Analyzing the Slowdown_Part 1

7/29/2019 Analyzing the Slowdown_Part 1

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Analyzing the Indian EconomicSlowdown

Part I

- A presentation to NMCCA

Vikram M SampatReliance Industries Ltd.

August 19, 2012 Navi Mumbai


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Analyzing the Indian Economic Slowdown

Background

Advantage India..

Areas for improvement..

Conclusions


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Background

What is a slowdown?

India Historic GDP growth trends

Global perspective

Current trends


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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?


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Indian slowdown?

Falling GDP growth 5.3% is the lowest rate in 7 years

Indian economy : Believed to be in slowdown


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India Historic GDP trends

4.1

3.1

4.6

6.7

0

12

3

4

5

6

7

8

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 growthidentified

First 3 phases relate tosocialist India

Period up to 1970scharacterized by Hindu rate ofgrowth

Economic liberalization post1985 brought about a shift in

economic growth

Significant growth impetus post 1988
http://www.rbi.org/http://www.rbi.org/


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1988 2011 : Economic performance

Source: www.rbi.org, Aravind Panagaria

Liberalization started byRajiv Gandhi & NarsimhaRao Govts.

GDP growth broke pasttrends post 1988

2003-2008 : Highlight yearswith highest growth

Widely believed to be a newlevel of growth

Growth has slowed downmarginally since then

6.3

4

6.8

5.2

8.9

7.7

0

1

2

3

4

5

6

7

8

9

10

1988-90 1990-93 1993-97 1997-2003 2003-08 2008-11

Was 2003-08 a break from trend or a new trend?
http://www.rbi.org/http://www.rbi.org/


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Global Perspective - GDP trends

Strong global economy over 20

years. Robust economic growth

Low inflation rate

Low real interest rate

Past 5 years have seen

exceptional growth US has witnessed stable growth

Falling growth rate in Euro area

Strong performance from Asia

2003-08 - A golden period


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US Unemployment Jobless recovery

Source: Bureau of Labor Statistics

Technology

boom

Unemployment A structural problem?

Despite strong performance, jobs return slowly

Unemployment

rate, %


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Population Profile

US has moved to a developed market age profile


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Trouble makers : Interest rates

Source: Tuatara Management Limited, 4 July 2008

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

Policy decision to maintain low interest rates..


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Trouble makers : US savings

Was the US consuming

too much?

So was the developed world

Source: US Dept of Commerce

led to unusually high consumption in developed world


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Trouble makers :US reserves

US Financing itself throughemerging market reserves

Excessive US current accountdeficits

with excessive reliance on deficits and borrowings


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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 borrowersbut escaped responsibility for defaults

and innovative financing to keep the show going


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Derivatives - CDS

Started as an insurance

At peak volume outstanding of $62 trillion, CDS volumes much higher thanunderlying bonds issues

Cos like AIG wrote far too many contracts. Lehman party to 7-10% of markettrades, increasing risk index and catalyzing banking busts

Not settled through exchange posed severe counter party risks

Measures health of CDS dealers

All this was a combustible mixture!!


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Stock markets

Global equity markets witnessed record growth

Equity Valuations reached a record high


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Investors turned tocommodities in search of

high returns and catalyzed

record high commodity prices

Commodity markets couldnot sustain the pressure

Rapidly rising commodity

prices stoked inflation across

the board

Greed got the better of the system

Commodity prices


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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


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Inflation

High commodity prices kicked in inflation in developed and emerging markets

Food, housing and commodity boom triggered inflation


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Rising inflation

Hike in the interest rates

Source: Tuatara Management Limited, 4 July 2008

Trigger for sub-prime

Break-down of loan-consumption cycle


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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


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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?


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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


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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


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Advantage India..

Economy

Liberal Society

Democracy

Demography


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Economy Size & potential

Large and growing

economy

Growth driven by internalconsumption

Liberalized industry &financial system


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India Robust GDP growth

Second fastest growth rate consistently in large economies

Stable growth

Worlds largest democracy with advanced (but slow) legal structure


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Savings & Investment

High savings andinvestment rates

Supported bysophisticated

financial markets

ICOR-4Thus savingscan support 8%

GDP growth

Savings to support investments


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GDP Structure - Drivers

GDP led by services basedon:

Strong IT infrastructure

English speaking population

Young population &favourable demographics

Strong education systems

GDP structure driven by educated populace and free society


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FII inflows

Favoured FII destination


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Demography & demographics dividend

Only 5.5% of population over 65 years

Median age 26 years : over 52% below25 years

By 2030, around 62 63% of Indianpopulation will be in working age withlowest dependency ratio

Large and growing middle class

Documents

Analyzing the Slowdown_Part 1