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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
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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?
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8
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