Friday, June 08, 2012

Do we really understand India's economic slowdown?

My post below on the Eurozone impact on India has drawn jeers from some readers consequent to the latest GDP data becoming available. I am asked whether I stick to my 7% forecast. Another reader warns me that I will have to swallow my words. I accept these comments in all humility.

But that is not to say that I feel the need to change my position. If anything, the low base of 2011-12 improves the chances of 7% growth in 2012-13. That apart, the depreciation of the rupee and the decline in oil prices are positive factors in the present environment.

What do we make of the sequential decline in growth over the last four quarters? I am still not persuaded that major errors of policy have contributed. Most people point to the fiscal situation and say that the government's basic orientation towards higher social spending and reluctance to rein in subsidies has led up to the present situation where a high fiscal deficit along with high inflation limit the scope for RBI to cut interest rates and stimulate investment.

A very basic conundrum remains, however. The overall investment level is close to 35%. Why is this level of investment not producing growth of 8% this year when it did so in the past eight years except for 2008-09, the worst year of the financial crisis? That tells me that the fundamental factor in 2011-12 that impinged on growth in 2011-12 must be similar to that in 2008-09, and that would be the Eurozone crisis. It cannot be any of the policy factors that most commentators point to. Add to this delays in approvals of projects at a time when the anti-corruption crusade has created a fear psychosis and supply bottlenecks in coal and power sectors, and you have an explanation for the slide this year.

It follows that if the supply bottlenecks are sorted out to some extent, and fiscal correction paves the way for a further cut in interest rates, the growth rate should be better in 2012-13, without any of the 'big bang' reforms people are talking about. Maybe the stock market has caught on to this possibility in recent days?

More in my ET column, Slowdown: do we know why?

17 comments:

Anonymous said...

First of all, no one can believe the numbers coming out of the statistics dept, so 7% or 10%, the govt can make up whatever it wants.

http://articles.economictimes.indiatimes.com/2012-06-01/news/31959198_1_trade-surplus-account-deficit-current-account

http://capitalmind.in/2012/06/has-india-plunged-into-recession-gdp-data-fudge-reveals-details/

Anonymous said...

Yes sure, we should believe the numbers you choose to pull out of your ass. If the government could 'fudge' these numbers, why have they not issued 10% GDP growth rate numbers in the last decade? Uneducated Idiot

Anonymous said...

The numbers and analysis put forward are plausible. If 'Policy Paralysis' has not hindered growth in past then why now? It means that there is some other factor/s driving the plunge or so called 'Slow down' (eg Eurozone).

But it also does not rule the fact that 'Policy Paralysis' in fact exists. You may not directly ascribe it to current slow down (though more sentimental), it definitely exists. And list of reforms required remains the same for the very reason that these reforms are long awaited, thanks to government nonchalant attitude.

Policy Paralysis may not be responsible for slow down, but it will definitely impede the recovery, if and whenever, it happens (hopefully sooner).

And there is one more conundrum - If it is global crises only that is largely behind the slow down, why is India affected the most among BRIC countries? Why S&P downgrade warning for only India and why not for China or Russia? This remains unanswered going by the logic you presented.

I and many like me are not economist and we're bound to go by the sentiments evinced in daily news, unless some one like you presents a fair picture supported with numbers. Thanks for that.

But will be great if you can also resolve the above conundrum i.e. why only India and why not BRC?

Vivek said...

The hypocrisy has been amazing among Indian analysts, but it is being corrected by economists like Ruchir Sharma of Morgan Stanley.

The boom in the early 2000s was not because of any extraordinary policy in India, but because of global liquidity. This can be established by the fact that all emerging markets and commodities did well during that period. Policy and policy paralysis were irrelevant.

This is also borne by the fact that whenever global liquidity has tightened, emerging markets have suffered more than even the economies which have the fundamental problems.

We have to stop with the idea that when its a boom, its because of a fundamental Indian story and when things are not going well, its because of external factors - Europe, etc. That is hypocritical. If you want to tease out the impact of the fundamentals in India, it has to be done by adjusting against and comparing against other emerging countries. Given that India has the lowest credit rating among the Brics, that should tell you all you need to know about how good India's fundamentals and policies are.

These are not my points. I'm paraphrasing Ruchir, perhaps imperfectly, and he might well be wrong, but I find these points far more plausible. Please see his interview in the economic times from this week.

I'm optimistic that this realization will ultimately force good policies and will bring about the true improvement in fundamentals that we all desire.

Vivek said...

http://articles.economictimes.indiatimes.com/2012-06-11/news/32175166_1_breakout-nations-ems-average-growth

crazyphoton said...

I think your data suffers from selection bias and is too thin. For instance you point out that fiscal deficit was higher in 2009-10 and yet growth was higher but conveniently ignore that fiscal was lower between 2004-08 when growth was higher. Then again regarding policy paralysis, you can't just take data from a quarter... and that too just look at the overall absolute number and say "hey guys, look its positive!" you should analyze it over a longer period and comment upon the trend in it.

You say GFCF is growing @ a slow rate but it was growing slower even in 2009-10 and 10-11 when growth was higher... what you ignore here is that increase in inventory investment in those 2 years was close to 60% and 40% which means that the "recovery" or "growth" we were seeing the post lehman crisis was predominantly restocking based. Businesses were never confident of recovery in growth and hence they never increased their fixed capital formation (it was increasing @ 15-17% pre Lehman and only 5-7% post lehman). I am afraid but your analysis appears to be shallow to me at least.

Bank action said...

The original advice you received, to send the CA a letter stating that the debt was settled in full and provide a copy of the original letter demonstrating this fact, is sound imho. You might also want to pull a copy of your credit report to make sure they aren't reporting a debt they shouldn't even be collecting.
Bank action

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'Bade mian' said...

Prof
For GFCF, have you considered the following:

1. Efficiency - how has the efficiency changed over time. I am sure we are not China, but even in India we may be facing some fall in efficiency of GFCF, thereby not getting as much return on it?

2. Lag - the GFCF of one year would impact the GDP of the following years. What we are now seeing is the effect of lower GFCF in the past years. I am sure you guys have probably modeled that lag, that may explain a lower GDP in a year of a relatively higher GFCF number.

Thanks

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