India s macroeconomic trends: some issues. New Delhi, 9 th February, 2015

Transcription

1 India s macroeconomic trends: some issues New Delhi, 9 th February, 2015

2 Make in India or Make for India? Is a policy of aggressive export led growth on the lines of China viable? Diminished global demand might not be able to accommodate another export led-china. (Rajan) Is the overt emphasis on large-scale manufacturing misplaced? Is it the sole answer to generating large scale employment? Is there a medium term challenge from increased automation (use of robots, 3-D printing etc) that creates a technological upper-bound for employment in manufacturing?

3 Make in India some comments Are Make in India and Make for India two distinct strategies? Alternatively does an attempt to integrate into the global supply chain create a set of efficiencies that would increase TFP? Instead of a general boost to exports, should the focus be on getting a bigger share of the jobs that are being re-shored from China s East Cost to countries such as Vietnam, Myanmar and Africa?

4 We seem to be ER competitive vis-à-vis our peers what s the problem then? (REERs versus competitor economies) unadjusted adjusted (per capita income) adjusted (TFP) Competitors: Bangladesh, Indonesia,Malaysia,Philippines,Thailand,Vietnam

5 The total factor productivity challenge is export orientation the answer? The sharp rise in TFP in the mid-200s came during a period of unprecedented export growth

6 Currency management strategy should we target exchange rates? Growing concern regarding over-valuation of the exchange rate. Likely to grow if ECB and BOJ fueled carry-trades keep pushing up the rupee. Currently, fairly heavy intervention(dollar buying) by the RBI. Some liberalization of capital account in recent monetary policy Consensus forecasts of $15-20 bn capital account surplus in 1Q CY 2015 Is a mercantilist exchange rate policy an adjunct of the Make in India strategy? What are the costs? The tie-in with the flexible inflation targeting needs to be considered. Will an artificially depreciated currency entail higher than optimal interest rates?

7 A US Fed rate hike measuring the shock effect EM financial market sensitivity to US interest rates: A cross-country perspective Elasticity of EM benchmark yield to 10-yr UST yield * Czech republic 0.88 Turkey 0.65 South Korea 0.61 Indonesia 0.60 Thailand 0.58 Philippines 0.53 Colombia 0.53 South Africa 0.51 China 0.44 Mexico 0.40 Peru 0.38 Poland 0.32 Chile 0.30 Brazil 0.24 Malaysia 0.18 Vietnam** 0.09 India** 0.02 Hungary** Russia Venezuela** Source: CMIE & HDFC Bank ** Insignificant Sensitivity of exchange market pressure to 10-yr UST yield * Venezuela 0.62 Russia** 0.60 Ukraine 0.27 South Africa 0.20 Brazil 0.18 Indonesia 0.15 Vietnam 0.15 Peru 0.14 Poland 0.14 Mexico 0.12 Argentina 0.11 India 0.09 Turkey** 0.08 Malaysia** 0.07 Philippines ** 0.06 Hungary** 0.04 South Korea** 0.03 Chile ** 0.02 Colombia** 0.02 China** 0.02 Czech republic ** 0.02 Thailand** 0.02 Source: CMIE & HDFC Bank ** Insignificant While time series analysis shows that India is somewhat insulated, growing foreign ownership of Indian assets particularly debt raises vulnerability * Controlled for impact of S&P VIX & global commodity prices

8 On investments, growth and fiscal strategy Sector-wise investment growth in % Y-o-Y Private corporate sector Total investment Public sector in % Capacity Utilizaton in % Y-o-Y growth Q1FY06 Q4FY06 Q3FY07 Q2FY08 Q1FY09 Q4FY09 Q3FY10 Q2FY11 Q1FY12 Q4FY12 Q3FY13 Q2FY14 Q1FY Q2FY12 Q3FY13 Q4FY12 Q1FY13 Q2FY13 Q3FY14 Q4FY13 Q1FY14 Q2FY14 Source: RBI Industry OBICUS Q3FY15 Q4FY14 Q1FY15 Q2FY Source: CSO

9 The challenge Given investment revival critical for spurring growth. Low capacity utilization rates and uncertain growth environment will hold back private investment Excess demand in infrastructure remains Conventional PPP model Build Operate Transfer(BOT) largely unsuccessful in areas such as road-building Yet significant private investor interest in operation and maintenance of projects

10 Choices and strategies Allow deviation from fiscal consolidation path to accommodate capital spending. Trade short term deficit expansion for aggressive consolidation by selling down created assets. Borrow currently against future expected sales and minimize fiscal stress through say bullet-repayment agreement Ring-fence proceeds from asset sales for asset creation swap Improve regulatory environment and try to incentivize both private sector and FDI.