Research workers in the Macro Unit at ICRIER have been developing the theoretical account of prima economic indexs to seek and calculate India ‘s GDP growing. The latest consequences from this exercising were published in an early December issue of Business Standard. This paper attempts to further widen our GDP prognosis until the terminal of 2009-10 and besides provides an analysis of recent tendencies in the Indian macroeconomic state of affairs. The construction of the paper is as follows: The following subdivision ab initio describes the alterations in India ‘s external environment. It besides examines the nature and strength of the ongoing planetary economic downswing by looking at recent tendencies in universe economic growing, planetary trade and fiscal flows and the collateral harm that has been caused in major emerging economic systems. Section 3 so provides an analysis of past crises that India had undergone and besides the recent tendencies of the Indian economic system before and after the oncoming of the planetary downswing. Section 4 examines the policy response to the downswing and points out its strengths and failings. Sections 3 and 4 therefore supply the context for the growing prognosis included in this paper. The next-to-last subdivision outlines the methodological analysis of the prima economic indexs analysis and provides the prognosiss for 2008-09 and 2009-10. Finally, subdivision 6 contains policy suggestions for India to retrieve from the current lag and sketch sustained high and inclusive growing in the average term.
2. Global Economic Downturn
The extraordinary fiscal crisis in the US has spread to Europe and Japan and is likely to see most developed economic systems enduring a drawn-out period of recession that could widen beyond 2009 and harmonizing to some even beyond 2010. The fiscal crisis in the US started in the latter half of 2007, with the alleged sub-prime lodging mortgage crisis. As is by now good established, 1 the crisis had its existent roots in enormously inordinate leverage by investing and commercial Bankss, under-pricing of hazard and deficiency of necessary regulative inadvertence. The busting of some of the large fiscal establishments has created an ambiance of deficiency of assurance. This in bend has near wholly clogged the flow of recognition in the system. The banker ‘s proverb that ‘it ‘s non the velocity that kills, it ‘s the sudden halt ‘ fits the present unstable state of affairs rather good. The deadlock seen in the recognition flow has had a direct impact on investing and ingestion and has taken a monolithic toll of the existent economic system. The morphing of the ‘Wall Street crisis ‘ in to a historical ‘Main Street crisis ‘ has led to the bulk of OECD economic systems skiding into deep recession. And it is non yet clear as to when the underside of this recessive slide will be reached. This causes a farther loss of assurance.
The outrageousness of the state of affairs can be sensed by looking at some Numberss. The IMF has re-estimated that the losingss for fiscal establishments on history of US-based mortgage loans ( the so called sub-prime loans ) and securities may lift up to US $ 2.2 trillion ( last estimation in October 2008 was US $ 1.4 trillion ) [ IMF, 2008a and 2009a ] . The entire financess made available by the US authorities and the Federal Reserve so far under the assorted deliverance plans have already amounted to a humongous US $ 7.5 trillion or more ( James Barth, 2008 ) . In add-on, the loss of market capitalisation can be gauged from the crisp autumn in stock market monetary values both in mature and emerging economic systems. The loss of wealth this represents is bound to adversely impact planetary demand for a drawn-out period. This twelvemonth in the Forbes list of billionaires the entire wealth registered was 2.4 trillion U.S. dollars, down from 4.4 trillion last twelvemonth, cut downing more than 45 per cent and taging the worst reading since Forbes began roll uping the list.
This acute fiscal crisis resulted in a crisp lag of planetary GDP growing rate ( Fig. 1 ) . The acuteness, capriciousness and velocity of the economic downswing can be gauged by the frequent downgrading of prognosiss by the IMF. An IMF appraisal in early November 2008 has projected that the universe end product would turn by 2.2 per cent in 2009 as compared to 3.4 per cent in 2008 and 5.2 per cent in 2007 ( IMF, 2008b and 2009b ) . This has been revised in January 2009 to every bit low as 0.5 per cent and there is talk of the planetary GDP really undertaking in 2009 if major emerging economic systems are unable to counterbalance for the monolithic loss of external demand. Projections by the IMF in November 2008 for advanced economic systems had estimated a contraction of around 0.3 per cent in 2009. This has been revised downwards in January 2009 to around 2.0 per cent. This is the first one-year contraction for developed economic systems taken together since World War II. The World Bank had projected in early December 2008 that universe trade will contract by 2.1 per cent in 2009, the first clip since 1982 ( World Bank, 2009 ) . The IMF in January 2009 has revised it downwards to 2.8 per centum. The diminution in exports in some major economic systems in the 3rd and 4th quarters of 2008 has been merely stupefying. In January 2009, exports fell aggressively in Japan by 46.3 per cent, in Germany by 20.7 per cent, China by 17.5 per cent, in India by 15.9 per cent and in UK by 6.7 per cent.
3. Indian Economy: Past Crisiss and Recent Developments
3.1 Past Crisiss
Using an averaging procedure of past crises as done in the seminal survey of Reinhart and Rogoff ( 2008 ) we try to see the impact of the present planetary crisis on the nature, badness and continuance of the economic downswing in India. The past crises that have been considered are the three major crises – 1991-92 balance of payment ( BOP ) crisis ; 1997-98 radioactive dust from the Asiatic fiscal crisis ; and 2000-02 crisis caused by the worldwide bursting of the dotcom bubble and 9/11 incident.
Quite expectedly, the sequencing of the crisis and the transmittal mechanism are different in developed and developing economic systems. In the developed universe the crisis originated in the fiscal sector and so impacted the existent economic system. The Swedish and Norse crises of the 1890ss and the present crisis in the US followed this sequence. For developing economic systems in the current crisis the causality and sequencing by and large runs the other manner, with the existent sector being hit foremost and the fiscal sector thenceforth. The form was of class different in the Asiatic fiscal crisis of the ulterior 1890ss when the crisis besides originated in the fiscal sectors of Asiatic economic systems. In line with this tendency, in each of the instances of external daze, the existent sector of the Indian economic system has been ab initio impacted by the crisis as its Bankss are considered safe and robust. Exports and foreign trade overall have been the first to be impacted and act as the channel for the external crisis to be transmitted to the Indian economic system.
The chart below shows the norm of one-year exports growing rates during the three major crises that India has suffered since the terminal of 1880ss. The period that has been selected is three old ages before and after the worst hit twelvemonth of the crisis. In the past times of crisis, we find that the export growing declined by 12 per centum points during the crises period. But rather fortuitously for the export sector, it recovered within a twelvemonth of the slack in all the three major crises. Now, the sudden recovery of the exports sector can be attributed to the fact that immense depreciations were charged during the crisis period.
On the other manus if we look at the imports we find that the slack is for a longer continuance. As we can see from Fig. 4b, import growing starts falling two old ages prior to the crises. The autumn in import growing, unlike the export growing, during all the three major crisis seasons is greater than the autumn seen in export growing. The import growing declined at an norm of 14 per centum and recovered in times longer than that for exports. The ground can be attributed to the fact that crisp depreciation during the crisis period makes the imports more expensive, therefore, taking to their drawn-out slack. The recovery in the instance of imports is longer i.e. for around a period of two old ages as compared to exports wherein the clip taken is merely one twelvemonth. As they say “ Time does n’t save anybody ” , during the present crisis i.e. 2008-09, the growing in exports and imports has started withdrawing in September and October 2008 severally.
In the earlier crises the fabrication sector besides was negatively impacted. For illustration during the BOP crisis of 1991-92, the index of industrial production ( IIP ) grew at merely 0.6 per cent. Industrial production has besides weakened during the present downswing. IIP growing for the period, October to December 2008, averaged 0.4 per cent. In the month of January 2009, IIP registered a negative growing of around -0.5 per cent. As can be seen from the norm of past crises, IIP growing in the peak twelvemonth of the crises has fallen by an norm of 3 per centum points, twelvemonth on twelvemonth ( Fig. 5a ) . In the present planetary downswing, fabrication has virtually collapsed. In India ‘s instance it is non yet clear if the trough of the industrial rhythm has been reached and hence it is hard to calculate the tendency for the recovery.
Finally, in the instance GDP growing we find it falling by about 3 per centum points during the extremum crises twelvemonth ( Fig. 5b ) .
3.2 Indian Economy: Recent Developments
India had been turning robustly at an one-year mean rate of 8.8 per cent for the past five old ages ( 2003-04 to 2007-08 ) . This was higher than the possible growing rate of end product as estimated both by the IMF and OECD ( See IMF, 2007 and OECD, 2007 ) . The strong Indian growing narrative, based on its structural strengths of a immature population, skilled work force, lifting nest eggs and investing rates, big unrealized domestic demand and globally competitory houses attracted important investor attending in recent old ages. Analysts have predicted that by the twelvemonth 2025, India would be the 3rd largest economic system in the universe after China and the US. Recent high rates of economic growing have been the consequence of high degrees of investing, rise in productiveness supported by technological up-gradation and greater integrating with planetary flows of trade, finance and engineering. The challenge is to prolong these high growing rates while besides forestalling an unacceptable rise in income and spacial unfairnesss and besides extinguishing absolute poorness in a given clip frame. The reply to this challenge is in raising India ‘s possible rate of end product growing by taking the binding restraints. We have besides estimated the possible growing rate for India during the last decennary based on HP filter technique ( Hodrick and Prescott, 1997 ) and found that in the last three old ages, India had been turning above its possible growing rate ( Fig. 6 )
Fears of over-heating of the economic system prompted the Reserve Bank of India ( RBI ) to get down pecuniary tightening every bit early as September 2004 when the cash-reserve ratio ( CRR ) for commercial Bankss was raised. The crisp addition in planetary fuel and nutrient monetary values in the first one-fourth of 2008 aggravated inflationary concerns and resulted in farther pecuniary tightening that saw involvement rates being hiked until August 2008. This was clearly a instance of policy running behind the curve and accordingly over-compensating in its effort to weaken inflationary outlooks. Expectedly, this sum of pecuniary contraction resulted in a decelerating down of the economic system with the GDP growing coming down to 7.8 per cent during April-September 2008 from 9.3 per cent in the same period of 2007.
The planetary fiscal sector meltdown precipitated by the prostration of Lehman Brothers in September 2008 and the subsequent practical nationalisation of AIG, the universe largest insurance company, impacted India at a clip when the economic system was already in the thick of a cyclical lag. The immediate transmittal of the fiscal crisis to India was through a surcease of recognition flows which was reflected in the spiking of nightlong call money rates that rose to about 20 per cent in October and early November 2008 ( See Fig. 7 ) . Spooked by market rumours and some circumstantial grounds, depositors sought safety by switching their sedimentations off from private Bankss to big public sector Bankss as reflected in the State Bank of India ( SBI ) seeing an addition in sedimentations of more than Rs. 1000 crore per twenty-four hours during that period. Foreign institutional investors ( FIIs ) withdrew from the Indian markets to supply the much-needed liquidness to their parents in the US or Europe. This resulted in a net repatriation of about $ 13 billion by the FIIs in 2008 on history of equity disinvestment though little has resulted in a crisp diminution in equity monetary values and market capitalisation. Besides, there had been large-scale salvation of retentions with common financess which put farther force per unit area on liquidness. Therefore, while the Indian banking sector remained mostly unharmed by the planetary fiscal crisis, it could non get away a liquidness crisis and a recognition crunch. This in bend has had its impact on investing and ingestion and the existent economic system.
Therefore, the present planetary crisis has already begun impacting the Indian economic system. With the crisp autumn in oil and other trade good monetary values, rising prices frights have receded. The year- on-year rising prices rate has already come down to 2.4 per cent in the hebdomad ended 28 February 2009 from the extremum of 12.9 per cent for the hebdomad ended 2 August, 2008. This does non to the full reflect the existent softening of monetary values in the last few months, which is better seen by looking at month-on-month monetary value alterations ( See in the following subdivision ) . The important diminution in monetary values is deserving observing as it presents policy options that could be missed otherwise.
4. Causes of the planetary meltdown in 2008-09
4.1 Impact of Monetary Tightening
Price stableness, strongly grounding inflationary outlooks, advancing growing and keeping fiscal stableness are the professed aims of Indian pecuniary policy. The tolerance bound for the intents of pecuniary policy for rising prices in India is considered to be at approximately 5 per cent. Inflation in India has been at moderate degrees as compared to other emerging economic systems but during 2003-04 the sweeping monetary value index
( WPI ) rising prices crossed the 6 per cent grade ( Fig. 9 ) .
In response to the rise in rising prices, the RBI, with its militant stance on rising prices, and faced with an overheating economic system, started pecuniary policy tightening every bit early as September 2004 when the CRR was raised from 4.5 to 5 per cent in two stairss. As the inflationary state of affairs worsened in the subsequent period the tightening got harder as
shown in Fig. 9. With headline rising prices traversing dual figures first clip in the 2nd hebdomad of June 2008 and making 11 per cent chiefly due to the unnatural hiking in planetary fuel, nutrient and trade good monetary values, the RBI continued with farther pecuniary tightening. The last set of steps to chill the economic system was announced at the terminal of August 2008. The RBI, apparently in response to planetary oil monetary values traversing $ 147 per barrel and domestic year-on-year rising prices making 12.9 per cent raised the CRR by 25 footing points to 9 per cent. As several critics pointed out, the tight pecuniary policy stance was provoked chiefly to counterbalance for the financial enlargement that originated with the 2008-09 budget. But the RBI possibly overlooked that monetary value tendencies, as reflected in the month-on-month alterations had begun to head due souths since terminal of September 2008. The economic system had already slowed down before the oncoming of the planetary crisis on history of the steps taken since the latter half of 2004.
The effects of pecuniary policy are capable to long slowdowns and the full impact of the progressive tightening that continued until August 2008 is still to to the full work itself out. However, the contractionary urges generated by the fastening undertaken until August 2008 are now being countered by the expansionary impact of pecuniary policy relaxation that started in the latter half of October 2008.
4.2 Industrial Sector Weakness
Fig. 11 plots the 12-monthly moving norm of growing rates in the index of industrial production ( IIP ) from September 1982. This shows that industrial growing is characterized by drawn-out periods of downswings. We had two old downswings since the early 1980s: the first 1 in the early 1990s enduring 33 months and the 2nd one since the ninetiess enduring a longer 71 months. The first downtrend that happened in the early 1990s was on the dorsum of the external payment crisis whereas the 2nd downtrend coincided with the East Asiatic crisis. The recent downswing started since May 2007 and by December 2008 has already run for 20 months was preceded by the longest upward industrial rhythm during which the IIP growing rate improved about continuously for 64 months. Underliing the beginning of theslowdown is the hardening of involvement rates since March 2007 in the aftermath of the fastening pecuniary policy. The 2nd one-fourth year-on-year IIP growing in the current twelvemonth ( Q2 2008-09 ) has dropped to 4.7 per cent from 5.3 per cent in the first one-fourth. In Q3 2008-09, the growing rate had turned to merely 0.4 per cent. In January 2009 the growing rate turned negative at -0.5 per cent. The downswing is turning terrible and would be prolonged due to the planetary crisis.
4.3 Investment Failing
The major drivers of India ‘s high growing rate in the last five old ages have been investing and private ingestion. As we can see from Fig. 13, the rate of growing in gross fixed investing more than doubled from about 7 per cent during 2001-03 to about 16 per cent during 2003-07. Growth in private concluding ingestion besides rose from about 5 per cent during 2001-05 to about 8 per cent during 2005-07. Private ingestion growing has slowed down since Q3 2007-08, and the growing in fixed investing has continuously fallen since Q2 2007-08 with some pick-up merely in Q2 2008-09. Government concluding ingestion outgo which usually is capable to broad swings has shown some sensible growing in recent quarters and well so in Q3 2008-09.
The fiscal crisis in the US and the attendant recession in major developed states have altered investing sentiments in India. The investing failing which had already begun in India in the 2nd half of 2007-08 has farther worsened
4.4 Fiscal Measures
Fig. 14 provides a synoptic position of financial tendencies from 1990-91, the twelvemonth in which India confronted its gravest economic crisis. There has been a steady betterment in cardinal and province fundss since 2001-02 when the fiscal and gross shortages of the combined cardinal and province authoritiess reached a extremum of 9.9 per cent and 7.0 per cent of GDP severally.
Figure: 13 Fiscal indexs of the combined Centre and the province
There was some impairment in the cardinal authorities fundss in 2005-06 but these improved in 2006-07. The financial consolidation by the provinces has besides been rather important in recent old ages.
The cardinal authorities budget for the current twelvemonth 2008-09 targeted a farther betterment in the financial state of affairs. However, several taking experts and economic experts have once and for all pointed out the gross underestimate of financial shortage in that budget. The Interim Budget, released in February 2009, has now disclosed a immense rise in fiscal shortage of the cardinal authorities to 6 per cent of GDP in 2008-09 from 2.7 per cent in 2007-08.
The tabular array given below summarizes the tendencies of the budget as presented in the Interim Budget 2009-10. The financial shortage in 2008-09 got worsened from the budget estimations which was due to an addition in the outgo of Rs. 150,069 crore ( 2.8 per cent of GDP ) and a diminution in the gross of Rs. 40,762 crore ( 0.75 per cent of GDP ) . The fiscal load which arose from fiscal stimulation bundles ( including both gross autumn and expenditure addition ) amounted to Rs. 40,700 crore constituting merely 0.75 per cent of GDP. Thus, besides the financial shortage of 3.5 per cent of GDP from the budget estimations, the majority of it, i.e. , 2.8 per cent of GDP has non been due to financial stimulation bundles.
Table 2: Cardinal Govt Budget 2009-10 ( Rs iin Crores )
The estimations given supra do non take into history the non-budgetary points of oil and fertiliser bonds which are estimated to be around Rs. 95,942 crore, which is tantamount to 1.8 per cent of GDP. For the financial twelvemonth 2007-08 which was a twelvemonth before the crisis struck, this amounted to Rs. Nineteen thousand four hundred and 50 three crore or around 0.4 per cent of GDP. Therefore including these non-budgetary points, the financial shortage at the Centre, in 2008-09, would be 7.8 per cent of GDP as compared to around 3.1 per cent of GDP in the financial twelvemonth 2007-08. More than doubling of the shortage and mostly, arguably, on history of political electoral considerations as it was generated prior to the eruption of the planetary crisis in September 2008. The financial shortage of the provinces taken on the whole is expected to be over 3 per cent of GDP in 2008-09 against the budget estimations of 2.1 per centum. Sing the extra adoption of Rs. 30,000 crore for the fiscal stimulation bundle and the likely deficit in revenue enhancement grosss, the combined overall financial shortage would be around 11 per cent of GDP in 2008-09 as against 5.4 per cent in 2007-08.
5. Policy introduced in response to the Economic Slowdown
5.1 Monetary Policy Measures
Before the spread of the planetary crisis, lifting rising prices was one major downside hazard for the Indian economic system. But the autumn of monetary values of oil and other trade goods and overall autumn in demand as a consequence of recession in major developed states has pushed down the rate of rising prices in India. Inflation measured by the sweeping monetary value index ( WPI ) had peaked at 12.9 per cent in early August 2008 and has been coming down since so. WPI rising prices dropped to 4.4 per cent by 31 January 2009 and merely 2.4 per cents on 28 February 2009. Monetary policy shifted gear and became expansionary from October after the graduated table of the US fiscal sector meltdown and its likely inauspicious effects on the Indian economic system became apparent. The policy focal point has shifted from incorporating rising prices to advancing growing. The RBI therefore acted with considerable briskness in inculcating considerable liquidness in to the system.
Falling rising prices, a positive by-product of planetary crisis, enabled the cardinal bank to loosen pecuniary policy more sharply. As indicated earlier, the RBI lowered the hard currency modesty ratio ( CRR ) demands of Bankss from 9 per cent to 5 per cent, statutory modesty ratio ( SLR ) demands from 25 per cent to 24 per cent and the repo rate ( the rate at which it lends to Bankss overnight ) , from 9 per cent to 5 per cent and change by reversal repo rate ( the rate at which RBI borrows from Bankss ) from 6 per cent to 3.5 per cent. It besides opened a particular window for Bankss for short-run financess for on-lending to common financess, NBFC ‘s and lodging finance companies. It has besides started the buy-back of the market stabilisation strategy ( MSS ) securities from mid-November. RBI has opened a refinance installation to Small Industrial Development Bank of India ( SIDBI ) , National Housing Bank ( NHB ) and EXIM Bank and a liquidness installation to NBFCs through a SPV. It besides has opened a dollar barter agreement for Bankss for their abroad operations. The existent or possible liquidness injection under all these steps has been estimated at Rs. 3,88,045 crore equivalent to over 7 per cent of GDP ( Table 5 ) .
This is so an impressive batch of pecuniary policy steps and shows that the RBI is both alert and active. The present job is that this extra liquidness seems to hold either found its manner into a build-up of bank sedimentations or been preempted by authorities adoption. There is barely any grounds that it has been used for hiking either investing or ingestion demand.
The liquidness crisis and recognition crunch felt in the economic system from mid-September to October 2008 has turned into a state of affairs of deep demand contraction for bank finance as the effects of planetary recession has spread to India. In fact the enlargement of bank finance in January 2009 has been negative at Rs.11, 218 crore as against an enlargement of Rs. 70,396 crore in the same month of 2008 ( Fig. 18 ) . In the last four months from November 2008 to February 2009, enlargement of bank finance to the commercial sector has been merely Rs. 60,862 crore as compared to Rs. 2,36,227 crore in the same period last twelvemonth. This reflects a really soft investing sentiment in the economic system which may prevail in the approaching months.
5.2 Fiscal Stimulation
Due to the acuteness of the fiscal crisis and the ineffectualness of pecuniary policy, authoritiess across the universe have announced assorted financial stimulation bundles to counter the crisis. In footings of GDP, South African authorities has announced the biggest stimulus bundle that constitutes around 24 per cent of GDP ( Fig. 19 ) . The 2nd biggest stimulation bundle has been announced by the Chinese authorities which constitutes 16.3 per cent of GDP with a entire sum of around US $ 586 billion. In absolute footings, the US financial stimulation is the largest with an sum of US $ 787 billion. However, these financial Numberss do non supply the existent estimation of entire stimulation as warrants are non included in these computations nor automatic stabilizers provided in certain states. The Indian authorities ‘s financial bundle is little in magnitude representing about 1.3 per cent of GDP for 2008-09. This seems to be rather little as compared to most of the states. But as has been reiterated earlier there is less financial headway in India which is already running a high public debt.
6. Decision and Policy Suggestions
The Indian economic system was on a cyclical lag after a five-year record roar and there was every hope that the economic system will travel for another strong growing stage after this brief lag. The planetary crisis has changed this really mentality and will alternatively intensify and protract Indian economic system ‘s lag. The policy response has been prompt, by far, and to the point in the signifier of easing pecuniary policies, Torahs and ordinances and financial enlargement but the impact may non be much in the close term. A major concern is the terrible weakening of India ‘s financial place and balance of payments during this crisis period. The basic inquiry that still lingers is how much clip it will ta ke to re vive the invest ent and consumer Delawares mand which are falling apart like anything.
Fiscal and pecuniary stairss to spread out at a clip of utmost uncertainness like was there during the world-wide meltdown will hold limited impact. On the other manus, the crisp reversal of the steady financial betterment over the past five old ages or so would weaken public fundss well and hive away up jobs for the economic system earlier than subsequently. The aim of economic policy must be to maximise on additions from planetary integrating while doing a decrease in poorness and unfairnesss. Therefore, a better manner to react to the present crisis is the frequently repeated and now go cliche of triping the “ 2nd unit of ammunition of reforms ” which is long delinquent. India has to well loosen up its “ license and blessing ” system by any mode they could transporting. One manner could be to chalk out procedural reforms which will surge up the investing clime for both domestic and foreign investing. It should present reforms in its instruction system at both the school and university degrees, it should transport out reforms in agribusiness at its assorted phases i.e. from input to end product through selling. The authorities should be a spot more stiff and proactive in altering policies and processs to make anyplace near the title-holders that are already blossoming all around the universe and edifice universe category substructure of power, roads, ports, airdromes, urban substructure, H2O and sanitation. Reforms in countries like India, where state of affairss are tough, would be much more effectual.
The existent challenge for Indian policy shapers and India Inc. is nevertheless to seek and raise the portion of India ‘s exports in major markets and merchandise sections. It is truly ironical that India ‘s portion in universe trade is lower than the degree as in 1950! ! This is non well-founded any longer if we have to accomplish rapid growing with equity. Exports have the desirable feature of being comparatively labour intensive. This is particularly true of services exports that include a broad scope of exports such as package, tourist net incomes, movies, accounting, legal services etc. On the other manus, there is barely ground for our fabric and garment exports to free evidences, as they have been making, to Bangladesh, Vietnam and other such smaller economic systems when we still have such a big pool of unemployed human resources. For forcing both services and labour intensive manufactured exports, the policy shapers must pay much greater attending to labor market reforms on the one manus and to development of vocational accomplishments on the other.