Download Analysing Economic Slowdown - Part 1

Survey
yes no Was this document useful for you?
   Thank you for your participation!

* Your assessment is very important for improving the work of artificial intelligence, which forms the content of this project

Document related concepts

Financialization wikipedia, lookup

Transcript
Analyzing the Indian Economic
Slowdown
Part I
- A presentation to NMCCA
Vikram M Sampat
Reliance Industries Ltd.
August 19, 2012
Navi Mumbai
Analyzing the Indian Economic Slowdown
 Background
 Advantage India…..
 Areas for improvement…..
 Conclusions
Background
 What is a slowdown?
 India – Historic GDP growth trends
 Global perspective
 Current trends
What is slowdown?
 Significant reduction in rate of GDP growth
 GDP growth remains positive
 Slowdown is not a recession
 Employment and productivity may decline
 Is India experiencing a slowdown?
Indian slowdown?
 Falling GDP growth – 5.3% is the lowest rate in 7 years
 Indian economy : Believed to be in slowdown
India – Historic GDP trends
8
6.7
7
6
5
4
 First 3 phases relate to
socialist India
4.6
4.1
3.1
3
2
1
0
1951-65
1965-81
1981-88
1988-2011
Phase 1
Phase 2
Phase 3
Phase 4
Source: www.rbi.org, Aravind Panagaria
 4 phases of economic growth
identified
 Period up to 1970s
characterized by Hindu rate of
growth
 Economic liberalization post
1985 brought about a shift in
economic growth
 Significant growth impetus post 1988
1988 – 2011 : Economic performance
10
8.9
9
7.7
8
7
6.8
6.3
6
 GDP growth broke past
trends post 1988
5.2
5
4
4
 Liberalization started by
Rajiv Gandhi & Narsimha
Rao Govts.
 2003-2008 : Highlight years
with highest growth
3
2
1
0
1988-90
1990-93
1993-97 1997-2003 2003-08
Source: www.rbi.org, Aravind Panagaria
2008-11
 Widely believed to be a new
level of growth
 Growth has slowed down
marginally since then
 Was 2003-08 a break from trend or a new trend?
Global Perspective - GDP trends

Strong global economy over 20 
years.
Past 5 years have seen
exceptional growth
 Robust economic growth
 US has witnessed stable growth
 Low inflation rate
 Falling growth rate in Euro area
 Low real interest rate
 Strong performance from Asia
 2003-08 - A golden period
8
US Unemployment – Jobless recovery
Unemployment
rate, %
Technology
boom
Source: Bureau of Labor Statistics
 Despite strong performance, jobs return slowly
 Unemployment – A structural problem?
Population Profile
 US has moved to a developed market age profile
Trouble makers : Interest rates

Loose monetary policy for too long after 2001 recession
 US Fed was the big culprit with one year at 1%
 Allowed excessive liquidity build-up through borrowings
 US monetary policy tightening was very sluggish between 2004-06
Source: Tuatara Management Limited, 4 July 2008
 Policy decision to maintain low interest rates…..
11
Trouble makers : US savings
 Was the US consuming
too much?
Source: US Dept of Commerce
 So was the developed world
 … led to unusually high consumption in developed world
Trouble makers : US reserves
 Excessive US current account
deficits
 US Financing itself through
emerging market reserves
 … with excessive reliance on deficits and borrowings
13
Assets securitization

CDOs used to keep exposures off balance sheets

Greatly enhanced secondary markets for loans

Provided 20-30% of Inv. banks profits before the meltdown

Banks and rating agencies failed to adequately scrutinize borrowers
but escaped responsibility for defaults
 … and “innovative” financing to keep the show going
Derivatives - CDS
Measures health of CDS dealers

Started as an insurance

At peak volume outstanding of $62 trillion, CDS volumes much higher than
underlying bonds issues

Cos like AIG wrote far too many contracts. Lehman party to 7-10% of market
trades, increasing risk index and catalyzing banking busts

Not settled through exchange – posed severe counter – party risks
 All this was a combustible mixture!!
Stock markets

Global equity markets witnessed record growth
 Equity Valuations reached a record high
16
Commodity prices
 Greed got the better of the system

Investors turned to
commodities in search of
high returns and catalyzed
record high commodity prices

Commodity markets could
not sustain the pressure

Rapidly rising commodity
prices stoked inflation across
the board
Inflation triggers

Growing consumption
demand led to steep rise in
food and non-food inflation

Inflation which was earlier
contained due to aggressive
manufacturing by Asia/China,
could no longer be controlled
once commodity, house and
food prices shot up
 Rising prices for food and commodities triggered inflation
18
Inflation
 High commodity prices kicked in inflation in developed and emerging markets
 Food, housing and commodity boom triggered inflation
Trigger for sub-prime
 Rising inflation
 Hike in the interest rates
Source: Tuatara Management Limited, 4 July 2008
 Break-down of loan-consumption cycle
20
Impact on the equity markets
(Worlds Equity Market Cap)

Credit Crunch leads to withdrawal of funds from equity markets, leading
to a drastic fall in indices

Fall in overall consumer demand further leads to fall in the stocks
India – Following Global Trends
 Indian and China following
global GDP trends
 Slowing growth in US & EU have
impacted exports
 Slowdown : A fallout from global trends?
Global overview - Summary
 Indian economic boom during 2003-08 coincided with and was
helped by the global economy boom
 Bust in 2008 has been followed by severe crisis, which is still
continuing in Europe
 Indian economy has been impacted due to the bust.
 Indian growth has returned to pre-boom period performance
 Indian economy increasingly linked to global economy
 India mirroring global cycles
India - Current GDP Trends
 Significant reduction in GDP
− Contraction in manufacturing
− Slower growth in services
− Slowdown in investment
 Other concerns
− Bludgeoning fiscal deficit
− High inflation
− Rupee depreciation
− European crisis
 India – On the edge
Advantage India…..
 Economy
 Liberal Society
 Democracy
 Demography
Economy – Size & potential
 Large and growing
economy
 Growth driven by internal
consumption
 Liberalized industry &
financial system
India – Robust GDP growth
 Second fastest growth rate consistently in large economies
 Stable growth
 World’s largest democracy with advanced (but slow) legal structure
Savings & Investment
 High savings and
investment rates
 Supported by
sophisticated
financial markets
 ICOR-4
Thus savings
can support 8%
GDP growth
 Savings to support investments
GDP Structure - Drivers
 GDP led by services based
on:
− Strong IT infrastructure
− English speaking population
− Young population &
favourable demographics
− Strong education systems
 GDP structure driven by educated populace and free society
FII inflows
 Favoured FII destination
Demography & demographics dividend
 Only 5.5% of population over 65 years
 Median age – 26 years : over 52% below
25 years
 By 2030, around 62 – 63% of Indian
population will be in working age with
lowest dependency ratio
 Demographics are not destiny Large and growing middle class