 in Formal and Informal Sector

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

And

hra

Pra

desh

Ass

am

Bih

ar

Guj

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Har

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Him

acha

l Pra

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Kar

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Mad

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Formal Informal

Correlation Coefficient of the growth rates of different variables between formal and Informal Sector:

1994-95 to 2000-01

  Fixed assets outstanding loan gross value added Wages per worker

Correlation Coefficient ® -0.187 0.027 0.231 -0.376

p-values 0.373 0.896 0.270 0.0637*

*Significant at 10% level of significance

2000-01 to 2005-06

  Fixed assets outstanding loan gross value added Wages per worker

Correlation Coefficient -0.033 -0.052 0.311 0.210

p-values 0.875 0.806 0.131 0.316