'Will India become a superpower?' This is a question that nags every Indian. With the nature of problems that plague India, the chances of the country becoming a superpower are remote.
"India needs to be, not a powerful or dominant country, but a country which is less discontented from within", says Ramachadra Guha writer, historian and biographer who spoke on the topic 'Ten Reasons Why India Will Not and Should Not Become a Superpower' in a meeting organised by Aspen Institute India in New Delhi.
Guha pointed out that in 1948, there was a mood of despair and gloom about India's prospects, the government was seen as the only agent that could bring about change.
Today, however, there is a sense of optimism about India's prospects, although the government is seen as the major impediment in the country's progress.
Tarun Das, president, Aspen Institute India, said India needed more debates such as this to provide a more balanced view of the country's growth and development.
Of the 10 reasons he listed, Guha suggested that environmental degradation is likely to remain the most pressing challenge facing India. Primary education also remains a significant challenge that needs to be overcome.
He went on to elucidate the ten points that he thought would objectively prevent India from becoming a superpower:
1.Religious extremism: Long term trends indicate that liberals and moderates in every religious community in India are on the defensive.
2. Left wing extremism: Extremism in the form of the Naxalite movement, which is a result of geographical reasons and also social and political forces, owing to the continued dispossession and deprivation of tribal people in India.
3. Corruption: The corruption and corrosion of the power center in India, as a result of political parties functioning as family firms rather than open, transparent political systems.
4. Decline of public institutions: This includes universities, police, civil services, the judiciary (except for higher judiciary) etc.
5. Rich-poor divide: The increasing gap between the rich and the poor which is particularly manifested through farmer suicides in India, a phenomenon that has become pervasive only in the last 10-15 years, perhaps because there is now the expectation of a 'good life' that did not exist before.
6. Environmental degradation: The degradation at a local level, which is impacting people's lives in very real ways, whether in the form of massive depletion of underground aquifers, chemical contamination of soil, death of rivers, loss of species etc.
7. Apathy of the media: Apathy in covering issues of rising income inequality, environmental degradation.
8. Political chaos: The political fragmentation manifests as coalition governments at both the central and regional levels, which makes it very difficult to forge sustainable long term policies in the realm of health, education, etc.
9. Border disputes: India's unresolved border disputes, especially in Kashmir and the North East (Nagaland and Manipur) which indicates that there are parts of India that are not comfortable with being part of India.
10. Unstable neighbour: India's increasingly unstable neighbourhood is another serious impediment to our superpower ambitions.
Source
Showing posts with label GDP. Show all posts
Showing posts with label GDP. Show all posts
Tuesday, July 14, 2009
Sunday, July 5, 2009
Indian economy better placed than China’s, says Roach
Stephen S Roach, chairman of Morgan Stanley Asia, expressed his optimism on the prospects for the Indian economy over that of China, saying that India has made a lot of improvement in recent years on the macro developments, especially with an increase in foreign direct investments, higher savings and improvement in infrastructure in the share of India in GDP.
“These improvements reinforce the long-standing accomplishments of India on the micro front—large collection of world-class competitive companies, well educated IT competent workforce, extraordinary entrepreneurs and innovators, well developed capital market, solid financial institutions, rule of law and democracy,” said Roach in a press conference, adding that what has been missing in this interplay between the micro and now the improved macro has been the political impetus to reforms, something it has hobbled your government in the last five years.
“India is a more balanced economy than the rest of export-led Asia,” Roach told reporters in Mumbai on Wednesday. In fact, for the first time, Roach is now more optimistic about prospects for India than China. “China faces major challenges for the first time in 30 years,” Roach said. “It pushed its export-led model too far, leaving it too dependent on the external climate.”
Roach noted that the recent election changes the prospects for reforms going forward and hopes that the new Congress-led government will be more effective in pushing the reforms forward on a number of fronts and will be much less hobbled by the politics of coalition management.
Talking about the growth forecast for the Indian economy, Roach said the growth would remain between 5.5-6.5% for now. Incidentally, Morgan Stanley on May 28 raised India’s growth forecast to 5.8% in the fiscal year to March 31, 2010, from an earlier estimate of 4.4%. The economic growth in the $1.2 trillion economy may turn out to be the real surprise in Asia, Roach said.
“The growth in the Indian economy cannot go beyond 8% in another 2-3 years time,” he said. Roach also noted that disinvestment is important for India to reduce its fiscal deficit.The fiscal deficit of India widened to a seven-year high of 6.2% in the fiscal to March 31 as government borrowed more to fund fiscal stimulus packages.
Source
“These improvements reinforce the long-standing accomplishments of India on the micro front—large collection of world-class competitive companies, well educated IT competent workforce, extraordinary entrepreneurs and innovators, well developed capital market, solid financial institutions, rule of law and democracy,” said Roach in a press conference, adding that what has been missing in this interplay between the micro and now the improved macro has been the political impetus to reforms, something it has hobbled your government in the last five years.
“India is a more balanced economy than the rest of export-led Asia,” Roach told reporters in Mumbai on Wednesday. In fact, for the first time, Roach is now more optimistic about prospects for India than China. “China faces major challenges for the first time in 30 years,” Roach said. “It pushed its export-led model too far, leaving it too dependent on the external climate.”
Roach noted that the recent election changes the prospects for reforms going forward and hopes that the new Congress-led government will be more effective in pushing the reforms forward on a number of fronts and will be much less hobbled by the politics of coalition management.
Talking about the growth forecast for the Indian economy, Roach said the growth would remain between 5.5-6.5% for now. Incidentally, Morgan Stanley on May 28 raised India’s growth forecast to 5.8% in the fiscal year to March 31, 2010, from an earlier estimate of 4.4%. The economic growth in the $1.2 trillion economy may turn out to be the real surprise in Asia, Roach said.
“The growth in the Indian economy cannot go beyond 8% in another 2-3 years time,” he said. Roach also noted that disinvestment is important for India to reduce its fiscal deficit.The fiscal deficit of India widened to a seven-year high of 6.2% in the fiscal to March 31 as government borrowed more to fund fiscal stimulus packages.
Source
Monday, March 30, 2009
'Crisis: There is scope for India to do well'
Martin Feldstein is the George F Baker Professor of Economics at Harvard University and a member of the Economic Recovery Advisory Board convened by the US President. He is also President Emeritus of the National Bureau of Economic Research and served as former US President Ronald Reagan's chief economic advisor.
In India to address the Canara Robeco Thought Leadership Series, Feldstein, who is also a Business Standard columnist. spoke to Niladri Bhattacharya and Sidhartha about the global economic situation. Excerpts:
Do you see some change in India in the last 12 months?
It has slowed down more than I expected. I thought India would be more immune to the global slowdown. I was quite worried about the global economy, and India, unlike the other Asian countries, is less involved in manufacturing, and I thought it would therefore be less adversely affected.
It was affected, partly due to a lack of credit, which affected large industries, and also because of the equity market, due to panic selling by emerging market investors.
They did not make a distinction between the potential health of the Indian economy and the hit that Thailand and Malaysia have taken. You were also hit very hard by high energy and food prices, and that led to a tightening of monetary policy.
But I remain relatively optimistic about India, with energy prices down and food prices no longer at such elevated levels. There is more scope for India to do well than what it's been doing over the past year.
How does India compare with China?
China is going to do very well. It is suffering because of a loss of exports and due to a very sharp decline in manufacturing.
But Chinese officials have made it clear that they are going to use this as an occasion for a major shift to domestic activity, which is not just cyclical but for bolstering both consumer spending and government spending to provide services to consumers. China has the levers or controls to do it.
In the past few days, there has been some optimism, especially in the stock markets. Do you see certain signs of revival in the global economy, given the latest data?
There have been some recent statistics in the US about aggregate demand and housing and retail sales. I would like to believe that it's the beginning of a recovery, but I really do not. January was awful and so the fact that February bounced back a little may be just that. If you take the two months together, we are still looking at a net decline and that's not something very positive.
If we have two more months of positive numbers, then I would be surprised and pleased and start seeing things coming back.
There is a good chance that we see a few months of very positive news, not necessarily positive GDP growth, when the stimulus is introduced. The stimulus is going to add $250 billion in a year and about $60 billion on a quarterly basis. It's not a lot, but it's about 1.5 per cent of the quarterly GDP.
A national income accountant will multiply that by four and make an annual rate out of it and say it's a 6 per cent increase in GDP.
Even if the rest of the GDP is falling by 5 per cent, you put the two together, and the national income accountant would say it is zero or one per cent and politicians can say growth is back. But it would just be a mechanical, one-time level effect.
A year ago, the NBER had not officially declared the US in recession but my sense, by looking at individual monthly numbers, was that we were sliding into a recession and a deep-lasting recession. It took us several months before we got a confirmation.
We will not turn the corner in 2009. If we are lucky, it will happen by this time in 2010, but it may well not happen. It is very hard to see anything and say with confidence that there is a recovery.
Will the recovery start from the US?
China will get its act together sooner than anybody else. Who goes first will depend on trade patterns and things like that. But we (the US) will come out before Europe.
Will the Geithner plan be one of the key drivers?
It has the potential to be so. It's not clear that it is ready to do the full job. There are a number of problems, but it's much better than any of the plans that have come along before. A trillion dollars sounds like a lot of money, but if the purpose is to cleanse the balance sheets, then banks have $10 trillion worth of securities.
They have large amounts of underwater paper in residential and commercial mortgages and consumer loans. It's not clear if $1 trillion is enough to make the institutions and counterparties say, this is cleared up and start lending. If it is not a big enough step, then people may say it has failed.
It's not clear if the whole process will deliver that. It's not clear if the banks will be willing to sell the mortgages they have, because if borrowers are paying, then the loans can be carried at the initial value and do not have to be marked down. Once banks sell it, they have to take the loss and they will see if they have the capital to do so.
Do you see more shocks like Lehman going down?
A shock is something that you did not expect. The risk is that we will see declines, especially in commercial real estate and you may see some significant losses that could bring down commercial banks.
It is not clear if the plan is going to succeed in avoiding nationalisation or avoiding bank failures. They have got the right idea and they will discover if banks are ready to sell. If they are not, they have to go back and reconsider what the viable strategies are.
There is talk of tighter regulation and better supervision. Will we see overregulation?
It may happen. What's needed is more supervision and not regulation. One of the reasons supervisors did not do a good job was because they were falling back on the language of Basel.
For instance, Basel allowed them to ignore off-balance sheet assets. If that's what the Financial Stability Forum and BIS concluded, then who is a bank supervisor to question that? Bank supervisors did not use common sense to go beyond what was written.
Do you see traditional banking making a comeback?
There was a strong case for the repeal of the Glass-Steagall Act for integrated financial services. That is not what brought us down. A very high loan-to-value ratio and things such as that are the problems that have to be dealt with. The fundamental structure of banks need not be changed.
What are your expectations from the G 20 meeting?
These things do not normally produce much. With the conflict of what ought to be done, I do not see them producing much.
Source
In India to address the Canara Robeco Thought Leadership Series, Feldstein, who is also a Business Standard columnist. spoke to Niladri Bhattacharya and Sidhartha about the global economic situation. Excerpts:
Do you see some change in India in the last 12 months?
It has slowed down more than I expected. I thought India would be more immune to the global slowdown. I was quite worried about the global economy, and India, unlike the other Asian countries, is less involved in manufacturing, and I thought it would therefore be less adversely affected.
It was affected, partly due to a lack of credit, which affected large industries, and also because of the equity market, due to panic selling by emerging market investors.
They did not make a distinction between the potential health of the Indian economy and the hit that Thailand and Malaysia have taken. You were also hit very hard by high energy and food prices, and that led to a tightening of monetary policy.
But I remain relatively optimistic about India, with energy prices down and food prices no longer at such elevated levels. There is more scope for India to do well than what it's been doing over the past year.
How does India compare with China?
China is going to do very well. It is suffering because of a loss of exports and due to a very sharp decline in manufacturing.
But Chinese officials have made it clear that they are going to use this as an occasion for a major shift to domestic activity, which is not just cyclical but for bolstering both consumer spending and government spending to provide services to consumers. China has the levers or controls to do it.
In the past few days, there has been some optimism, especially in the stock markets. Do you see certain signs of revival in the global economy, given the latest data?
There have been some recent statistics in the US about aggregate demand and housing and retail sales. I would like to believe that it's the beginning of a recovery, but I really do not. January was awful and so the fact that February bounced back a little may be just that. If you take the two months together, we are still looking at a net decline and that's not something very positive.
If we have two more months of positive numbers, then I would be surprised and pleased and start seeing things coming back.
There is a good chance that we see a few months of very positive news, not necessarily positive GDP growth, when the stimulus is introduced. The stimulus is going to add $250 billion in a year and about $60 billion on a quarterly basis. It's not a lot, but it's about 1.5 per cent of the quarterly GDP.
A national income accountant will multiply that by four and make an annual rate out of it and say it's a 6 per cent increase in GDP.
Even if the rest of the GDP is falling by 5 per cent, you put the two together, and the national income accountant would say it is zero or one per cent and politicians can say growth is back. But it would just be a mechanical, one-time level effect.
A year ago, the NBER had not officially declared the US in recession but my sense, by looking at individual monthly numbers, was that we were sliding into a recession and a deep-lasting recession. It took us several months before we got a confirmation.
We will not turn the corner in 2009. If we are lucky, it will happen by this time in 2010, but it may well not happen. It is very hard to see anything and say with confidence that there is a recovery.
Will the recovery start from the US?
China will get its act together sooner than anybody else. Who goes first will depend on trade patterns and things like that. But we (the US) will come out before Europe.
Will the Geithner plan be one of the key drivers?
It has the potential to be so. It's not clear that it is ready to do the full job. There are a number of problems, but it's much better than any of the plans that have come along before. A trillion dollars sounds like a lot of money, but if the purpose is to cleanse the balance sheets, then banks have $10 trillion worth of securities.
They have large amounts of underwater paper in residential and commercial mortgages and consumer loans. It's not clear if $1 trillion is enough to make the institutions and counterparties say, this is cleared up and start lending. If it is not a big enough step, then people may say it has failed.
It's not clear if the whole process will deliver that. It's not clear if the banks will be willing to sell the mortgages they have, because if borrowers are paying, then the loans can be carried at the initial value and do not have to be marked down. Once banks sell it, they have to take the loss and they will see if they have the capital to do so.
Do you see more shocks like Lehman going down?
A shock is something that you did not expect. The risk is that we will see declines, especially in commercial real estate and you may see some significant losses that could bring down commercial banks.
It is not clear if the plan is going to succeed in avoiding nationalisation or avoiding bank failures. They have got the right idea and they will discover if banks are ready to sell. If they are not, they have to go back and reconsider what the viable strategies are.
There is talk of tighter regulation and better supervision. Will we see overregulation?
It may happen. What's needed is more supervision and not regulation. One of the reasons supervisors did not do a good job was because they were falling back on the language of Basel.
For instance, Basel allowed them to ignore off-balance sheet assets. If that's what the Financial Stability Forum and BIS concluded, then who is a bank supervisor to question that? Bank supervisors did not use common sense to go beyond what was written.
Do you see traditional banking making a comeback?
There was a strong case for the repeal of the Glass-Steagall Act for integrated financial services. That is not what brought us down. A very high loan-to-value ratio and things such as that are the problems that have to be dealt with. The fundamental structure of banks need not be changed.
What are your expectations from the G 20 meeting?
These things do not normally produce much. With the conflict of what ought to be done, I do not see them producing much.
Source
Monday, March 16, 2009
The world is not flat
Tom Friedman has got his challenger. The world is not flat, says the World Bank, in its latest World Development Report.
And don't you believe in the "death of distance", because distance from a centre of economic activity is a critical factor for both people and geographies.
Indeed the report, titled "Reshaping economic geography", argues that development is almost always concentrated -- and that is the way it is meant to be. So governments should be encouraging such concentration by facilitating migration and building the infrastructure that helps the process (like transport linkages).
It cites Tokyo-Yokohama's dominance of the Japanese economy and Cairo's in Egypt to make the point, though the Report does not seem to argue a 'cause and effect' sequence that goes beyond merely recording a fact that is obvious.
And yet, readers will immediately recall the success of China's coastal strategy, which was deliberately designed to encourage concentration of economic activity, and worked--one of the thoughts behind India's official support to special economic zones.
The report challenges some long-established notions, especially in India where the spatial distribution of industrial activity has been part of official policy for more than half a century.
There is the effort to "provide urban facilities in rural areas" (or Pura); there is Narendra Modi with his notion of a "rurban" (rural-urban) model for Gujarat; and variations on these themes.
The report does not necessarily disagree with such initiatives, arguing that policies should encourage inclusive growth and try to equalise standards of living across geographies. But that would seem counter-intuitive when it argues at the same time that uneven development is an inescapable fact of life.
The report is likely to provoke debate, and its authors say that it is meant to be a starting point for discussion, not a final argument.
Certainly, India has seen that the cluster logic works for many industries (Tamil Nadu as an auto hub, Bangalore as an IT-driven city, and one-industry towns that dot the country like Moradabad and Tirupur).
More importantly, the country needs to figure out how to make its cities work better (the correct pricing of land and the development of mass transport are crucial, and on both points realisation is only slowly dawning on politicians and policymakers), how to finance urban development in a self-sustaining manner, and how to make the divisions between rich and poor more porous within a city so that habitations do not become completely stratified.
But there will also be debate about the changing nature of the city (de-industrialised, and service-driven), the drift to suburbia, the move to off-centre, campus-style office complexes, and what each of these means for concentration.
As with all World Development Reports, there is a set of tables that provide inter-country comparisons on some basic parameters.
India now figures about two-thirds of the way down the list of about 130 countries when it comes to per capita income (it used to be 16th from the bottom when the WDR first came out three decades ago, but there were fewer countries then), and just about scrapes into the category of 'lower-middle income' countries with per capita income of $950 (for 2007).
In total economic size, it is the smallest among the Bric economies, being fractionally behind Russia and Brazil. It therefore ranks 12th as an economy, 25th as an exporter, 20th as a recipient of foreign investment, and gets one dollar per capita as official aid (lower-middle income country average: $9). It has the fifth highest external debt, but that debt is just 15 per cent of GDP (low- and middle-income country average: 75 per cent).
And the maximum numbers of out-migrants in the world are from Mexico, China and India, followed in short order by Iran, Pakistan and Indonesia. On most millennium development goals, India is better than the low-income country average, but worse than the typical lower-middle income country figure.
And in case anyone is still in the mood for chest-thumping, India's per capita income is about one-eighth of the world average.
Source
And don't you believe in the "death of distance", because distance from a centre of economic activity is a critical factor for both people and geographies.
Indeed the report, titled "Reshaping economic geography", argues that development is almost always concentrated -- and that is the way it is meant to be. So governments should be encouraging such concentration by facilitating migration and building the infrastructure that helps the process (like transport linkages).
It cites Tokyo-Yokohama's dominance of the Japanese economy and Cairo's in Egypt to make the point, though the Report does not seem to argue a 'cause and effect' sequence that goes beyond merely recording a fact that is obvious.
And yet, readers will immediately recall the success of China's coastal strategy, which was deliberately designed to encourage concentration of economic activity, and worked--one of the thoughts behind India's official support to special economic zones.
The report challenges some long-established notions, especially in India where the spatial distribution of industrial activity has been part of official policy for more than half a century.
There is the effort to "provide urban facilities in rural areas" (or Pura); there is Narendra Modi with his notion of a "rurban" (rural-urban) model for Gujarat; and variations on these themes.
The report does not necessarily disagree with such initiatives, arguing that policies should encourage inclusive growth and try to equalise standards of living across geographies. But that would seem counter-intuitive when it argues at the same time that uneven development is an inescapable fact of life.
The report is likely to provoke debate, and its authors say that it is meant to be a starting point for discussion, not a final argument.
Certainly, India has seen that the cluster logic works for many industries (Tamil Nadu as an auto hub, Bangalore as an IT-driven city, and one-industry towns that dot the country like Moradabad and Tirupur).
More importantly, the country needs to figure out how to make its cities work better (the correct pricing of land and the development of mass transport are crucial, and on both points realisation is only slowly dawning on politicians and policymakers), how to finance urban development in a self-sustaining manner, and how to make the divisions between rich and poor more porous within a city so that habitations do not become completely stratified.
But there will also be debate about the changing nature of the city (de-industrialised, and service-driven), the drift to suburbia, the move to off-centre, campus-style office complexes, and what each of these means for concentration.
As with all World Development Reports, there is a set of tables that provide inter-country comparisons on some basic parameters.
India now figures about two-thirds of the way down the list of about 130 countries when it comes to per capita income (it used to be 16th from the bottom when the WDR first came out three decades ago, but there were fewer countries then), and just about scrapes into the category of 'lower-middle income' countries with per capita income of $950 (for 2007).
In total economic size, it is the smallest among the Bric economies, being fractionally behind Russia and Brazil. It therefore ranks 12th as an economy, 25th as an exporter, 20th as a recipient of foreign investment, and gets one dollar per capita as official aid (lower-middle income country average: $9). It has the fifth highest external debt, but that debt is just 15 per cent of GDP (low- and middle-income country average: 75 per cent).
And the maximum numbers of out-migrants in the world are from Mexico, China and India, followed in short order by Iran, Pakistan and Indonesia. On most millennium development goals, India is better than the low-income country average, but worse than the typical lower-middle income country figure.
And in case anyone is still in the mood for chest-thumping, India's per capita income is about one-eighth of the world average.
Source
Economic slowdown: Is the end in sight?
The numbers for the Index of Industrial Production for January 2009, released Wednesday, are along broadly expected lines. The overall index dropped by 0.5 per cent from its level of January 2008, while the manufacturing component, accounting for about 80 per cent of the index, dropped by 0.8 per cent.
Along with the significant upward revision to the December numbers, which saw the estimated growth from December 2007 change from -2 per cent to -0.5 per cent, these relatively small negative numbers give the impression of a bottoming out of the decline. Indeed, they suggest that the stringent credit conditions that emerged in October, and contributed to the decline immediately afterwards, have begun to ease and producers are now using low input prices and interest rates to replenish depleted inventories. If this is the case, it is indeed good news for a beleaguered economy and its prospects for the year ahead.
However, the numbers need to be understood in greater detail, and must be interpreted with caution. In the first place, if these numbers were in fact a precursor to a bottoming out, they suggest that the transmission from policy action to economic response is lightning fast.
Monetary policy turned pro-growth in October. There was also a significant fiscal stimulus around the same time, as the government paid out a part of the arrears on account of the implementation of the Sixth Pay Commission recommendations. This, it appears, is having some impact.
The numbers for consumer durables production have shown an increase, though small, in contrast to the negative pattern seen for this category over the past few months. Perhaps government employees who received their arrears are doing the right thing by the economy and using them to buy new appliances. As the implementation spreads to state government and public enterprise employees, this suggests significant support to some sectors.
On the broader issue of transmission lags, though, the implied speed of the process raises some questions. Of particular interest is the surge in the industry segment machinery and equipment, which grew by 17.5 per cent over January 2008. This took the capital goods category to a growth rate of 15.4 per cent, completely against the grain of the past few months.
This number is, in fact, reminiscent of the investment boom of a couple of years ago. It would be greatly reassuring to policymakers and investors if machinery production were surging in the current environment. But, in the midst of all the news that is coming in from companies, banks and other players, it stretches credibility.
The aberration is even more striking when compared with the performance of other industry segments. Only five of the 17 showed positive growth. Metal products and transport equipment, both driven by the factors similar to machinery and equipment, declined by 4 per cent and 13.4 per cent, respectively, over January 2008. Cotton textiles declined by 8.5 per cent, as did sectors which have relatively high export content, like leather and leather products. Even food processing, typically seen as a relatively stable segment, declined by a huge 16.1 per cent.
In short, take away the machinery and equipment segment and the decline in the manufacturing sector would appear much more drastic. Quality and consistency issues apart, the conclusion that a bottom is being reached seems premature.
Source
Along with the significant upward revision to the December numbers, which saw the estimated growth from December 2007 change from -2 per cent to -0.5 per cent, these relatively small negative numbers give the impression of a bottoming out of the decline. Indeed, they suggest that the stringent credit conditions that emerged in October, and contributed to the decline immediately afterwards, have begun to ease and producers are now using low input prices and interest rates to replenish depleted inventories. If this is the case, it is indeed good news for a beleaguered economy and its prospects for the year ahead.
However, the numbers need to be understood in greater detail, and must be interpreted with caution. In the first place, if these numbers were in fact a precursor to a bottoming out, they suggest that the transmission from policy action to economic response is lightning fast.
Monetary policy turned pro-growth in October. There was also a significant fiscal stimulus around the same time, as the government paid out a part of the arrears on account of the implementation of the Sixth Pay Commission recommendations. This, it appears, is having some impact.
The numbers for consumer durables production have shown an increase, though small, in contrast to the negative pattern seen for this category over the past few months. Perhaps government employees who received their arrears are doing the right thing by the economy and using them to buy new appliances. As the implementation spreads to state government and public enterprise employees, this suggests significant support to some sectors.
On the broader issue of transmission lags, though, the implied speed of the process raises some questions. Of particular interest is the surge in the industry segment machinery and equipment, which grew by 17.5 per cent over January 2008. This took the capital goods category to a growth rate of 15.4 per cent, completely against the grain of the past few months.
This number is, in fact, reminiscent of the investment boom of a couple of years ago. It would be greatly reassuring to policymakers and investors if machinery production were surging in the current environment. But, in the midst of all the news that is coming in from companies, banks and other players, it stretches credibility.
The aberration is even more striking when compared with the performance of other industry segments. Only five of the 17 showed positive growth. Metal products and transport equipment, both driven by the factors similar to machinery and equipment, declined by 4 per cent and 13.4 per cent, respectively, over January 2008. Cotton textiles declined by 8.5 per cent, as did sectors which have relatively high export content, like leather and leather products. Even food processing, typically seen as a relatively stable segment, declined by a huge 16.1 per cent.
In short, take away the machinery and equipment segment and the decline in the manufacturing sector would appear much more drastic. Quality and consistency issues apart, the conclusion that a bottom is being reached seems premature.
Source
Tuesday, March 10, 2009
Recession to last till 2010-end
Be it living rooms or public transport, the one question that's on top of everyone's mind is the magnitude of the economic crisis and how long it will last. Some of these queries were answered on Friday by Nouriel Roubini, a leading economic forecaster and Prof. of Economics at NYU's Stern School of Business, at the India Today Conclave 2009.
Roubini, who had predicted the collapse of the US housing market and global recession three years ago, believes that all's still not well with the world economy even though the US has been in recession since the end of 2007. But unlike most other recessions, this one will be a protracted one, which is slated to last for a good 36 months.
With the world's largest financial institutions having collapsed last year, the world's financial system has suffered a cardiac arrest and the global economy is in a semi-comatose state. Despite billions of dollars being spent via stimulus and economic packages, the health of financial institutions is not getting better because US economic losses have touched almost $3.6 trillion, he said.
According to him, while the good news is that the International Monetary Fund is committed to not letting other large financial institutions go the Lehman Brothers way, the bad news is that the credit losses are so huge that it will be rather difficult for any upswing to result in a credible turnaround anytime soon. At present, $1.43 trillion will be required to recapitalise the ailing banking sector of the US, he said.
And if the policy responses are not coordinated and cohesive, the recession could well be L-shaped in nature and the pain could be protracted. The slowdown in emerging economies like China, Korea and India has conclusively proved that the decoupling theory is humbug. The world today is connected by trade, capital and financial channels. This is evident from the slowdown of both the capital and trade flows in these emerging economies. No wonder, their growth has declined from 7 per cent to 3 per cent; these countries have hard-landed already.
Roubini said if retail consumption is falling then corporates are saving cash and thereby curtailing capital expenditure and production. Consequently, job losses are mounting and people are not spending in fear. This has resulted in a vicious cycle and to end this, a collective response from the governments is required.
And if this was not bad enough, Roubini said that even if there is a recovery 12-18 months down the line, it will be warped by the supply side shocks. Commodity producers like oil producing countries have already cut down production. So expect oil prices to touch $100 as soon as the world economy begins to turn around. The only thing that can save the day is prudent and timely action by governments.
Source
Roubini, who had predicted the collapse of the US housing market and global recession three years ago, believes that all's still not well with the world economy even though the US has been in recession since the end of 2007. But unlike most other recessions, this one will be a protracted one, which is slated to last for a good 36 months.
With the world's largest financial institutions having collapsed last year, the world's financial system has suffered a cardiac arrest and the global economy is in a semi-comatose state. Despite billions of dollars being spent via stimulus and economic packages, the health of financial institutions is not getting better because US economic losses have touched almost $3.6 trillion, he said.
According to him, while the good news is that the International Monetary Fund is committed to not letting other large financial institutions go the Lehman Brothers way, the bad news is that the credit losses are so huge that it will be rather difficult for any upswing to result in a credible turnaround anytime soon. At present, $1.43 trillion will be required to recapitalise the ailing banking sector of the US, he said.
And if the policy responses are not coordinated and cohesive, the recession could well be L-shaped in nature and the pain could be protracted. The slowdown in emerging economies like China, Korea and India has conclusively proved that the decoupling theory is humbug. The world today is connected by trade, capital and financial channels. This is evident from the slowdown of both the capital and trade flows in these emerging economies. No wonder, their growth has declined from 7 per cent to 3 per cent; these countries have hard-landed already.
Roubini said if retail consumption is falling then corporates are saving cash and thereby curtailing capital expenditure and production. Consequently, job losses are mounting and people are not spending in fear. This has resulted in a vicious cycle and to end this, a collective response from the governments is required.
And if this was not bad enough, Roubini said that even if there is a recovery 12-18 months down the line, it will be warped by the supply side shocks. Commodity producers like oil producing countries have already cut down production. So expect oil prices to touch $100 as soon as the world economy begins to turn around. The only thing that can save the day is prudent and timely action by governments.
Source
Monday, February 16, 2009
Full text of the budget speech
Mr Speaker, Sir,
I rise to present the Interim Budget for 2009-10.
Five years ago the people of India had voted for change. In the words of our Prime Minister, Dr. Manmohan Singh, people had sought "a change in the manner in which this country is run, a change in the national priorities and a change in the processes and focus of the Government". The Common Minimum Programme of the United Progressive Alliance, built around 'Aam Aadmi', was a response to this call for change. As indicated by Shri P. Chidambaram in July 2004, this programme spelt out seven clear economic objectives:
a) Maintaining a growth rate of 7-8 per cent per year for a sustained period;
b) Providing universal access to quality basic education and health;
c) Generating gainful employment and promoting investment;
d) Assuring hundred days of employment to the breadwinner in each family at the minimum wage;
e) Focusing on agriculture, rural development and infrastructure;
f) Accelerating fiscal consolidation and reform; and
g) Ensuring higher and more efficient fiscal devolution.
As I present the sixth budget of the Government of the United Progressive Alliance which completes its tenure in a couple of months, I can say with confidence that every effort has been made by the government to deliver on the commitments made.
For the first four years of the UPA government, our policies ensured a dream run for the economy with Gross Domestic Product (GDP) recording increase of 7.5 per cent, 9.5 per cent, 9.7 per cent and 9 per cent from fiscal year 2004-05 to 2007-08. For the first time, the Indian economy showed sustained growth of over 9 per cent for three consecutive years. With per capita income growing at 7.4 per cent per annum, this represented the fastest ever improvement in living standards over a four year period.
During this period, the fiscal deficit came down from 4.5 per cent in 2003-04 to 2.7 per cent in 2007-08 and the revenue deficit declined from 3.6 per cent to 1.1 per cent.
Investment and savings showed significant improvement. The domestic investment rate as a proportion of GDP increased from 27.6 per cent in 2003-04 to over 39 per cent in 2007-08. The gross domestic savings rate shot up from 29.8 per cent to 37.7 per cent during this period. The gross capital formation in agriculture as a proportion of agriculture GDP improved from 11.1 per cent in 2003-04 to 14.2 per cent in 2007-08
The buoyant growth of Government revenues facilitated fiscal consolidation as mandated in the FRBM Act. The tax to GDP ratio increased from 9.2 per cent in 2003-04 to 12.5 per cent in 2007-08 bringing us within striking distance of the target for fiscal correction. This also enhanced our capacity to raise resources internally to finance our growth at the rate of 9 per cent per annum during the Eleventh Five Year Plan.
All this would not have been possible without the guidance of UPA Chairperson, Smt. Sonia Gandhi, the inspiring leadership of Prime Minister, Dr. Manmohan Singh and the hard work put in by my predecessor, Shri P. Chidambaram.
Mr Speaker, Sir,
The growth drivers for this period were agriculture, services, manufacturing along with trade and construction. Hon'ble Members will agree with me that the real heroes of India's success story were our farmers. Through their hard work, they ensured "food security" for the country. With record procurement of 22.7 million tonnes of wheat and 28.5 million tonnes of rice for our Public Distribution System in 2008, our granaries are full. During this four year period, the annual growth rate of agriculture rose to 3.7 per cent. The production of foodgrains increased by about 10 million tonnes each year to reach an all time high of over 230 million tonnes in 2007-08. Despite a high base, the outlook for 2008-09 is encouraging with the country receiving normal rainfall during the agricultural season. Manufacturing, registered as well as unregistered, recorded a growth of 9.5 per cent per annum in the period 2004-05 to 2007-08. Similarly, communication and construction sectors grew at the rate of 26 per cent and 13.5 per cent per annum, respectively.
Though our growth is based largely on domestic efforts, foreign trade and capital inflows played a catalytic role. India's exports grew at an annual average growth rate of 26.4 per cent in US dollar terms during this period. Foreign trade increased from 23.7 per cent of GDP in 2003-04 to 35.5 per cent in 2007-08. The conscious policy to gradually integrate the Indian economy with the world, opened new opportunities for Indian corporates to build world scale plants and aim at global competitiveness.
In order to maintain a high GDP growth rate on a sustained basis with price stability, the Indian economy had to face two inter-related macro-economic challenges. These relate to capital inflows and global inflation. Profitable investment opportunities generated by high GDP growth attract foreign capital. In 2007-08, capital inflows spurted to an unprecedented 9 per cent of GDP, far in excess of current account financing requirements leading to large accumulation of reserves and build up of pressure on prices.
During 2008-09, international prices of many essential commodities particularly fuel oils, food and edible oils and metals rose to alarming levels. To cite just one example, the price of crude oil which was US $ 28 per barrel in 2003-04 shot up to US $ 147 per barrel in 2008. The sharp rise in global inflation, even with a moderated pass-through, put pressure on domestic prices. The WPI headline inflation shot up to nearly 13 per cent in the first week of August 2008. To ease supply side constraints, Government took a series of fiscal and administrative measures, in concert with monetary policy measures by the Reserve Bank of India. RBI raised the interest rates to mop up excess liquidity. This, in turn, had implications for the growth rate from the demand as well as supply side. These, along with easing of global price pressures, led to a decline in domestic prices with inflation rate falling to 4.4 per cent on January 31, 2009. We have weathered the crisis, but there is no room for complacency.
More
I rise to present the Interim Budget for 2009-10.
Five years ago the people of India had voted for change. In the words of our Prime Minister, Dr. Manmohan Singh, people had sought "a change in the manner in which this country is run, a change in the national priorities and a change in the processes and focus of the Government". The Common Minimum Programme of the United Progressive Alliance, built around 'Aam Aadmi', was a response to this call for change. As indicated by Shri P. Chidambaram in July 2004, this programme spelt out seven clear economic objectives:
a) Maintaining a growth rate of 7-8 per cent per year for a sustained period;
b) Providing universal access to quality basic education and health;
c) Generating gainful employment and promoting investment;
d) Assuring hundred days of employment to the breadwinner in each family at the minimum wage;
e) Focusing on agriculture, rural development and infrastructure;
f) Accelerating fiscal consolidation and reform; and
g) Ensuring higher and more efficient fiscal devolution.
As I present the sixth budget of the Government of the United Progressive Alliance which completes its tenure in a couple of months, I can say with confidence that every effort has been made by the government to deliver on the commitments made.
For the first four years of the UPA government, our policies ensured a dream run for the economy with Gross Domestic Product (GDP) recording increase of 7.5 per cent, 9.5 per cent, 9.7 per cent and 9 per cent from fiscal year 2004-05 to 2007-08. For the first time, the Indian economy showed sustained growth of over 9 per cent for three consecutive years. With per capita income growing at 7.4 per cent per annum, this represented the fastest ever improvement in living standards over a four year period.
During this period, the fiscal deficit came down from 4.5 per cent in 2003-04 to 2.7 per cent in 2007-08 and the revenue deficit declined from 3.6 per cent to 1.1 per cent.
Investment and savings showed significant improvement. The domestic investment rate as a proportion of GDP increased from 27.6 per cent in 2003-04 to over 39 per cent in 2007-08. The gross domestic savings rate shot up from 29.8 per cent to 37.7 per cent during this period. The gross capital formation in agriculture as a proportion of agriculture GDP improved from 11.1 per cent in 2003-04 to 14.2 per cent in 2007-08
The buoyant growth of Government revenues facilitated fiscal consolidation as mandated in the FRBM Act. The tax to GDP ratio increased from 9.2 per cent in 2003-04 to 12.5 per cent in 2007-08 bringing us within striking distance of the target for fiscal correction. This also enhanced our capacity to raise resources internally to finance our growth at the rate of 9 per cent per annum during the Eleventh Five Year Plan.
All this would not have been possible without the guidance of UPA Chairperson, Smt. Sonia Gandhi, the inspiring leadership of Prime Minister, Dr. Manmohan Singh and the hard work put in by my predecessor, Shri P. Chidambaram.
Mr Speaker, Sir,
The growth drivers for this period were agriculture, services, manufacturing along with trade and construction. Hon'ble Members will agree with me that the real heroes of India's success story were our farmers. Through their hard work, they ensured "food security" for the country. With record procurement of 22.7 million tonnes of wheat and 28.5 million tonnes of rice for our Public Distribution System in 2008, our granaries are full. During this four year period, the annual growth rate of agriculture rose to 3.7 per cent. The production of foodgrains increased by about 10 million tonnes each year to reach an all time high of over 230 million tonnes in 2007-08. Despite a high base, the outlook for 2008-09 is encouraging with the country receiving normal rainfall during the agricultural season. Manufacturing, registered as well as unregistered, recorded a growth of 9.5 per cent per annum in the period 2004-05 to 2007-08. Similarly, communication and construction sectors grew at the rate of 26 per cent and 13.5 per cent per annum, respectively.
Though our growth is based largely on domestic efforts, foreign trade and capital inflows played a catalytic role. India's exports grew at an annual average growth rate of 26.4 per cent in US dollar terms during this period. Foreign trade increased from 23.7 per cent of GDP in 2003-04 to 35.5 per cent in 2007-08. The conscious policy to gradually integrate the Indian economy with the world, opened new opportunities for Indian corporates to build world scale plants and aim at global competitiveness.
In order to maintain a high GDP growth rate on a sustained basis with price stability, the Indian economy had to face two inter-related macro-economic challenges. These relate to capital inflows and global inflation. Profitable investment opportunities generated by high GDP growth attract foreign capital. In 2007-08, capital inflows spurted to an unprecedented 9 per cent of GDP, far in excess of current account financing requirements leading to large accumulation of reserves and build up of pressure on prices.
During 2008-09, international prices of many essential commodities particularly fuel oils, food and edible oils and metals rose to alarming levels. To cite just one example, the price of crude oil which was US $ 28 per barrel in 2003-04 shot up to US $ 147 per barrel in 2008. The sharp rise in global inflation, even with a moderated pass-through, put pressure on domestic prices. The WPI headline inflation shot up to nearly 13 per cent in the first week of August 2008. To ease supply side constraints, Government took a series of fiscal and administrative measures, in concert with monetary policy measures by the Reserve Bank of India. RBI raised the interest rates to mop up excess liquidity. This, in turn, had implications for the growth rate from the demand as well as supply side. These, along with easing of global price pressures, led to a decline in domestic prices with inflation rate falling to 4.4 per cent on January 31, 2009. We have weathered the crisis, but there is no room for complacency.
More
Friday, February 13, 2009
Confusion amid a crisis
Even as bloggers are busy decoding depression, the real challenge now for India will be to maintain the national savings rate above 35% of GDP.
This is the high season for confusion about the state of the world economy. The pace at which world output is slowing has caught most economists—other than the most pessimistic members of the tribe—unawares.
Even the D-word is now getting an airing. Economics bloggers are busy trying to define what a depression really means. British Prime Minister Gordon Brown used the word to describe the state of the global economy in a speech last week; his media managers quickly moved into overdrive to dismiss his usage as a slip of the tongue. But then the chief of the International Monetary Fund announced on Monday that the rich nations are “already in depression”. This came just a few days after the multilateral lender said that the world economy was already at a standstill. Dominique Strauss-Kahn says that the IMF growth forecast could be cut once again: “The worst cannot be ruled out.”
The semantics and speeches aside, the big issue is whether the world economy is stumbling into a Japan-style decade of zero growth and deflation, and what this will mean for India.
The immediate pain is visible. The first official estimates of Indian economic growth have been pegged at a six-year low of 7.1%. That’s a far cry from the needless bravado earlier this fiscal year, when the then finance minister P. Chidambaram insisted that Indian growth would not be affected by the global crisis.
Most private sector economists expect the economy to perform worse than the government’s statistics office has initially estimated. The 21 professional forecasters polled by the Reserve Bank of India every quarter expect an average growth rate of 6.8% in the current fiscal year, against the 7.7% average estimate made in the previous survey.
The current slowdown—and the prospect that it will worsen—could reopen the old debate: At what rate can India sustainably grow in the medium term?
There have always been contentious debates on what drives economic growth in any country—use of more resources such as labour and capital, or a better use of resources through higher productivity? Barry Bosworth and Susan Collins, in a 2007 research paper on “growth accounting” for India and China, showed that of the output growth per worker in these two countries between 1978 and 2004, roughly half came from capital accumulation and the other half from higher productivity.
Ensuring that India maintains strong economic growth despite the obvious global problems will require coherent strategy from the Indian government—both this one and the next. The current focus seems to be throwing cash at every industry and major project that can make itself heard in the election season. Some of this may be inevitable in a boisterous democracy such as ours, but lobbying and rent seeking also play a part.
Analyses such as the one from Bosworth and Collins suggest that long-term policy should focus on two important issues: maintaining rates of savings and investment so that capital accumulation stays on track; and long-term reforms that will create incentives for Indians to take risks and work harder.
First, let’s consider savings and investments. The splendid boom that began five years ago and is now winding down was driven by both a benign global business climate as well as a huge increase in the national savings rate. The latter has shot up by around 12 percentage points since the beginning of this decade—and higher domestic savings have been able to support the higher investment rate that led to accelerating growth.
The real challenge now will be to maintain the national savings rate above 35% of gross domestic product (GDP). Most of the rise in the savings rate these past few years was because of healthier corporate balance sheets and lower government deficits. Both are likely to deteriorate in the current downturn. It is safe to guess that national savings have peaked for now and will decline as a proportion of national output. Irresponsible fiscal policy could pull it down to levels that make it difficult for India to grow above 6% a year. That is something the Indian government should avoid.
The second big challenge will be to boost productivity, through more open product markets, better infrastructure, a more educated and skilled workforce, and access to capital for both large and small businesses. The march out of poverty is essentially about raising output per worker—and productivity has a big role to play in this.
These are trying times for policymakers. And there is too much confusion right now for a coherent policy to emerge. But even as the government is busy fighting many small fires, it should not take its eyes off the larger issue—that the economy will keep growing rapidly only if investments stay on track and there are reforms to boost productivity per worker.
Source
This is the high season for confusion about the state of the world economy. The pace at which world output is slowing has caught most economists—other than the most pessimistic members of the tribe—unawares.
Even the D-word is now getting an airing. Economics bloggers are busy trying to define what a depression really means. British Prime Minister Gordon Brown used the word to describe the state of the global economy in a speech last week; his media managers quickly moved into overdrive to dismiss his usage as a slip of the tongue. But then the chief of the International Monetary Fund announced on Monday that the rich nations are “already in depression”. This came just a few days after the multilateral lender said that the world economy was already at a standstill. Dominique Strauss-Kahn says that the IMF growth forecast could be cut once again: “The worst cannot be ruled out.”
The semantics and speeches aside, the big issue is whether the world economy is stumbling into a Japan-style decade of zero growth and deflation, and what this will mean for India.
The immediate pain is visible. The first official estimates of Indian economic growth have been pegged at a six-year low of 7.1%. That’s a far cry from the needless bravado earlier this fiscal year, when the then finance minister P. Chidambaram insisted that Indian growth would not be affected by the global crisis.
Most private sector economists expect the economy to perform worse than the government’s statistics office has initially estimated. The 21 professional forecasters polled by the Reserve Bank of India every quarter expect an average growth rate of 6.8% in the current fiscal year, against the 7.7% average estimate made in the previous survey.
The current slowdown—and the prospect that it will worsen—could reopen the old debate: At what rate can India sustainably grow in the medium term?
There have always been contentious debates on what drives economic growth in any country—use of more resources such as labour and capital, or a better use of resources through higher productivity? Barry Bosworth and Susan Collins, in a 2007 research paper on “growth accounting” for India and China, showed that of the output growth per worker in these two countries between 1978 and 2004, roughly half came from capital accumulation and the other half from higher productivity.
Ensuring that India maintains strong economic growth despite the obvious global problems will require coherent strategy from the Indian government—both this one and the next. The current focus seems to be throwing cash at every industry and major project that can make itself heard in the election season. Some of this may be inevitable in a boisterous democracy such as ours, but lobbying and rent seeking also play a part.
Analyses such as the one from Bosworth and Collins suggest that long-term policy should focus on two important issues: maintaining rates of savings and investment so that capital accumulation stays on track; and long-term reforms that will create incentives for Indians to take risks and work harder.
First, let’s consider savings and investments. The splendid boom that began five years ago and is now winding down was driven by both a benign global business climate as well as a huge increase in the national savings rate. The latter has shot up by around 12 percentage points since the beginning of this decade—and higher domestic savings have been able to support the higher investment rate that led to accelerating growth.
The real challenge now will be to maintain the national savings rate above 35% of gross domestic product (GDP). Most of the rise in the savings rate these past few years was because of healthier corporate balance sheets and lower government deficits. Both are likely to deteriorate in the current downturn. It is safe to guess that national savings have peaked for now and will decline as a proportion of national output. Irresponsible fiscal policy could pull it down to levels that make it difficult for India to grow above 6% a year. That is something the Indian government should avoid.
The second big challenge will be to boost productivity, through more open product markets, better infrastructure, a more educated and skilled workforce, and access to capital for both large and small businesses. The march out of poverty is essentially about raising output per worker—and productivity has a big role to play in this.
These are trying times for policymakers. And there is too much confusion right now for a coherent policy to emerge. But even as the government is busy fighting many small fires, it should not take its eyes off the larger issue—that the economy will keep growing rapidly only if investments stay on track and there are reforms to boost productivity per worker.
Source
Tuesday, December 2, 2008
Milestones mark Chidambaram's tenure as FM
P Chidambaram's tenure as finance minister in the last 54 months saw the Indian economy register 9 per cent plus growth in three consecutive years that resulted in buoyant tax collections.
But record-high crude oil prices and populist schemes announced by the Congress-led coalition government eroded many gains achieved in the first four years.
Chidambaram's initiatives on the tax policy front resulted in revenue collections posting a compounded annual growth rate (CAGR) of 22 per cent.
He made tax administration more efficient and introduced new taxes like the fringe benefit tax, the cash withdrawal tax and the securities transaction tax. He also widened the service tax net to cover many more services.
But record-high crude oil prices and populist schemes announced by the Congress-led coalition government eroded many gains achieved in the first four years.
Chidambaram's initiatives on the tax policy front resulted in revenue collections posting a compounded annual growth rate (CAGR) of 22 per cent.
He made tax administration more efficient and introduced new taxes like the fringe benefit tax, the cash withdrawal tax and the securities transaction tax. He also widened the service tax net to cover many more services.
Also, the successful rollout of the value added tax by the state governments, with the Centre willing to compensate for any loss incurred for shifting to the new tax regime, happened in the last three years.
On the tax policy front, Chidambaram merged the tax rate of CENVAT, which is a tax on goods, and service tax, so that goods and services were equally taxed as part of the move to introduce a goods and services tax.
On the tax policy front, Chidambaram merged the tax rate of CENVAT, which is a tax on goods, and service tax, so that goods and services were equally taxed as part of the move to introduce a goods and services tax.
Buoyant tax revenues helped him rein in fiscal and revenue deficits under the Fiscal Responsibility and Budget Management Act, till March 2008.
From a fiscal deficit of 4.5 per cent in 2003-04, the aim was to bring it down to 3 per cent in the current fiscal ending March 2009. But the implementation of the Sixth Pay Commission recommendations, the populist farmers' debt waiver scheme and an economic slowdown will make the finance minister's task difficult.
Initial estimates show that the Centre is likely to run a fiscal deficit of 4.49 per cent of GDP in the current fiscal. This deficit will be much higher if off-budget liabilities on account of subsidies granted through bonds for the oil, food and fertiliser sectors are also included.
From a fiscal deficit of 4.5 per cent in 2003-04, the aim was to bring it down to 3 per cent in the current fiscal ending March 2009. But the implementation of the Sixth Pay Commission recommendations, the populist farmers' debt waiver scheme and an economic slowdown will make the finance minister's task difficult.
Initial estimates show that the Centre is likely to run a fiscal deficit of 4.49 per cent of GDP in the current fiscal. This deficit will be much higher if off-budget liabilities on account of subsidies granted through bonds for the oil, food and fertiliser sectors are also included.
On the expenditure front, Chidambaram had enforced a tight leash with revenue expenditure growing by only 12.69 per cent year-on-year. But capital expenditure, which is required to create productive assets, actually registered a negative CAGR of 3.2 per cent during his tenure.
The last three years also saw a rush of capital into the country as portfolio investors pumped in record money into the stock market and private equity players too contributed to this growth.
This created a piquant problem for the government and also for the Reserve Bank of India.
The last three years also saw a rush of capital into the country as portfolio investors pumped in record money into the stock market and private equity players too contributed to this growth.
This created a piquant problem for the government and also for the Reserve Bank of India.
Record flow of capital meant increase in money supply that put upward pressure on inflation. India's central bank responded by tightening its monetary policy by increasing key rates like repo rate (the rate at which the central bank lends money to the banks) from 6 per cent to a peak of 9 per cent.
The RBI also increased the cash-reserve ratio from 4.5 per cent to a peak level of 9 per cent to suck money out of the system.
These rates, however, were brought down in the last few months as the economy faced a liquidity squeeze in the wake of the global financial turmoil.
The RBI also increased the cash-reserve ratio from 4.5 per cent to a peak level of 9 per cent to suck money out of the system.
These rates, however, were brought down in the last few months as the economy faced a liquidity squeeze in the wake of the global financial turmoil.
Headline inflation remained under control for most of his tenure but the increase in crude oil prices resulted in inflation hitting a 16-year high of 12.9 per cent this year.
When Chidambaram took over as finance minister, the Wholesale Price Index-based inflation was 5.02 per cent. As crude oil prices have declined in the last few weeks, the annual inflation rate too has come down to less than 9 per cent.
Many capital market reforms like corporatisation and demutualisation of stock exchanges, and permitting foreign investors to pick up equity in local exchanges, were initiated during his tenure.
When Chidambaram took over as finance minister, the Wholesale Price Index-based inflation was 5.02 per cent. As crude oil prices have declined in the last few weeks, the annual inflation rate too has come down to less than 9 per cent.
Many capital market reforms like corporatisation and demutualisation of stock exchanges, and permitting foreign investors to pick up equity in local exchanges, were initiated during his tenure.
Tuesday, November 11, 2008
How to get out of the squeeze
Will the world come to a spectacular and disastrous financial end? Credit markets across the globe, which were flush with liquidity not too long ago, are in a limbo as inter-bank borrowing stands frozen after a series of prominent write-downs, insolvencies and collapses.Suddenly, it’s clear that everyone and everything is connected. This connection is due to the frictionless flow of capital across the globe. But while a crisis in leading economies can spill over to the rest of the world, the bubble itself cannot be attributed to this ‘connectedness’. What the bubble truly needed to ‘inflate’ beyond all expectations was the age-old artificial booster of purchasing power: leverage. And it is this leverage that lies at the root of most of the evils that threaten to disrupt the global financial system.In many ways, India presented the globally leveraged punters with a near-perfect investment story. Here was a nation of a billion people. A nation that was always brimming with talent but had somehow not managed to find its place in the sun. A cheap and seemingly unlimited supply of talented labour, a huge hinterland and mega-cities hungry for the creation of physical and digital infrastructure. A consuming class larger than the population of the United States.
Income expansion, capital expenditure, infrastructure creation and the resultant consumption boost were the themes driving the ‘India story’ over 2003-7. Mutual funds garnered record inflows, even as the FDIs and portfolio investments by foreign investors soared. The result wasn’t difficult to predict: an overvalued stock market, which, by January 2008, was assuming several years of future growth as if it was assured.The only saving grace is that India’s economy, as well as its financial markets, are not as hopelessly overleveraged as those of the West. Capital adequacies at most banks are in double digits, and many leading corporates are actually cash rich rather than debt burdened. The ones that are ‘leveraged’ (prime examples would be debt-heavy real estate companies, or investors with ‘naked’ derivative positions in the stock market) would, of course, be susceptible to disproportionate losses in any downturn.While there is no denying the fact that an unprecedented phase of economic growth has been initiated, stock markets can take a long time to recover from the shock of largescale selling by FIIs and hedge funds. This is because Indian stock markets have, for some time now, relied more on foreign investors than on local institutions for emotional anchoring. The ‘main street’ might continue to struggle forward somehow, but the ‘financial street’ will find the going tough as overseas risk appetite refuses to reappear.The BSE Sensex has crashed through the psychologically important 10,000 floor and is down more than 55% from its January 2008 peak. Corporate earnings are being downgraded almost on a daily basis, while sustained FII outflows take the wind out of every rebound. Worse, GDP growth downgrades are beginning to happen almost every week now. Interest rates are refusing to fall back, reducing the consumers’ appetite to buy assets such as homes, vehicles and appliances. Capital spending by companies and development spending by government is slowing down and the job market is awash with supply.So, who exactly are these overleveraged players? Start with the sub-prime American home-owner, who ‘leveraged’ by taking on a mort-gage that he could not normally service, in the hope of home prices rising forever. Investment banks then packaged these mortgages into collateralised debt obligations (CDOs) bundles and helped banks trade them out, so they could go back and create even more mortgages. In turn, this drove up the bank leverage and home prices in a self-fulfilling virtuous cycle.The smarter investment bankers set up hedge funds and leveraged their funds using cheap yen loans to buy (and re-sell) more CDOs. Even smarter bankers then created contracts (credit default swaps—CDS— another sophisticated example of the leveraging effect of derivatives) that would guarantee such loans so that buyers could buy and sell them even more recklessly. Result: the CDS market is over $50 trillion today, which is over 3.5 times the annual US economic output and roughly equal to the global economy.American householders, already on steroids with seemingly perpetual home-price surges, merrily increased consumption by taking on more and more credit. The goods and services they consumed were provided by the factories of China, India and other Asian tigers. In turn, these economies experienced a multi-factor boom.
All this propelled the world into a commodity bull run it had not seen for decades. Oil rose from under $20 to over $140 per barrel in five years or so, resulting in a transfer of wealth from commodity importer countries to exporters. Most commodities have had spectacular bull runs aided by leveraged hedge funds that took deep positions, and rolled over their contracts month after month, while increasing consumption in the physical world kept demand sufficiently high to justify such prices.
The tipping point came when the first defaults and write-downs were reported in the sub-prime CDO bundles that were being traded with wanton zest by investment and other banks. Soon enough, the writedowns began to affect prices (and trading volumes) across the CDO market. Prices of CDOs crashed and trading volumes dried up, aggravating an already painful situation. Soon, the write-downs on CDOs pushed investment and commercial banks into a dangerous situation where their capital was no longer enough to back even a small fraction of the risks on their books.
And,in a perverse response to this information, the short-term money market dried up. No bank would lend to another. The virtuous cycle turned vicious. Credit markets froze in a matter of days. Bond values crashed and write-downs drove several investment banks and hedge funds into MTM losses that proved larger than their shareholder funds. The result: bankruptcy and rival (or government) takeovers in some of the largest names in the business. Bear Stearns, Lehman Brothers, Wachovia and AIG fell one by one, in a bizarre domino-like sequence that left global financial markets gasping.
The evaporation of risk appetite took its toll on the hitherto rocking but ‘connected’ stock markets of China, India, Brazil and Hong Kong, with FIIs and hedge funds adopting the ‘rush home’ policy in response to their own liquidity problems. Currencies fell in response to this outflow, further exacerbating the pain for those who had chosen to stay invested. Local investors and funds, again with leveraged positions in the futures and ‘funded’ segments, were caught napping and suffered enormous losses. Their margin calls triggered further sales, driving down markets even more.
In San Francisco suburbs, falling home prices are pushing distressed borrowers into penury. Local banks from California to Massachusetts are on the verge of financial collapse as the frozen short-term money market refuses to thaw in response to the government-sponsored $800 billion bailout. The biggest investment banks, insurance companies and mortgage lenders are either dead or are being desperately revived from a coma. Along with spectacular hedge fund losses (largely arising out of the sub-prime mess), Americans have lost trillions of dollars of stock market wealth.Even after the hastily announced (but welcome) relief measures across Europe and the US, credit markets (the lifeblood of trade and commerce) refused to open up, pushing these economies closer to not only a recession, but financial breakdown. As we go to press, we can only worry about whether this is only the surface of a greater financial gridlock. Or whether the infusion of capital, loan funds and deposit insurance by governments will ease the pain.As credit shrinks around the world (most of it is due to de-leveraging and winding down on the ‘financial street’), a lot of good credit (related to the ‘main street’ business) will contract and disappear along with ‘bad’ credit (which was a contributor to pure financial leverage). Many innocents will be run over in this purging, putting the world economy on the backburner for quite some time. It was a great party, while it lasted. It’s time now to clear the mess. Will regulators use this as a final opportunity to control and tame leverage, that perennial enemy of discretion? If not, this is only the beginning of the end.We’ve already seen how this can affect us in India. So, as a small investor, what should you do now? It’s time for value, rather than growth, to be the yardstick for stock picking. As it is for keeping equity at modest levels (as opposed to aggressive) in your overall asset allocation. For those who are already heavy on equity, it may not make sense to withdraw this late; so park incremental wealth away from the stock market. And take some harsh switch decisions on existing portfolios.
Sunday, September 21, 2008
PM panel asks govt to formulate new manufacturing policy
New Delhi: A high-powered group appointed by Prime Minister Manmohan Singh has asked the government to formulate a new manufacturing policy to reverse deceleration in growth in the sector.
“Manufacturing policy would ensure focussed attention by the government to various aspects that would enable it to achieve the goals of manufacturing and employment generation,” an official release said.
The group was formed by the Prime Minister in January under the chairmanship of National Manufacturing Competitiveness Council chief V. Krishnamurthy for suggesting policy measures and immediate steps to reverse deceleration in growth of manufacturing.
Krishnamurthy submitted the final report to the Prime Minister on Saturday recommending suggestions on a number of issues such as policies on macroeconomics, tax, trade, technology and FDI.
The recommendations were in respect of specific sectors that require focussed action by the government. These have been classified into two sets of industry verticals employment intensive and strategically important industries.
It has also called for creating a mechanism suitably empowered to monitor developments in the sector on a regular basis and to suggest necessary action to the government in line with the manufacturing policy.
Manufacturing growth has been hovering around 7-7.5% for the past 20 years, while the sector itself has stagnated at 17% of the GDP during the same time.
For the economy to grow at an average of 9-10% in the medium to long term, the manufacturing sector needs to grow at about 12-14%. “Such growth is also required from the point of view of absorbing the surplus work force now dependent on rural sector,” it said.
Industrial growth declined to 5.7% in the first four months of this fiscal, against 9.7% a year ago. Manufacturing, which contributes about 80% to Index of Industrial Production, grew by 7.5% in July, slower than 8.8% a year ago.
The terms of reference for the group included suggestions on both short-term and long-term issues relating to the growth of the sector. The group in January-February this year submitted four interim reports-- in time for formulation of Budget 2008-09 and to assist in framing the Foreign Trade Policy -- on the measures required for an immediate arrest in the decline of the sector’s growth.
These interim reports form Part-II of the final report submitted, while Part-I deals with measures required for the long-term growth of the manufacturing sector.
The report took into account experience gained by the country in respect of the manufacturing sector during the past two decades as well as in the implementation of the National Strategy for Manufacturing (NSM 2006) prepared by NMCC during the past three years.
It has also considered policies adopted by various developing countries like Korea, Taiwan, Singapore, Hong Kong, Malaysia, Indonesia, Thailand and China, which have posted high growth rates of manufacturing for a prolonged period.
Secretaries in the Ministries of Finance, Commerce, Textiles, Revenue and Industrial Policy and Promotion as well as the Member Secretary of NMCC were part of the group.
“Manufacturing policy would ensure focussed attention by the government to various aspects that would enable it to achieve the goals of manufacturing and employment generation,” an official release said.
The group was formed by the Prime Minister in January under the chairmanship of National Manufacturing Competitiveness Council chief V. Krishnamurthy for suggesting policy measures and immediate steps to reverse deceleration in growth of manufacturing.
Krishnamurthy submitted the final report to the Prime Minister on Saturday recommending suggestions on a number of issues such as policies on macroeconomics, tax, trade, technology and FDI.
The recommendations were in respect of specific sectors that require focussed action by the government. These have been classified into two sets of industry verticals employment intensive and strategically important industries.
It has also called for creating a mechanism suitably empowered to monitor developments in the sector on a regular basis and to suggest necessary action to the government in line with the manufacturing policy.
Manufacturing growth has been hovering around 7-7.5% for the past 20 years, while the sector itself has stagnated at 17% of the GDP during the same time.
For the economy to grow at an average of 9-10% in the medium to long term, the manufacturing sector needs to grow at about 12-14%. “Such growth is also required from the point of view of absorbing the surplus work force now dependent on rural sector,” it said.
Industrial growth declined to 5.7% in the first four months of this fiscal, against 9.7% a year ago. Manufacturing, which contributes about 80% to Index of Industrial Production, grew by 7.5% in July, slower than 8.8% a year ago.
The terms of reference for the group included suggestions on both short-term and long-term issues relating to the growth of the sector. The group in January-February this year submitted four interim reports-- in time for formulation of Budget 2008-09 and to assist in framing the Foreign Trade Policy -- on the measures required for an immediate arrest in the decline of the sector’s growth.
These interim reports form Part-II of the final report submitted, while Part-I deals with measures required for the long-term growth of the manufacturing sector.
The report took into account experience gained by the country in respect of the manufacturing sector during the past two decades as well as in the implementation of the National Strategy for Manufacturing (NSM 2006) prepared by NMCC during the past three years.
It has also considered policies adopted by various developing countries like Korea, Taiwan, Singapore, Hong Kong, Malaysia, Indonesia, Thailand and China, which have posted high growth rates of manufacturing for a prolonged period.
Secretaries in the Ministries of Finance, Commerce, Textiles, Revenue and Industrial Policy and Promotion as well as the Member Secretary of NMCC were part of the group.
Saturday, August 30, 2008
India's economic growth slows, GDP drops to 7.9 pc in Q1
New Delhi, August 29: Indian economic growth moderated to 7.9 per cent in the first quarter of current fiscal, against 9.2 per a year ago as rising borrowing costs impacted manufacturing and some other sectors.
However, moderation in the GDP growth was expected as RBI hardened interest rates to control double-digit inflation.
If the first quarter GDP growth continues in the remaining months of this fiscal, the economy would expand at the rate more or less projected by Finance Minister P Chidambaram.
As he projected the economy to grow by close to 8 per cent, compared to 9 per cent in the previous fiscal.
Manufacturing growth almost halved to 5.6 per cent, against 10.9 per cent as rising interest rates impacted their expansion. Even though agriculture grew by lower rate of three per cent, it is quite considerable on the high base of 4.4 per cent.
The other sectors which witnessed considerable decline in growth rate are electricity, gas and water supply, which expanded at the rate of 2.6 per cent against 7.9 per cent.
In the services sector, trade, hotels, transport and communication grew by 11.2 per cent, against 13.1 per cent.
While, financing, insurance, real estate and business services expanded by 9.3 per cent, against 12.6 per cent.
However, community, social and personal services grew by higher rate of 8.4 per cent, against 5.2 per cent.
Construction activities also expanded at higher rate of 11.4 per cent, as compared to 7.7 per cent, while mining and quaring grew by 4.8 per cent, against 1.7 per cent.
In absolute terms, India's GDP stood at Rs 7,82,357 crore in the first quarter of this fiscal, against 7,24,949 crore in the corresponding period of 2007-08.
However, moderation in the GDP growth was expected as RBI hardened interest rates to control double-digit inflation.
If the first quarter GDP growth continues in the remaining months of this fiscal, the economy would expand at the rate more or less projected by Finance Minister P Chidambaram.
As he projected the economy to grow by close to 8 per cent, compared to 9 per cent in the previous fiscal.
Manufacturing growth almost halved to 5.6 per cent, against 10.9 per cent as rising interest rates impacted their expansion. Even though agriculture grew by lower rate of three per cent, it is quite considerable on the high base of 4.4 per cent.
The other sectors which witnessed considerable decline in growth rate are electricity, gas and water supply, which expanded at the rate of 2.6 per cent against 7.9 per cent.
In the services sector, trade, hotels, transport and communication grew by 11.2 per cent, against 13.1 per cent.
While, financing, insurance, real estate and business services expanded by 9.3 per cent, against 12.6 per cent.
However, community, social and personal services grew by higher rate of 8.4 per cent, against 5.2 per cent.
Construction activities also expanded at higher rate of 11.4 per cent, as compared to 7.7 per cent, while mining and quaring grew by 4.8 per cent, against 1.7 per cent.
In absolute terms, India's GDP stood at Rs 7,82,357 crore in the first quarter of this fiscal, against 7,24,949 crore in the corresponding period of 2007-08.
Thursday, August 28, 2008
Indian Economy Overview
India's economy is on the fulcrum of an ever increasing growth curve. With positive indicators such as a stable 8-9 per cent annual growth, rising foreign exchange reserves, a booming capital market and a rapidly expanding FDI inflows, India has emerged as the second fastest growing major economy in the world.
The economy has been growing at an average growth rate of 8.8 per cent in the last four fiscal years (2003-04 to 2006-07), with the 2006-07 growth rate of 9.6 per cent being the highest in the last 18 years. Significantly, the industrial and service sectors have been contributing a major part of this growth, suggesting the structural transformation underway in the Indian economy.
For example, industrial and services sectors have logged in a 10.63 and 11.18 per cent growth rate in 2006-07 respectively, against 8.02 per and 11.01 cent in 2005-06. Similarly, manufacturing grew by 8.98 per cent and 12 per cent in 2005-06 and 2006-07 and transport, storage and communication recorded a growth of 14.65 and per cent 16.64 per cent, respectively.
Another significant feature of the growth process has been the consistently increasing savings and investment rate. While the gross saving rate as a proportion of GDP has increased from 23.5 per cent in 2001-02 to 34.8 per cent in 2006-07, the investment rate-reflected as the gross capital formation as a proportion of GDP-has increased from 22.8 per cent in 2001-02 to 35.9 per cent in 2006-07.
During April-December 2007-08, gross fixed capital formation has accelerated to 32.6 per cent of GDP, from 30.5 per cent of GDP in the corresponding period in 2006-07. Continued
The economy has been growing at an average growth rate of 8.8 per cent in the last four fiscal years (2003-04 to 2006-07), with the 2006-07 growth rate of 9.6 per cent being the highest in the last 18 years. Significantly, the industrial and service sectors have been contributing a major part of this growth, suggesting the structural transformation underway in the Indian economy.
For example, industrial and services sectors have logged in a 10.63 and 11.18 per cent growth rate in 2006-07 respectively, against 8.02 per and 11.01 cent in 2005-06. Similarly, manufacturing grew by 8.98 per cent and 12 per cent in 2005-06 and 2006-07 and transport, storage and communication recorded a growth of 14.65 and per cent 16.64 per cent, respectively.
Another significant feature of the growth process has been the consistently increasing savings and investment rate. While the gross saving rate as a proportion of GDP has increased from 23.5 per cent in 2001-02 to 34.8 per cent in 2006-07, the investment rate-reflected as the gross capital formation as a proportion of GDP-has increased from 22.8 per cent in 2001-02 to 35.9 per cent in 2006-07.
During April-December 2007-08, gross fixed capital formation has accelerated to 32.6 per cent of GDP, from 30.5 per cent of GDP in the corresponding period in 2006-07. Continued
Wednesday, August 27, 2008
India to reclaim Mughal-age economic aura in next 50 yrs
India and China are set to become the world's leading economic and political powers in about 50 years reclaiming the glory of the year 1700 when Mughal India and Qing China each accounted for about one-fourth of world GDP, a leading German bank said on Tuesday.
According to data compiled by economic historian Angus Maddison, as recently as 1700, Qing China and Mughal India each represented a little less than 25 per cent of world GDP, but their respective shares dropped to less than 5 per cent by 1950, the Deutsche Bank said in a report.
However, China and India are poised to reclaim their places as the world's largest economies over the next half century, Deutsche Bank Research said in the report.
Noting that the four BRIC nations Brazil, Russia, India and China are characterised by high economic growth rates, large populations and expanding middle classes, the report said China and India would ‘re-emerge as major economic and political powers over the next fifty years or so and China is projected to replace the United States as the world's largest economy by 2040’.
In his book The World Economy: A Millennial Perspective, economic historian Angus Maddison has noted that during the years 0 to 1000, India figured as the world's pre-eminent economic power, closely followed by China. During 1500-1600 years also, India was only next to China in terms of world GDP share and remained among the top till as late as 17th century.
India was the world's largest economy with a 32.9 per cent share of the worldwide GDP in the first century and 28.9 per cent in the 11th century.
According to data compiled by economic historian Angus Maddison, as recently as 1700, Qing China and Mughal India each represented a little less than 25 per cent of world GDP, but their respective shares dropped to less than 5 per cent by 1950, the Deutsche Bank said in a report.
However, China and India are poised to reclaim their places as the world's largest economies over the next half century, Deutsche Bank Research said in the report.
Noting that the four BRIC nations Brazil, Russia, India and China are characterised by high economic growth rates, large populations and expanding middle classes, the report said China and India would ‘re-emerge as major economic and political powers over the next fifty years or so and China is projected to replace the United States as the world's largest economy by 2040’.
In his book The World Economy: A Millennial Perspective, economic historian Angus Maddison has noted that during the years 0 to 1000, India figured as the world's pre-eminent economic power, closely followed by China. During 1500-1600 years also, India was only next to China in terms of world GDP share and remained among the top till as late as 17th century.
India was the world's largest economy with a 32.9 per cent share of the worldwide GDP in the first century and 28.9 per cent in the 11th century.
Tuesday, August 26, 2008
Indian Economy: High Inflation, Slowing Growth – an Indian Economy of Gloom?
Some Indians believe that India is protected from many of the economic hardships felt by other nations around the world. The country’s strong domestic economy and lack of reliance on Western nations means that it can shield itself from external hardships to a certain extent. That extent may have just been reached, however. With inflation reaching 12.44% in August of 2008, almost triple what it was a year before and the highest in 13 years, India suddenly seems just as susceptible to financial troubles as the rest of the world . Couple inflation with shortages of food and the picture becomes worse. Even with record grain production in the 2007-2008 season, the increased demand means an overall shortage. "Despite the recent upward trend in food grains production, India's food security remains an area of concern," the Prime Minister's Economic Advisory Council (EAC) said in its economic guidance for 2008-2009. This gloomy message was echoed in the EAC’s more recent growth forecast, which was cut from 9.1% to 7.7% for 2009, weak by Indian standards. Developed nations can afford lower growth rates, with fewer people suffering from poverty and higher GDP levels. Much as with China and the other emerging economies, India needs high growth rates so that better conditions can trickle down to the hundreds of millions still living subsistence lives. It could be argued that the need is more pressing in India, however, as democracy tends to amplify unhappiness. Indeed, Indian newspapers recently have been filled with gloomy pronouncements about the economy and the government. Contributing to this negative sentiment are the credit crunch and oil prices. In an effort to protect its citizens, the Indian government has absorbed much of this oil-price-rise, and has taken a hit in its trade, with a widening deficit. India is an import-dependent economy, which means by nature it would have a deficit. It produces almost none of its own oil which can be a major budget worry when energy prices get out of hand. In fact, in early 2007, Prime Minister Singh asked Ali al-Naimi, Saudi Oil Minister, to help stabilize the oil market and to help keep prices at a level developing countries like India could manage. As we all know, that is easier said than done. And with elections coming up soon, the government is dishing out incentives including 21% salary hikes across five million government employees, plus more than $15 billion in aid for struggling farmers. These incentives have a feel-good factor but do nothing to help the country’s economic position. Meanwhile the elections themselves are a massive undertaking, involving more than 670 million people and quite a bit of expense. Put it all together and you have a growing costs, a widening deficit and slowing growth – plenty of cause, many would argue, for a bit of gloom. Nevertheless, a growth of nearly 8% per year, consistently, would mean doubling the economy in just over a decade. And if India could sustain this growth rate until 2015, the Indian economy would surpass those of Italy, France, and the UK by 2015, and those of Germany, Japan and the US by 2050. Only China would be mightier at that point. In fact, when we look at growth rates over the last five years, 7.7% growth would be just over the average of 7,35%:
Year GDP
2003 4.3%
2004 8.3%
2005 6.2%
2006 8.4%
2007 9.2%
2008 7.7%
Although there are plenty of reasons to be gloomy right now, the future continues to hold a lot of promise for India.
Santos de la Raya, EconomyWatch.com
Wednesday, August 6, 2008
Why India might overtake China
It has only been a few years since Asia bulls have been touting the arrival of the Chinese Century, citing that nation's enormous potential.
Now, get ready for predictions of the India Century.
That, in fact, was the title of a recent white paper by the Chicago-based consultancy Keystone-India, founded by a group of top economists from Ernst & Young who believe that India is on track to surpass China in growth. "We believe this is India's moment," declares Keystone Chief Economist William T Wilson.
China has a two decade-long track record of 9.5% average annual growth, exports 10 times as much as India, and dwarfs India as a magnet for foreign investment.
By contrast, India has achieved an annual growth rate of 7% or higher only seven times in the past two decades. And largely because of its unruly politics and stifling bureaucracy, it wasn't long ago that economists bemoaned the "Hindu growth rate," implying the nation is simply culturally incapable of achieving high growth.
Even under Keystone's projections, India wouldn't match China's current hypergrowth rates for at least another 15 years. And even by 2050, China's economy would be bigger measured in US dollars.
But longer term, Keystone contends India will be in a stronger position. It projects that China's average annual growth will peak at 8.8 per cent over the next five years, and then gradually trend downward to under 7 per cent in the 2020s and around 4% by the 2040s.
India's annual growth is projected to rise to around 7.3 per cent by 2010 and stay over 7 per cent until the mid-2030s, and still be in the 6% range until 2050.
What's more, Wilson contends that Keystone's forecasts are conservative.
Demographics
The biggest reason India has more long-term growth potential is simply that its population is younger and is growing more quickly than China's. Currently, China has 300 million more people than India.
But because of its very low birth rate, largely due to the one-child policy, China's population is expected to peak at around 1.45 billion by 2030.
India's population is expected to increase by 350 million by 2030, more new people than the US, Western Europe, and China combined. India will have 200 million more people than China by midcentury.
What's more, China's population is aging rapidly. As a result, the number of working-age Chinese is projected to peak in 2020 and start declining steadily thereafter, while India's workforce will keep growing for at least four more decades.
However, India's fertility rate also is declining, meaning future families will have fewer children to support and more to spend on consumption.
Development experts call this combination of a growing workforce and declining fertility a 'demographic dividend,' which helped power explosive economic growth in East Asia's Tiger economies from the 1960s through the early 1990s.
Capital Efficiency
The big driver of China's economic growth has been massive investment, equal to 40% to 45% of gross domestic product a year, an extraordinarily high rate on world standards�and twice the percentage of India's.
In 2004, investment in China was equal to half of its $1.5 trillion in GDP. In that context, China's 9.5% growth rate that year shouldn't be too surprising.
"It is staggering how much investment was needed to power Chinese growth in recent years," Wilson notes. "Any nation investing half of GDP in fixed-capital income looks a lot like pre-crisis Asia."
India, however, gets much more bang for the rupee. It has achieved 6% average growth with an investment rate half that of China's, around 22% to 23% a year.
Investment Growth
Many signs point to big increases in investment in India, Wilson says.
In fact, he estimates investment in India could reach 35% of GDP within a decade, which would enable it to match China's 9% plus growth. One reason is that the savings rate in India rose from 23.5% of GDP in 2001 to 28.1% in 2004.
And because of its growing workforce and the decline in family size, India's savings rate should continue to rise to a projected 37% in 20 years.
Since investment is highly correlated to domestic savings, that should translate into higher investment and economic growth.
Meanwhile, the rapidly aging population of China means that its savings rate also is likely to drop in the future, as it has in most other nations with graying workforces.
Second, India thus far has gotten by with minimal foreign investment. Keystone notes that in the past four years alone, China has drawn $200 billion more in foreign investment.
However, India is planning to open up many long-protected sectors that have great allure to foreign investors and that could draw huge inflows of money.
They include telecom, where Indian demand now is growing even faster than China's, commercial real estate, and department stores. Although some of the reforms have stalled recently due to domestic political opposition, Wilson believes the government will prevail.
"If you look at the institutional changes and the number of industries that have liberalised over the past five years, the pace has been phenomenal,he says.
Wilson predicts India's real estate sector will draw a huge influx of money from foreign hedge funds, and liberalisation of retail will be 'the real big bang' for the economy.
New Entrepreneurs
Indian industry so far has been led by many of the big business families and conglomerates that dominated when India was still a quasi-socialist, heavily regulated economy.
They generally have done a good job of taking advantage of new opportunities offered by liberalization since the early 1990s. But the more dynamic companies in India are smaller ones that are led by new generations of entrepreneurs who take greater risks or are more connected to the global economy.
These new companies also have more creative managers, argues Debashis Ghosh, another Keystone partner who worked at Ernst & Young.
Keystone focuses on researching mid-sized Indian companies with $10 million to $100 million in annual sales.
"The bigger companies are still led by oldschool types who used to depend on access to government and got huge when there was nobody else in the game.
"Because they had scale, foreigners had to deal with them," says Ghosh.
"Now, though, the top talent from the Indian Institutes of Technology and the Indian Institutes of Management are flowing into the mid-sized sector. That is like getting a management team of all Wharton and Massachusetts Institute of Technology grads."
As a result, he contends that the Indian companies of the future are more dynamic than those of China, where management tends to be weak.
Higher Productivity
India has averaged respectable productivity growth of 2.5% a year over the past two decades. But that can grow sharply, thanks to liberalization of many industries, a literacy rate that has risen from 18% in 1951 to 65% now, and India's rising openness to foreign trade, which has jumped from 15% of GDP in 1991 to 26% now.
Manufacturing Surge China dwarfs India as a manufacturing power, especially for export.
And it will be a long time before India, with its inadequate infrastructure and components supply base, will be a serious export rival. But in recent years, India's domestic manufacturing industry has been growing strongly.
What's more, a number of Indian companies are especially strong in high-end manufacturing, such as auto parts, power generators, and medical equipment, that requires a lot of engineering.
In terms of quality and efficiency, several Indian auto parts companies are on par with the US.
"If you look at engineering work across the board, in industries from pharmaceuticals to telecom, what India is doing is an order of magnitude beyond what China is doing," says Keystone's Ghosh.
Anyone who visits both countries today may find it hard to imagine India overtaking China in economic performance.
But when you look at the fundamental drivers�growth in the workforce, fixed investment, and productivity -- over the long run the prospect looks a lot more plausible.
Now, get ready for predictions of the India Century.
That, in fact, was the title of a recent white paper by the Chicago-based consultancy Keystone-India, founded by a group of top economists from Ernst & Young who believe that India is on track to surpass China in growth. "We believe this is India's moment," declares Keystone Chief Economist William T Wilson.
China has a two decade-long track record of 9.5% average annual growth, exports 10 times as much as India, and dwarfs India as a magnet for foreign investment.
By contrast, India has achieved an annual growth rate of 7% or higher only seven times in the past two decades. And largely because of its unruly politics and stifling bureaucracy, it wasn't long ago that economists bemoaned the "Hindu growth rate," implying the nation is simply culturally incapable of achieving high growth.
Even under Keystone's projections, India wouldn't match China's current hypergrowth rates for at least another 15 years. And even by 2050, China's economy would be bigger measured in US dollars.
But longer term, Keystone contends India will be in a stronger position. It projects that China's average annual growth will peak at 8.8 per cent over the next five years, and then gradually trend downward to under 7 per cent in the 2020s and around 4% by the 2040s.
India's annual growth is projected to rise to around 7.3 per cent by 2010 and stay over 7 per cent until the mid-2030s, and still be in the 6% range until 2050.
What's more, Wilson contends that Keystone's forecasts are conservative.
Demographics
The biggest reason India has more long-term growth potential is simply that its population is younger and is growing more quickly than China's. Currently, China has 300 million more people than India.
But because of its very low birth rate, largely due to the one-child policy, China's population is expected to peak at around 1.45 billion by 2030.
India's population is expected to increase by 350 million by 2030, more new people than the US, Western Europe, and China combined. India will have 200 million more people than China by midcentury.
What's more, China's population is aging rapidly. As a result, the number of working-age Chinese is projected to peak in 2020 and start declining steadily thereafter, while India's workforce will keep growing for at least four more decades.
However, India's fertility rate also is declining, meaning future families will have fewer children to support and more to spend on consumption.
Development experts call this combination of a growing workforce and declining fertility a 'demographic dividend,' which helped power explosive economic growth in East Asia's Tiger economies from the 1960s through the early 1990s.
Capital Efficiency
The big driver of China's economic growth has been massive investment, equal to 40% to 45% of gross domestic product a year, an extraordinarily high rate on world standards�and twice the percentage of India's.
In 2004, investment in China was equal to half of its $1.5 trillion in GDP. In that context, China's 9.5% growth rate that year shouldn't be too surprising.
"It is staggering how much investment was needed to power Chinese growth in recent years," Wilson notes. "Any nation investing half of GDP in fixed-capital income looks a lot like pre-crisis Asia."
India, however, gets much more bang for the rupee. It has achieved 6% average growth with an investment rate half that of China's, around 22% to 23% a year.
Investment Growth
Many signs point to big increases in investment in India, Wilson says.
In fact, he estimates investment in India could reach 35% of GDP within a decade, which would enable it to match China's 9% plus growth. One reason is that the savings rate in India rose from 23.5% of GDP in 2001 to 28.1% in 2004.
And because of its growing workforce and the decline in family size, India's savings rate should continue to rise to a projected 37% in 20 years.
Since investment is highly correlated to domestic savings, that should translate into higher investment and economic growth.
Meanwhile, the rapidly aging population of China means that its savings rate also is likely to drop in the future, as it has in most other nations with graying workforces.
Second, India thus far has gotten by with minimal foreign investment. Keystone notes that in the past four years alone, China has drawn $200 billion more in foreign investment.
However, India is planning to open up many long-protected sectors that have great allure to foreign investors and that could draw huge inflows of money.
They include telecom, where Indian demand now is growing even faster than China's, commercial real estate, and department stores. Although some of the reforms have stalled recently due to domestic political opposition, Wilson believes the government will prevail.
"If you look at the institutional changes and the number of industries that have liberalised over the past five years, the pace has been phenomenal,he says.
Wilson predicts India's real estate sector will draw a huge influx of money from foreign hedge funds, and liberalisation of retail will be 'the real big bang' for the economy.
New Entrepreneurs
Indian industry so far has been led by many of the big business families and conglomerates that dominated when India was still a quasi-socialist, heavily regulated economy.
They generally have done a good job of taking advantage of new opportunities offered by liberalization since the early 1990s. But the more dynamic companies in India are smaller ones that are led by new generations of entrepreneurs who take greater risks or are more connected to the global economy.
These new companies also have more creative managers, argues Debashis Ghosh, another Keystone partner who worked at Ernst & Young.
Keystone focuses on researching mid-sized Indian companies with $10 million to $100 million in annual sales.
"The bigger companies are still led by oldschool types who used to depend on access to government and got huge when there was nobody else in the game.
"Because they had scale, foreigners had to deal with them," says Ghosh.
"Now, though, the top talent from the Indian Institutes of Technology and the Indian Institutes of Management are flowing into the mid-sized sector. That is like getting a management team of all Wharton and Massachusetts Institute of Technology grads."
As a result, he contends that the Indian companies of the future are more dynamic than those of China, where management tends to be weak.
Higher Productivity
India has averaged respectable productivity growth of 2.5% a year over the past two decades. But that can grow sharply, thanks to liberalization of many industries, a literacy rate that has risen from 18% in 1951 to 65% now, and India's rising openness to foreign trade, which has jumped from 15% of GDP in 1991 to 26% now.
Manufacturing Surge China dwarfs India as a manufacturing power, especially for export.
And it will be a long time before India, with its inadequate infrastructure and components supply base, will be a serious export rival. But in recent years, India's domestic manufacturing industry has been growing strongly.
What's more, a number of Indian companies are especially strong in high-end manufacturing, such as auto parts, power generators, and medical equipment, that requires a lot of engineering.
In terms of quality and efficiency, several Indian auto parts companies are on par with the US.
"If you look at engineering work across the board, in industries from pharmaceuticals to telecom, what India is doing is an order of magnitude beyond what China is doing," says Keystone's Ghosh.
Anyone who visits both countries today may find it hard to imagine India overtaking China in economic performance.
But when you look at the fundamental drivers�growth in the workforce, fixed investment, and productivity -- over the long run the prospect looks a lot more plausible.
Courtsey:Specials.rediff.com
Excerpted from: Chindia-How China and India are Revolutionizing Global Business by Pete Engardio
Tuesday, July 29, 2008
The world's largest economies
India
The Indian economy is the 12th largest in the world. That is, India's gross domestic product stands at $1.171 trillion.
However, in terms of purchasing power parity, India is the world's fourth largest economy. Its GDP in purchasing power parity terms is at $3.092 trillion.
These are the year 2007 figures, recently released by the World Bank.
By definition, purchasing power parity (PPP) is an economic theory that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency's purchasing power.
India is the one of the world's fastest growing economies, yet its annual per capita income remains quite low at $950, or about Rs 40,000. That puts India in the 160th spot.
Incidentally, World Bank figures show that the world's GDP is at $54.347 trillion. India accounts for just over 2 per cent of global GDP.
1. United States
The American GDP is at $13.812 trillion, making it the world's largest economy. It accounts for more than 25 per cent of the entire world's GDP!
In terms of purchasing power parity too, the United States is the world's leading economy.
However, its per capita income at $46,040, per year, pegs it at the 15th spot in the world.
2. Japan
Japan, with a GDP of $4.377 trillion, is the world's second largest economy.
However, in terms of purchasing power parity, Japan is ranked third by the World Bank. It's GDP in PPP terms is $4.283 trillion.
Japan's per capita income (annual) is $37,670, making it the 25th highest in the world.
3. Germany
Germany is the world's third largest, with its GDP at $3.297 trillion.
But in PPP terms, Germany is the world's fifth largest economy. It's GDP in PPP terms is at $2.752 trillion.
Its per capita income is the 23rd highest in the world, at $38,860.
4. China
China, the Asian giant, is the world's fourth largest economy with a GDP of $3.281 trillion; but in purchasing power parity terms it ranks second at $7.055 trillion.
It is the world's fastest growing major economy and its giant strides have taken the world by a storm. Economists predict that over the next few decades, it could topple the US as the world's largest economy.
China's per capita income, however, is still low at $2,630 per year.
5. United Kingdom
Britain is the world's fifth largest economy. Its GDP is at $2.728 trillion.
In purchasing power parity terms, the United Kingdom's GDP stands at $2.082 trillion making it the seventh largest in the world.
Britain is a rich nation. Its per capita income is at an impressive $42,740. That would rank it in the 19th spot
6. France
The French GDP is at $2.563 trillion, making it the world's sixth largest economy; but in terms of PPP, it is the world's 8th largest (GDP in PPP terms, $2.054 trillion).
The per capita income of the French at $38,500 makes them the 24th richest people in the world.
7. Italy
Italy's GDP in absolute terms is at $2.107 trillion. That makes it the planet's seventh largets economy.
However, in purchasing power parity terms its GDP is at $1.780 trillion and its rank is 10th.
Italians' per capita income is the 30th highest in the world. It is $33,540.
8. Spain
Spain is the eighth largest economy with its GDP at $1.429 trillion. In purchasing power parity, however, it slips to the 11th spot ($1.373 trillion).
With a per capita income of $29,450 per year, its people are the 36th richest in the world.
9. Canada
The Canadian GDP stands at $1.326 trillion, making it the world's ninth largest economy.
In PPP terms, however, it stands 14th in the world. Its GDP in PPP terms is at $1.178 trillion.
Its people enjoy a comfortable life with a per capita income of $39,420, which is 22nd highest in the world.
10. Brazil
The Brazilian economy too has been growing at a scorching pace. It is the world's 10th largest economy with a GDP of $1.314 trillion.
But in terms of purchasing power (GDP - $1.834 trillion), it is better placed at number 9.
Amongst the emerging economies, it has one of the best per capita income figures -- $5,910. This places it in the 85th spot in the world
11. Russian Federation
In absolute GDP terms, Russia -- at $1.291 trillion -- is the world's 11th largest economy., but it jumps to the 6th spot in terms of purchasing power parity ($2.088 trillion).
Its per capita income is at $7,650, the 78th highest in the world.
The Indian economy is the 12th largest in the world. That is, India's gross domestic product stands at $1.171 trillion.
However, in terms of purchasing power parity, India is the world's fourth largest economy. Its GDP in purchasing power parity terms is at $3.092 trillion.
These are the year 2007 figures, recently released by the World Bank.
By definition, purchasing power parity (PPP) is an economic theory that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency's purchasing power.
India is the one of the world's fastest growing economies, yet its annual per capita income remains quite low at $950, or about Rs 40,000. That puts India in the 160th spot.
Incidentally, World Bank figures show that the world's GDP is at $54.347 trillion. India accounts for just over 2 per cent of global GDP.
1. United States
The American GDP is at $13.812 trillion, making it the world's largest economy. It accounts for more than 25 per cent of the entire world's GDP!
In terms of purchasing power parity too, the United States is the world's leading economy.
However, its per capita income at $46,040, per year, pegs it at the 15th spot in the world.
2. Japan
Japan, with a GDP of $4.377 trillion, is the world's second largest economy.
However, in terms of purchasing power parity, Japan is ranked third by the World Bank. It's GDP in PPP terms is $4.283 trillion.
Japan's per capita income (annual) is $37,670, making it the 25th highest in the world.
3. Germany
Germany is the world's third largest, with its GDP at $3.297 trillion.
But in PPP terms, Germany is the world's fifth largest economy. It's GDP in PPP terms is at $2.752 trillion.
Its per capita income is the 23rd highest in the world, at $38,860.
4. China
China, the Asian giant, is the world's fourth largest economy with a GDP of $3.281 trillion; but in purchasing power parity terms it ranks second at $7.055 trillion.
It is the world's fastest growing major economy and its giant strides have taken the world by a storm. Economists predict that over the next few decades, it could topple the US as the world's largest economy.
China's per capita income, however, is still low at $2,630 per year.
5. United Kingdom
Britain is the world's fifth largest economy. Its GDP is at $2.728 trillion.
In purchasing power parity terms, the United Kingdom's GDP stands at $2.082 trillion making it the seventh largest in the world.
Britain is a rich nation. Its per capita income is at an impressive $42,740. That would rank it in the 19th spot
6. France
The French GDP is at $2.563 trillion, making it the world's sixth largest economy; but in terms of PPP, it is the world's 8th largest (GDP in PPP terms, $2.054 trillion).
The per capita income of the French at $38,500 makes them the 24th richest people in the world.
7. Italy
Italy's GDP in absolute terms is at $2.107 trillion. That makes it the planet's seventh largets economy.
However, in purchasing power parity terms its GDP is at $1.780 trillion and its rank is 10th.
Italians' per capita income is the 30th highest in the world. It is $33,540.
8. Spain
Spain is the eighth largest economy with its GDP at $1.429 trillion. In purchasing power parity, however, it slips to the 11th spot ($1.373 trillion).
With a per capita income of $29,450 per year, its people are the 36th richest in the world.
9. Canada
The Canadian GDP stands at $1.326 trillion, making it the world's ninth largest economy.
In PPP terms, however, it stands 14th in the world. Its GDP in PPP terms is at $1.178 trillion.
Its people enjoy a comfortable life with a per capita income of $39,420, which is 22nd highest in the world.
10. Brazil
The Brazilian economy too has been growing at a scorching pace. It is the world's 10th largest economy with a GDP of $1.314 trillion.
But in terms of purchasing power (GDP - $1.834 trillion), it is better placed at number 9.
Amongst the emerging economies, it has one of the best per capita income figures -- $5,910. This places it in the 85th spot in the world
11. Russian Federation
In absolute GDP terms, Russia -- at $1.291 trillion -- is the world's 11th largest economy., but it jumps to the 6th spot in terms of purchasing power parity ($2.088 trillion).
Its per capita income is at $7,650, the 78th highest in the world.
Wednesday, July 16, 2008
Fitch downgrades Indian currency, who downgrades fitch?
Fitch downgrades Indian currency, who downgrades fitch?
There has been a lot of speculation for many days now that credit rating agencies would downgrade India ratings.
Fitch was the first and it downgraded local currency default rating from Stable to Negative. The overall rating stays the same at BBB-.
The press release says :
The revision to the local currency Outlook is based on a considerable deterioration in the central government’s fiscal position in 2008-09 (FY09), combined with a notable increase in government debt issuance to finance subsidies not captured in the budget,” said James McCormack, Head of Asia Sovereign ratings.
Fitch forecasts the central government deficit may increase from 2.8% of GDP in FY08 to 4.5% of GDP in FY09 based in part on higher on-budget subsidies, interest payments and public wages. The agency expects bonds issued to oil and fertiliser companies to reach at least 2% of GDP this year, implying an underlying central government deficit of 6.5% of GDP or higher.
The markets reacted and fell across all kinds of markets.
The higher fiscal deficit has been one of the weakest links in Indian economy for a long time and there is no surprise. I also calculated the off-balance sheet items and clearly it makes the entire fiscal deficit much larger than reported.
However, what is ironical is Fitch downgrades India but we don’t have any mechanism to downgrade Fitch itself? I am sure Moody’s and S&P will follow as well and we all know their role in the recent sub-prime mess. Should these ratings continue to be so important that they lead to a bloodbath in markets? The markets clearly seem to be valuing them still despite they failing time and again to safeguard the markets.
There has been a lot of speculation for many days now that credit rating agencies would downgrade India ratings.
Fitch was the first and it downgraded local currency default rating from Stable to Negative. The overall rating stays the same at BBB-.
The press release says :
The revision to the local currency Outlook is based on a considerable deterioration in the central government’s fiscal position in 2008-09 (FY09), combined with a notable increase in government debt issuance to finance subsidies not captured in the budget,” said James McCormack, Head of Asia Sovereign ratings.
Fitch forecasts the central government deficit may increase from 2.8% of GDP in FY08 to 4.5% of GDP in FY09 based in part on higher on-budget subsidies, interest payments and public wages. The agency expects bonds issued to oil and fertiliser companies to reach at least 2% of GDP this year, implying an underlying central government deficit of 6.5% of GDP or higher.
The markets reacted and fell across all kinds of markets.
The higher fiscal deficit has been one of the weakest links in Indian economy for a long time and there is no surprise. I also calculated the off-balance sheet items and clearly it makes the entire fiscal deficit much larger than reported.
However, what is ironical is Fitch downgrades India but we don’t have any mechanism to downgrade Fitch itself? I am sure Moody’s and S&P will follow as well and we all know their role in the recent sub-prime mess. Should these ratings continue to be so important that they lead to a bloodbath in markets? The markets clearly seem to be valuing them still despite they failing time and again to safeguard the markets.
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