India s macroeconomic trends: some issues New Delhi, 9 th February, 2015
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?
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?
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) 2004 100.0 100 100.0 2005 103.0 100 100.9 2006 97.0 91 92.8 2007 101.3 92 95.2 2008 96.9 89 90.3 2009 99.2 85 86.6 2010 103.4 86 87.8 2011 102.2 84 85.4 2012 96.9 80 82.2 2013 95.4 79 2014 100.1 82 Competitors: Bangladesh, Indonesia,Malaysia,Philippines,Thailand,Vietnam
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
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?
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** -0.01 Russia -0.23 Venezuela** -0.25 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
On investments, growth and fiscal strategy Sector-wise investment growth 50.0 40.0 30.0 20.0 in % Y-o-Y 10.0 0.0-10.0-20.0-30.0-40.0 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Private corporate sector Total investment 2011-12 2012-13 Public sector in % 81.0 79.0 77.0 75.0 73.0 71.0 69.0 Capacity Utilizaton 40.0 67.0 in % Y-o-Y growth 30.0 20.0 10.0 0.0-10.0 Q1FY06 Q4FY06 Q3FY07 Q2FY08 Q1FY09 Q4FY09 Q3FY10 Q2FY11 Q1FY12 Q4FY12 Q3FY13 Q2FY14 Q1FY15 65.0 Q2FY12 Q3FY13 Q4FY12 Q1FY13 Q2FY13 Q3FY14 Q4FY13 Q1FY14 Q2FY14 Source: RBI Industry OBICUS Q3FY15 Q4FY14 Q1FY15 Q2FY15-20.0 Source: CSO
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
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.