Harsh R.K.

Dubey
28th Batch MITSOB, Pune
 INTRODUCTION
Trends vs. Cycles: Tendencies
Short Term Cyclical fluctuations (Project) => Trend
Classify every uptrend as cyclical (‘overheating’)
Long Term Trends
Medium Term Performance: 2003-04 to 2007-08
Short Term: Inflation – Global cost push
Role of Policy reform:
Sustaining growth
Raising productivity/ offsetting cost increases

02 August 2008 General: AV 2

Economic Growth Perspective
Phase I: 1950-1 to 1979-80
Two sub-phases (50to 65; 66 to 79)
Phase II: 1980-81 to 1993-4
Start: Policy regime change
End (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 break
Rising trend growth

02 August 2008 General: AV 3

 Figure 1: Three Phases of Growth
(Phase III Result of radical reform)
9%

7%

5%

3%

1%
1951
1953
1955

1967
1969
1971
1973

1983
1985
1987
1989
1991

2001
2003
2005
2007
1957
1959
1961
1963
1965

1975
1977
1979
1981

1993
1995
1997
1999

2009
2011
-1%

-3%
GdpmpGr GdpGrTrend GdpTndHpf

-5%

02 August 2008 General: AV 4

 Recent Developments:
Past five years ( 2003-4 to 2007-8)
Growth Acceleration
 GDP
Average Income / Per capita GDPmp (PcGdp)
Avg. Private Consumption (PvtCons)
Aggregate Growth drivers
Supply side
Demand Side
Sector drivers of growth

02 August 2008 General: AV 5

 Growth acceleration:
( 2003-4 to 2007-8)
In the next three figures:-
Cyclical movement around Rising trend
HP filtered trend
GDPmp: 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

02 August 2008 General: AV 6

 Fig 2:Growth Acceleration-Gdp
10%

GdpmpGr GdpGrTrend GdpTndHpf

9%

8%

7%

6%

5%

4%

3%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

02 August 2008 General: AV 7

 Fig 3: Per Capita Income
Per Capita Income (PcGdpmp)
9%

8%
PcGdp
G
r PcGma5y
o 7%
w
t
h 6%

r
a 5%
t
e
4%
(

%
)

3%

2%
1999-00
1992-3

1993-4

1994-5

1995-6

1996-7

1997-8

1998-9

2000-1

2001-2

2002-3

2003-4

2004-5

2005-6

2006-7

2007-8
02 August 2008 General: AV 8
 Fig 4: Per Capita Consumption

02 August 2008 General: AV 9

 Aggregate Demand Growth Dynamics:
Investment Led growth
Growth of Demand
Investment growth rate doubled
Pvt consumption & imports accelerated
Govt. 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
02 August 2008 General: AV 10
 Fig 6: Investment Led
40%
Gdcf/Gdp MaGdcf/gdp
Gdcf - GDP ratio & moving avg (%)

35%

30%

25%

20%

15%

02 August 2008 General: AV 11

 Fig 5: Investment Led Growth
Gdpmp GDCF PFCEdm GFCE
20%

18.0%
18%

16%

14%

12%

10% 9.5% 9.2% 8.9%

8%
7.0%
6.1% 6.2%
6% 5.3% 5.6%
5.0% 4.7% 4.5%
4%

2%

0%
91-2to97-8 98-9 to 02-3 03-4to07-8

02 August 2008 General: AV 12

 CONTRIBUTION TO DEMAND
70%
60.1%
60% 57.7%
55.0%

50% 47.8%

40%
34.0%

30% 26.9%

20%
11.6% 12.0%13.6%
10% 5.4%

0%
92-3to97-8 97-8 to 02-3 02-3to07-8
-10% -7.6%
PFCEdm GDCF GFCE Net exports -14.7%
-20%

02 August 2008 General: AV 13

 Supply Side: Investment & Savings
Investment 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/investment
Lag during sharp acceleration

02 August 2008 General: AV 14

 Investment: Total, Fixed & Private (ratio to GDP)
40%

GCF/GDP GFCF/GDP IKpvt/Gdp

35%
Investment- Ratios (% of GDP)

30%

25%

20%

15%

2005-6@

2006-7*
2001-2

2002-3

2003-4

2004-5

2007-8
02 August 2008 General: AV 15
 Supply Side: Savings
Savings rate also rose by 9.8% (2003-4 to 2007-8)
Avg. 33.3% of GDP from 23.6% in previous 5 yrs
Private and Public
 Increment (4 yrs) 5.1% & 3.4% respectively
Contributed(60:40)
Saving Rate: 36.1% of GDP in 2007-8
Maintenance 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%.
02 August 2008 General: AV 16
 FDI : Inward and outward
35

30
F FDI Inbound FDI Outbound
D
I
25
(

U
S
20
$

b 15
i
l
l
i 10
o
n
)

02 August 2008 General: AV 17

 0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%

02 August 2008
1980
1981
1982
1983
1984
1985
1986
1987
NDP/Lhp

General: AV
1988
1989
1990
1991
1992
1993
Kstock/Lhp

1994
1995
1996
1997
1998
TFPGhp

1999
2000
2001
2002
2003
Sources of Growth

2004
2005
2006
2007
18
Sector Drivers
Manufacturing
GDP/Value Added
Investment: GCF, GFCF
Communication
Competition and efficiency
Trade, Agriculture, Construction
Labor intensive

02 August 2008 General: AV 19

 Drivers of Growth
Contribution to Growth (2002-3 to 2007-8)

transport by other Rest

means 10%
6% manufacturing
16%

other services
7% trade
14%

banking & insurance

8%

communication
11%

real
estate,ownership of
dwellings & business construction agriculture(crop)
services 10% 10%
8%

02 August 2008 General: AV 20

 Sector Drivers of Growth
Acceleration 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).

02 August 2008 General: AV 21

 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

Construction
1.5 1.3 1.0 1.0 1.4   1.2 -0.4

Telecommunication
2.2 0.5 0.6 0.6 0.4   0.5 -1.7

02 August 2008 General: AV 22

 Summary: Medium term gr trend
Growth has accelerated in last five years
While Consumption growth remained robust, the
acceleration was Investment led
External sector was a drag on demand because of oil
(and other) price increases
Private investment particularly corporate is leading
investment and growth
Domestic Saving rate has increased inline with I
Telecom, Construction, Manufacturing were the
leading sectors
11th Plan target of 9% average growth will be met

02 August 2008 General: AV 23

 INFLATION: Global effects
Kemal Dervis Exim lecture(18/3/08): Global Cost push
Global Commodity Price Shock
 All commodity index
 Food price Index
 Edible oil (Palm): Net Importer
 Effect on India: Primary food & edible oils

 Iron Ore: Net exporter

 Mineral Oil: Net Importer
Impact on Indian Inflation
Comparison: India(Wpi), USA(Pppi), UK(Ppi Manf)

02 August 2008 General: AV 24

 Global Cost Push?
70%

All Food

60%

50%

40%

30%

20%

10%

0%

-10%

02 August 2008 General: AV 25

 350
450
550
650
750
850
950
1,050
1,150

02 August 2008
2005M4
2005M5
2005M6
2005M7
2005M8
2005M9
2005M10
2005M11
2005M12
2006M1
2006M2
2006M3

General: AV
2006M4
2006M5
2006M6
2006M7
2006M8
Palm oil

2006M9
2006M10
2006M11
2006M12
2007M1
2007M2
World Price of Palm Oil ($/MT)

2007M3
2007M4
2007M5
2007M6
2007M7
2007M8
2007M9
2007M10
2007M11
2007M12
2008M1
2008M2
2008M3
2008M4
2008M5
2008M6
Global Supply: Edible Oil(Palm)

26
 60
70
80
90
100
110
120
130
140
150

02 August 2008
2005M4
2005M5
2005M6
2005M7
2005M8
2005M9
2005M10
2005M11
2005M12
2006M1
2006M2
2006M3

General: AV
2006M4
2006M5
2006M6
2006M7

PironOre
2006M8
2006M9
2006M10
2006M11
2006M12
2007M1
2007M2
2007M3
World Price of Iron Ore(cents/MT)

2007M4
2007M5
2007M6
2007M7
2007M8
2007M9
2007M10
2007M11
2007M12
2008M1
2008M2
2008M3
2008M4
2008M5
2008M6
Global Supply Shock: Iron Ore

27
 100
120
140
160
180
200
220
240
260

02 August 2008
2005M6
2005M7
2005M8
2005M9
2005M10
2005M11
2005M12
2006M1
2006M2
2006M3
2006M4

General: AV
2006M5
2006M6
2006M7
2006M8
2006M9
2006M10
2006M11
2006M12
2007M1
2007M2
Poil

2007M3
2007M4
2007M5
Global Oil Price Index (IMF )

2007M6
2007M7
2007M8
2007M9
2007M10
2007M11
2007M12
2008M1
2008M2
2008M3
2008M4
2008M5
2008M6
Global Supply Shock: Oil Price

28
 Rate of Growth: Iron Ore & Oil
100%

PironOre Poil

80%

60%

40%

20%

0%

-20%

02 August 2008 General: AV 29

 -1
1
3
5
7
9
11
13

02 August 2008
03.04
03.06
03.08
03.10
03.12
04.02
04.04
Pman

04.06
04.08
04.10

General: AV
04.12
Pfl

05.02
05.04
05.06
05.08
Pprf

05.10
05.12
06.02
06.04
06.06
06.08
Pprnf

06.10
06.12
07.02
07.04
07.06
Pmnrl

07.08
07.10
07.12
08.02
08.04
08.06
Contribution to change in WPI

30
 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

02 August 2008 General: AV 31

02 August 2008
10%
12%
14%
16%

-2%
0%
2%
4%
6%
8%
2007.01

2007.02

2007.03

2007.04

2007.05

General: AV
2007.06

2007.07
IndiaWpi

2007.08

2007.09

2007.10
UsaPpi

2007.11

2007.12

2008.01

2008.02

2008.03

2008.04

2008.05

2008.06
Inflation in India (WPI) and USA(PPI)

32
 Inflation: India-WPI Manf, UK-PPI
Manf, USA PPI Ind
16%
UsPpiInd UkPpiMnf IndWpiMf

14%

12%

10%

8%

6%

4%

2%

0%
2007.01

2007.02

2007.04

2007.05

2007.07

2007.08

2007.10

2008.01

2008.03

2008.06
2007.03

2007.06

2007.09

2007.11

2007.12

2008.02

2008.04

2008.05
-2%

02 August 2008 General: AV 33

Inflation Convergence: US & India
13
India Ppfce US Pcons
I 11
n Diff:India-US Poly. (Diff:India-US)
f
l 9
a
t 7
i
o
n 5
(

% 3
)

-1 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

-3

19th Junel 2008 Mumbai Isec: AV 34

 11%
13%

1%
3%
5%
7%
9%

19th Junel 2008

97q1
97q2
97q3
97q4
98q1
98q 2
98q3
98q 4
99q 1
99q2
99q3
99q4
00q1
00q2
00q3
00q4

Mumbai Isec: AV
01q 1
01q2
01q 3
01q4
02q 1
02q2
02q3
02q4
03q1
03q2
CPI unml

03q3
03q4
04q 1
04q2
04q3
04q4
05q1
05q2
Pfce def

05q3
05q4
06q1
06q2
06q3
06q 4
07q1
07q2
07q3
07q4
08q1
CPI(unme) & Gdp Pvt Cons deflator

35
 Monetary Policy and Inflation
Cost Push and Monetary accommodation!
Monetary Policy includes exchange rate policy
Important only for its effect on objectives
Monetary Policy Objectives
Production/Growth & Inflation – emphasis varies
Socio-Political Tolerance level of Inflation
Primary 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 07.10
M3ma gr. exceeded peaks of 95.04 and 98.04 in 07.01

02 August 2008 General: AV 36

 t
r
e

h
o
o

w
) (

M
M

11%
13%
15%
17%
19%
n 21%
23%

02 August 2008
94.05
94.10
95.03
95.08
96.01
96.06
96.11
97.04
97.09
98.02
98.07

General: AV
98.12
99.05
99.10
2000.03
2000.08
2001.01
2001.06
2001.11
M3

2002.04
2002.09
2003.02
2003.07
2003.12
2004.05
M3rlc

2004.10
2005.03
2005.08
2006.01
2006.06
2006.11
2007.04
2007.09
2008.02
2008.07
0%
2%
4%
6%
8%
Monetary Accommodation?

10%
12%
14%
16%
18%
20%

t
r
r
e
e

h
n

o
o

g
a

) (
M

37
 Real Interest Rate Convergence: US-India
8

US1yr India364d Dif:Ind-Us Poly. (Dif:Ind-Us)

I 6
n
t
e
r
4
e
s
t

r 2
a
t
e
(

% 0
)

1992

1993

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007
1994

1995

-2

-4

19th Junel 2008 Mumbai Isec: AV 38

 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 year
Aggregate Inflation: Who is hurt
Poor- unskilled wage lag.
Every one cannot be hurt unless GDP declines!

02 August 2008 General: AV 39

 Growth/Production objective:
Policy and Institutional Reform
March 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 shock
Investment Environment

02 August 2008 General: AV 40

 Medium-Long term implications
Natural 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

02 August 2008 General: AV 41

 Balance of Payments
Capital 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-shape

02 August 2008 General: AV 42

 Excess Capital Flows-over CAD (% of GDP)
7%
Excess Capital flow Portfolio (FII)
C Linear (Excess Capital flow) Linear ( Portfolio (FII))
a
6%
p
i
t
a 5%
l

F 4%
l
o
w
3%
s
(

%
2%
G
D
P
)

1%

0%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

-1%

02 August 2008 General: AV 43

 Current Act and Goods & Services Deficit
4%

P
a
y 3%
m
e
n
t 2%
s

B
a 1%
l
a
n
c 0%
e 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
(

%
G
-1%
D
P
)

-2%
Goods &Services Def Curnt Act Def

Poly. (Goods &Services Def) Poly. (Curnt Act Def)

-3%

02 August 2008 General: AV 44

 Long Term: Sustaining Growth
Reforms essential for sustaining 9% for two decades.
Policy Reform
Structural change: Labor market flexibility
Competition: 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)

02 August 2008 General: AV 45

Sustaining Growth: Institutional reform
Public and Quasi-Public goods & services
National Networks: Drinking Water, Waste (solid and
liquid)
Universal Primary education-outcome (not enrolment)
Civic/Urban services
Social service delivery: Empowerment
Debit/credit (smart card): PC WP 2002
Multi-application smart card (UID): 2005, 2006, 2007

02 August 2008 General: AV 46

 References
Precursor:
 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

02 August 2008 General: AV 47