Economic Slowdown and Macro Economic Policies
Economic Slowdown and Macro Economic Policies
Economic Slowdown and Macro Economic Policies
and the central banks take to ensure the economy keeps ticking over Types: -Monetary-Fiscal-Trade-Industrial-
Equity- income distribution stimulate consumption and investment Exchange rate stability Balance of payment equilibrium
..
II policymakers fail to immediately react to economic problems like slowdown and the policy implemented afterwards gets effective in lags
OF INDIAN
Notice the decline in GDP growth rate from Q4 2006-07
GDP
Q2
Q3
Q4
Q1
Q2 2008-09
Q3
2004-05
2005-06
2006-07
2007-08
World economic crisis surfaced in August 2007 But contrary to the popular belief, the Indian economy had started slowing down before its outbreak
bellwether of economic performance- IIP Index sharp downward trend from Q1 2007-08 Growth in secondary and tertiary sectors declined from 10.6 % and 11.2% in 2006-07 to 7.5% and 11.1% in 2007-08.
B.
The most important demand-reducing factor It started decelerating from 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.
A.BANKS Banks became wary of extending loans. Traders and exporters found it really difficult to secure credit. This adversely affected the consumer durables, exports and real estate sector the most B. FII
FII Inflows
40000 20000 0 -20000
FII Inflows apr jun aug oct dec feb apr jun aug oct dec feb apr jun aug oct dec feb apr jun aug oct dec 2005-06 2006-07 2007-08 2008-09
FII registered a steep fall between October and November 2007 from $3.6 to 2.2 $ billion Bearish trend in the stock market has dampening effect on private propensity to invest
C. FOREIGN TRADE Exports Exports constituted around 22% of GDP. Recessionary tendencies in OECD countries led to a steep decline India s merchandise and service exports.
Imports
International crude oil prices surged and it led to increase in India s crude oil bill from $5.6 billion to $10.96billion between July 2007 and august 2008. The drain from domestic demand on account of oil price increase was about 6% of country s 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 stagflationary phase Global inflation was driven by energy and agricultural prices: World food price crisis sharp rise in food price led to fall in demand for industrial products and services and worsened the slowdown
SIGNS OF SLOWDOWN
GDP growth has slowed consistently from 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 investment proposals have reportedly fallen from 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 8.8 2.4 9.1 10.6 7.7 7.4 10.4 8.4 5.4 7.1 7.8 6.7 8.0 9.6
GDP at factor cost Agriculture Industry Manufacturing Construction Mining & Quarrying Services Trade, Hotels, Transport & Communication Financing, insurance, real estate and business services Community, social & personal services
12.1
10.2
12.8
9.9
9.8 8.2
10.0 7.9
9.1 5.6
10.5 6.6
GDP at market price Private Consumption Govt. Consumption Fixed Investment Change in Stocks Exports Imports
WHAT ARE THE FACTORS BEHIND THE SLOWDOWN IN EACH COMPONENT OF GDP ?????
Rising Interest Rates High Inflation Fiscal Deficit Policy reform lag Global woes India not decoupled yet FII Selling
growth because of the government's failure 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 fiscal year if the growth had been faster but even the growth rate for Q2 declined to 7.6% government planning to spend Rs 56,850 crore extra. it will borrow nearly Rs 53,000 crore more than the budgeted level
Monetization of Deficit
It means printing money to meet the finanacial needs of the government. This leads to inflation in the economy . Example- Hyperinflation in Germany after the first world war
Subsidy Burden
33% of total subsidies- fertilizers- 1% of GDP 36%- food 26%- Oil- 3 times projected 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. Which will ultimately be subsidized by Oil producing companies or the government
NREGA SCHEME
Boosted consumption and aggregate demand and wages which further fueled inflation. 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 put together have resulted in fiscal problem
Inflation
Double digit inflation from Aug 2009 to Aug 2010 food inflation dropped from 9.01% on Nov 24 to 8 % on Dec
1, at its slowest pace in nearly 4 months inflation in primary articles category -7.74%, non food items -2.14%, fuel price index 15.53% in the year on November 19 In the previous week, annual fuel inflation stood at 15.49% primary articles price index was up 7.74%, compared with an annual rise of 9.08% a week earlier headline inflation stayed above 9% for the 11th month, despite 13 rate increases by the RBI since March 2010
Inflation
RBI targeting to bring inflation 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 failure to balance the pace of the growth and tame the inflation. [The government's] tight monetary policy has increased the cost of borrowing and thereby slowed down industrial growth by hindering fresh investment
Inflation
Inflation
12 10 8 6 Inflation 4 2 0
Fisher (1993) offered evidence hat 1 percentage point increase in the rate of inflation could cost an economy more than one-tenth of a percentage point of growth.
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
They ll eleminiate red tape and infrastructure bottlenecks. Land Acquistion Policy reforms FDI in retail will help in logistics, supply chain and increasing agricultural productivity Increase business confidence by liberalizing investment norms Composition of fiscal deficit matters.It should change from consumption expenditure to investtment expenditure Keep fiscal deficit within limits to prevent crowding out of private investment
High interest rates pulled down manufacturing sector growth to 2.7 per cent in the Q2FY12 from 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 further to 5.9 per cent in the Q2FY12 from 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 inflation.
This fiscal lower than-expected collections under small savings schemes such as public provident fund and post office deposits and lower cash surplus has forced the government to issue more bonds and increase borrowings Fiscal deficit of 4.6 % could have been achieved if the growth had been faster. Borrowing by government crowds out private investment, Fiscal deficit is a major issue when most of it is being spent on consumption not investment Increase in md while borrowing and ms while spending Lower liquidity higher interest rate India's slowdown is partly its failure to balance the pace of the growth and tame the inflation. [The government's] tight monetary policy has increased the cost of borrowing and thereby slowed down industrial growth by hindering fresh investment the government is trying to address the fiscal deficit through monetary policies, which is pushing up interest rates. Industry is paying the price of these fiscal imbalances with the agricultural sector also suffering despite a good monsoon this year The situation has been made worse by the problems in the Eurozone considering 20 per cent of India's exports are to the European Union