Global Crisis and the Indian EconomyOn a Few Unconventional Assertions

Sugata Marjit Centre for Studies in Social Sciences, Calcutta July,2009

MOTIVATION

How Global Recession has impacted Indian Economy at a Macro Level? Looking at the issue of Industrial Recession and its relationship with overall GDP growth. Argue that Pre recession excessive liquidity growth was fuelling bubbles and putting pressure on monetary policy of the RBI. Thus a check on liquidity flow had a positive effect as well. Does recession in the organized sector spill over to the unorganized sector?

Certain Stylized Facts

GDP has grown at 6.7% in 2008-09. Industry and Exports have been hit hard. Grew nonetheless on a yearly basis. Rates dropped significantly. Service Sector has done reasonably well.

Key Indicators
Item Units 1. GDP and related indicators GDP (current market prices) Rs. crore Growth rate % GDP (current market prices) Rs. crore Growth rate % Growth of GDP (factor cost, constant prices) % Savings Rate % of GDP Capital formation (rate) % of GDP Per cap NNP (factor cost & current prices) Rs. 2. Production Foodgrains Mill tonne Index of Industrial production (growth) Per cent Electricity generation (growth) Per cent 3. Prices Inflation (WPI) (52-week average) %change Inflation CPI (IW) %change 4. External sector Export growth ( US$) %change Import growth (US$) %change Current account deficit (CAD)/GDP Per cent Foreign exchange reserves US$ bn. Average exchange rate Rs./ US$ 5. Money and credit (M ) (annual) 3 %change Scheduled commercial bank credit (growth) %change 6. Fiscal indicators (Centre) Gross fiscal deficit % of GDP Revenue deficit % of GDP Primary deficit % of GDP 7. Population Million 2003-04 2754620 12.2 2402727 8.4 8.5 29.8 27.6 20871 213.2 7. 5.1 5.5 3.9 23198 198.4 8.4 5.1 6.5 3.8 2602065 8.3 7.5 31.7 32.1 26003 208.6 8.2 5.2 4.4 4.4 2004-05 3149407 14.3 2844942 9.3 9.5 34.2 35.5 29524 217.3 11.6 7.3 5.4 6.7 2005-06 3586743 13.9 3120029 9.7 9.7 35.7 36.9 33283 230.8 8.5 6.3 4.7 6.2 2006-07 4129173 15.1 3402716 9.1 9. 37.7 na 39.1 na 37490 229.9 ^^ 2.6 2.7 8.4 9.1 2007-08 4723400 14.4 3609425 6.1 6.7 2008-09 5321753 12.7 RE

21.1 27.3 2.3 113. 45.95 16.8 15.2 4.5 3.6 0.0 1072 1089

30.8 42.7 -.4 141.5 44.93 12.3 30.7 4. 2.5 0.0 1106

23.4 33.8 -1.2 151.6 44.27 17. 37. 4.1 2.6 .4 1122

22.6 24.5 -1.1 199.2 45.28 21.3 28.5 3.5 1.9 -.2 1138

28.9 35.4 -1.5 309.7 40.26 21.2 22.3 2.7 1.1 -.9 1154

3.6 14.4 -4.1 ^ 252. @ 45.99 18.4 17.5 6.2 ## 4.6 ## 2.6 ##

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

Query 1:

To what extent Industrial Recession is reflected in Slowdown of GDP Growth Rate? To what extent Sectoral Slowdown is supposed to be reflected in overall GDP Growth Rate? Given shares of each sector in GDP, overall growth rate of GDP is unlikely to respond substantially to a significant slowdown in the industrial sector. Consider two pessimistic scenarios a 3% drop or a 4% drop from 9% ( done before the 08-09 results were announced) .

Table: 1 Sectoral Growth Rate Analysis

Growth Rate Sector
Agriculture (keeping growth rate of Industry & Services unchanged) Growth rate of gdp at 6% Growth rate of gdp at 5%

-12.40

-18.03

Industry (keeping growth rate of Agriculture & Services unchanged)

-7.40

-12.56

Services (keeping growth rate of Agriculture and Industry unchanged)

5.89

4.30

Table 2: Sectoral Growth Rate Analysis

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

Sectors

1st case: Growth rate of Services unchanged

2nd case: Growth rate of Agriculture unchanged

3rd case: Growth rate of Industry unchanged

1st case: Growth rate of Services unchanged

2nd case: Growth rate of Agriculture unchanged

3rd case: Growth rate of Industry unchanged

Agriculture

-3.95

4.5

-3.95

-6.77

4.5

-6.77

Industry

0.34

0.34

8.1

-2.24

-2.24

8.1

Services

10.7

8.28

8.28

10.7

7.48

7.48

Table 3: Sectoral Growth Rate Analysis

Sectoral Growth Rate

Sectors

2008-09(AE) GDP estimated to grow at around 7%

Growth rate of GDP at 6%

Growth rate of GDP at 5%

Growth rate of GDP at 4%

Agriculture

3.1

1.79

0.89

-0.01

Industry

3.7

-0.09

-2.82

-5.55

Services

9.6

9.18

8.68

8.18

Source: Summary of Estiates of GDP at Constant (1999-00) Prices, CentralStatistical Organisation

Macroeconomic and Monetary Development, Reserve bank of India

Table 4: Quarterly Growth Rates of Different Sectors

2007-08 2008-09

Q1

Q2

Q3

Q1

Q2

Q3

Agriculture

4.4

4.4

6.9

2.7

-2.2

Industry

8.5

7.5

7.6

5.2

4.7

0.8

Services

10.7

10.7

10.1

10.2

9.6

9.5

GDP at factor cost

9.1

9.1

8.9

7.9

7.6

5.3

Source: Macroeconomic and Monetary Development, RBI

Query 2:

Excess Liquidity and Bubbles

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

Casual Hypothesis
Hypothesis Excess Liquidity may lead to bubbles. If it can not be contained, then Recession induced Shortage of Liquidity brings the Asset Prices in line with the fundamentals. But how to check for bubbles in share or asset prices such as real estate? If there are bubbles, do they respond to the regime of Excess liquidity. Can we look for structural breaks? Difficult proposition to prove, but a worthwhile query.

Two examples

The Stock Market scenario

A Simple method to track Bubbles Relationship between Adjusted Closing Price and EPS with a three period lead. High share price today must be in expectation of high EPS in future. Relationship between the price and performance. There are anomalies for quite a few shares , but we do not know (yet) that such deviations are sensitive to the pressure of excess liquidity ( need to work out)

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

Query 3:

The role of Unorganized Sector which absorbs more than 90% of work force How resilient is this one to recession?

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

Percentage
-20.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 0.0 -10.0

Growth Rate

-20.0 10.0 20.0 30.0 40.0 50.0 0.0

-10.0

Andhra Pradesh Assam

Assam Bihar Gujarat Haryana Himachal Pradesh Karnataka Kerala Madhya Pradesh Maharashtra Nagaland
Form al

Andhra Pradesh

Bihar Gujarat Haryana Himachal Pradesh Karnataka Kerala Madhya Pradesh Maharashtra Nagaland Orissa Punjab Rajasthan Tamil Nadu Tripura Uttar Pradesh West Bengal Chandigarh Dadra & Nagar Delhi Goa Daman & Diu Pondicherry India
State s

Statew ise Average G row th Rate of G VA of the years 199495 to 2000-01 in F ormal and Informal Sectors

State s w is e Ave r age Gr ow th Rate of GV A for the ye ar s 2000-01 to 2005-06 in For m al and Infor m al Se ctor

Formal Inf ormal

Orissa
State s Inf orm al

Punjab Rajasthan Tamil Nadu Tripura Uttar Pradesh West Bengal Chandigarh Dadra & Nagar Delhi Goa Daman & Diu Pondicherry India

Growth Rate
10.0 15.0 20.0 25.0 30.0 35.0 -5.0 0.0 5.0

-15.0

-10.0

Andhra Pradesh Assam Bihar Gujarat Haryana Himachal Pradesh Karnataka Kerala Madhya Pradesh Maharashtra Nagaland
Formal

Orissa Punjab Rajasthan Tamil Nadu Tripura

States

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

Inf ormal

Uttar Pradesh West Bengal Chandigarh Dadra & Nagar Delhi Goa Daman & Diu Pondicherry India

Percentage
-5.0 0.0 5.0 10.0 15.0 20.0

-10.0

Andhra Pradesh Assam Bihar Gujarat Haryana Himachal Pradesh Karnataka Kerala Madhya Pradesh Maharashtra
Formal

Nagaland
States

Orissa Punjab Rajasthan Tamil Nadu Tripura Uttar Pradesh West Bengal Chandigarh Dadra & Nagar Delhi Goa Daman & Diu Pondicherry India

Statew ise Average Grow th Rate of Wages per Worker for the years 2000-01 to 2005-06 in Form al and Inform al Sector

Informal

Correlation Coefficient of the growth rates of different variables between formal and Informal Sector:
1994-95 to 2000-01

Fixed assets Correlation Coefficient p-values -0.187 0.373

outstanding loan 0.027 0.896

gross value added 0.231 0.270

Wages per worker -0.376 0.0637*

*Significant at 10% level of significance

2000-01 to 2005-06

Fixed assets
Correlation Coefficient p-values -0.033 0.875

outstanding loan
-0.052 0.806

gross value added

0.311 0.131

Wages per worker

0.210 0.316