Wednesday, 20 June 2012

India Macroeconomic Situation — Cause for Concern?

RBI Governor Dr Subbarao explains the Indian economy outlook. He even defends the recent policy decision to hold rates against market expectations to cut rates. The PPT should be seen with his comments and explanations (given at the add notes section). It is pretty comprehensive and covers many aspects of Indian economy. On Comparing 2012 with 1991:
1.  Is 2012 going to be a repeat of 1991?
2.    Basis for this question: 
(i)    1991 crisis triggered by BoP pressures, which in turn were a consequence of fiscal profligacy of the 1980s. 
(ii)   In 2012, twin deficits once again 
(iii)  Large fiscal and current account deficits are lead indicators of stress building up in the system.
3.    In 1991, an implosion was imminent. In 2012, an implosion is not imminent. Why? 
(i)   Structure of the economy has changed in fundamental ways. The share of services sector in the economy has increased from 41% in 1991 to 67% in 2012. Performance of the services sector of the economy is less variable than that of agriculture and industry. 
(ii)  Today, Indian financial markets are more mature, diverse and deep. Have resilience to absorb shocks. 
(iii)  Our regulatory systems and crisis response mechanisms are more robust and sophisticated. 
(iv)  In 1991, rupee was overvalued by more than 20%. Today, exchange rate is largely market determined, and therefore able to absorb shocks.
 (v)   Foreign exchange reserves are much larger; provide 8 months of import cover as against 2 months of import cover in 1991. 
(vi)  External sector vulnerability indicators have deteriorated over the last year, but they are still at safe levels and much better when compared to 1991.
 He says there is no new normal for inflation (around 7%) however potential growth has slowed post-crisis:
•As per RBI’s estimates, potential growth rate 
    -  was 8.5% pre-crisis 
          -  may have declined to 8% post crisis
•Why? 
    -  Decline in growth of gross fixed capital formation from more than 15%  pre-crisis to less than half that rate
          -  Adverse external environment dampening domestic sentiment
     -  Large fiscal deficit
       -  Growing supply side constraints
     -  Persistent inflation
•It is possible potential growth has further declined below 8% as core inflation not softening significantly even as growth has been moderating. 
•But the potential growth rate needs to be estimated more robustly.

He sums up just aptly. He says India growths story remains but is not inevitable as most like to believe:
India Growth Story is still credible because the drivers of growth are intact
    -  entrepreneurism
    -  productivity
    -  demographic dividend – large market + potentially large savings
    -  democracy and decent legal system
But India Growth Story not inevitable!

Good stuff…Whatever the criticism, Subbarao’s speeches are crystal clear..

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