Global Economic Crisis: The Indian Perspectiveicrier.org/pdf/Presentation_Pankaj_Vashisht_SessionII.pdf · Global Economic Crisis: The Indian Perspective ... Reserve Bank of India

1

Global Economic Crisis: The Indian Perspective

Rajiv Kumar

Pankaj Vashisht

8th India-Korea Economic Dialogue New Delhi

20th May 2009

2

Structure of Presentation

• Severity of Crisis

• Global Crisis and India

• India’s Policy Response

• Assessment of Policy Response

• Potential Measures for Reigniting Growth

3

Severity of the Current Financial Crisis

4

Selected Countries Stock Market and Exchange Rate Changes

Stock Market Changes June-December 2008

(%)

Exchange Rate changes June –December 2008

vis-à-vis $ (%)China -48 1

Hong Kong -40 1

India -41 -13

South Korea -36 -20

Argentina -51 -13

Brazil -49 -31

Mexico -29 -26

Japan -36 18

Euro Area -37 -11

USA (S&P 500) -36 -

Source: Bloomberg, ADB 2009.

World Stock Market Crash: A Comparative Picture

Source: Barry Eichengreen and Kevin H. O’Rourke, A Tale of Two Depressions

6

Industrial Production CollapseQuarter on Quarter Growth Rate

Source: OECD- Plunge in Industrial Growth (Quarter 4, 2008)

-14 -12 -10 -8 -6 -4 -2 0

Canada

France

Germany

Italy

Japan

UK

USA

Brazil

India

Russia

7

Collapse of GDP GrowthSeasonally adjusted quarter on quarter growth rate

-3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0

Canada

France

Germany

Italy

Japan

UK

USA

Source: OECD

Note: GDP growth Q4, 2008

8

Rapidly Changing Global Economic Outlook, IMF Growth Projections

Source: World Economic Outlook updates, IMF

Apr, 2009Jan, 2009Apr, 2009Jan, 2009Nov, 2008Jul, 2008

GDP Estimates for 2009 GDP Estimates 2010

USA 0.8 -0.7 -1.6 -2.7 1.1 -0.04

UK 1.7 -1.3 -2.8 -4.0 0.2 -0.4

Germany 1.0 -0.8 -2.5 -5.0 0.1 -1.0

Japan 1.5 -0.2 -2.6 -6.1 0.6 0.5

France 1.4 -0.5 -1.9 -2.9 0.7 0.4

Canada 1.9 0.3 -1.2 -2.5 1.6 1.1

Italy 0.5 -0.6 -2.1 -4.4 -0.1 -0.4

Russia 7.3 3.5 -0.7 -5.9 1.3 0.5

China 9.8 8.5 6.7 6.5 8.0 7.5

India 8.0 6.3 5.1 4.5 6.5 5.6

World 3.9 2.2 0.5 -1.3 3.0 1.8

9

Collapse of Global Trade

-10.0 -5.0 0.0 5.0 10.0 15.0

19811983

1985

1987

19891991

1993

1995

1997

19992001

2003

2005

20072009

Source: WTO

Annual growth of global trade volumes, 1981-2009

Global trade is expected to decline by 9 % in 2009, the biggest contraction since World War II

10

Major Fiscal Stimulus in Selected Countries/ Economic Regions

–Bail out packages never got ahead of the markets

Ser. No Country Name Amount, US$ bn

1 Japan 516.3

2 EU 254.6

3 Australia 7.4

4 China 586

5 Korea 113

6 Chile 4

7 Korea 11.3

8 Mexico 5.8

9 India 80

10 USA 3400

11 Total 4978

Source: Global Economic Monitor, International Institute of Finance, December 2008 & media sources

11

Impact on India

12

Global Crisis and India

• Three Principal Channels of Transmission– Financial Markets

• Banking Sector• Capital Markets• Remittances• Commercial Borrowings

– Exports– Exchange rate

13

Limited Impact on Indian Banks: Quarterly Performance Indicators

Source: Prowess, CMIE

Note: Figures for the Month of March are Awaited

Profit Margin = PAT % to Total Income

-40-30-20-10

010203040506070

Mar

, 03

Sep,

03

Mar

, 04

Sep,

04

Mar

, 05

Sep,

05

Mar

, 06

Sep,

06

Mar

, 07

Sep,

07

Mar

, 08

Sep,

08

YOY

Prof

it G

row

th

-10

-5

0

5

10

15

Prof

it M

argi

n

Profit Grow th Profit Margin

14

Gross NPAs % to Gross Advances

Source: Report on Trend and Progress of Banking in India, 2007-08, RBI and Prowess, CMIE

5.2

3.3

2.5 2.3 2.2

0

1

2

3

4

5

6

2004-05 2005-06 2006-07 2007-08 2008-09 (Up toDec' Selected

Banks)

15

Month on Month Change in Outstanding Non-Food Credit

-60000

-40000

-20000

0

20000

40000

60000

80000

100000

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar(Mid)

2007 2008

Source: Reserve Bank of India

Note: Values in Rs. Crore

Credit Crunch

ECB FrozenAnnual NFC Growth

2007-08: 21.60 %

2008-09: 17.27 %

16

Crisis and Indian Capital Market:Net FII Inflows

-6000

-4000

-2000

0

2000

4000

6000

8000

Feb-

07

Apr-

07

Jun-

07

Aug-

07

Oct

-07

Dec

-07

Feb-

08

Apr-

08

Jun-

08

Aug-

08

Oct

-08

Dec

-08

Feb-

09

Net

FII

Inflo

ws,

mill

ion

US$


Year FII inflows US$ b IPO/FPO

2006-07: 3.2 5.4 (92)

2007-08: 20.3 10.9 (106)

2008-09: -15.1 3.8 (38)

17

Stock Market Collapse

Market Capitalization % to GDP

2342

52

80 86

109

55

0

20

40

60

80

100

120

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

BSE Sensex

0

5000

10000

15000

20000

25000

Jan,

03 Mar

May Ju

lSe

pN

ovJa

n,04 Mar

May Ju

lSe

pN

ovJa

n,05 Mar

May Ju

lSe

pN

ovJa

n,06 Mar

May Ju

lSe

pN

ovJa

n,07 Mar

May Ju

lSe

pN

ov,0

7Ja

n,08 Mar

May Ju

lSe

pN

ovJa

n,09

Mar

19827

18

Monthly FDI Inflows

Source: RBI Bulletin, May 11, 2009

Annual FDI Inflows, US$ billion2004-05 6.02005-06 8.92006-07: 22.82007-08: 34.32008-09: 33.6

19

External Commercial Borrowings

0500

100015002000250030003500400045005000

Mar

,08

Apr,0

8

May

,08

Jun,

08

Jul,0

8

Aug,

08

Sep,

08

Oct

,08

Nov

,08

Dec

,08

Jan,

09

Feb,

08

Valu

es in

US$

mill

ion


ECBs Annual , US$ billion2004-05 9.02005-06 14.32006-07: 20.82007-08: 30.32008-09: 12.0

20

Remittances Inflow

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0M

ar,0

3Ju

n,03

Sep,

03D

ec,0

3M

ar,0

4Ju

n,04

Sep,

04D

ec,0

4M

ar,0

5Ju

n,05

Sep,

05D

ec,0

5M

ar,0

6Ju

n,06

Sep,

06D

ec,0

6M

ar,0

7Ju

n,07

Sep,

07D

ec,0

7M

ar,0

8Ju

n,08

Sep,

08D

ec,0

8

Valu

es in

US

$ bi

llion

Annual Net Remittances Inflow, US$ billion

2006-07: 27.9

2007-08: 40.7

2008-09: 34.9*


Note: * April to December

Capital Account BOP % to GDP

-4.0-2.00.02.04.06.08.0

10.012.014.016.0

Q12006

Q22006

Q32006

Q42006

Q12007

Q22007

Q32007

Q42007

Q12008

Q22008

Q32008

FDI Portfolio Investment Loans Banking Capital Total Capital Account


22

Foreign Reserves & Exchange Rate

30.00

35.00

40.00

45.00

50.00

55.00

W1

Jan

08

W4

Jan

08

W3

Feb

08

W2

Mar

08

W1

Apr 0

8

W4

Apr 0

8

W3

May

08

W2

Jun

08

W1

Jul 0

8

W4

Jul 0

8

W3

Aug

08

W2

Sep

08

W1O

ct 0

9

W4

Oct

08

W2

Nov

08

W1

Dec

08

W4

Dec

08

W3

Jan

09

W2

Feb

09

W1

Mar

09

W4

Mar

09

200.0

220.0

240.0

260.0

280.0

300.0

320.0

340.0FER (US$ bn) Exchange Rate (Rs/$US)

•Stock of Reserves falling from $315 bn in May 08 to $252 bn in Mar 09

•Around 63 percent of decline in reserve can be attributed to valuation, hence actual decline in reserve is around US$ 20 billion

•Rupee tumbling by 27% from end-Apr 08 to end-Mar 09

23

Imports and Exports Growth

24

Composition of Demand Growth

Investment de-acceleration

Quarterly GDP Growth: Actual & Projected

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

RBI Effect

ICRIER annual growth Projection2008-09: 6.32009-10: 4.8 – 5.5

ICRIER Projection

Crisis Effect

26

Policy Response

27

Budget Outlays on Rural India: Blessing in Disguise

Ser. No.

Item 2008-09 (RE) 2009-10 (BE)

1 Bharat Nirman 6.25 8.18

2 NREGS 6.00 6.02

3 Fertilizer Subsidies (a+b+c)a. Indigenous Ureab. Imported Ureac. Concession on Decontrolled Fertilizers

15.173.302.209.67

10.001.721.566.72

4 Farm Loan Waiver 13.06 -

5 Total 40.49 24.20

MSP for Wheat increased from Rs. 630 per quintal in 2003-04 to Rs. 1080 in 2008-09 (71 % increase)

MSP for common variety of paddy increased from Rs. 550 per Quintal in 2003-04 to Rs. 900 in 2008-09 (63 % increase)

Values in US$ billion

Source: Union Budget

28

Fiscal Stimulus

• Three packages of fiscal stimulus, early Dec 08, early Jan 09, early Mar 09

• Across-the-board excise duty reduction by 4 %age points• Additional plan spending of US$ 4 billion• State governments allowed additional market borrowing of US$ 6

billion for plan expenditure• Assistance to export industries• 2 percentage point reduction in central excise and service tax• Current excise duty rate: 8 percent

– Direct fiscal burden of stimulus 1.8% of GDP– Fiscal deficit (Central and States combined) rising sharply

to 11% of GDP in 2008-09 (5.4% in 2007-08) and likely to be over 10% in 2009-10

29

Monetary Policy Response:RBI Policy Rate Changes

•Credit tightening from Sep 2004 to Aug. 2008 and loosening thereafter •Cash reserve ratio (CRR) brought down from 9% to 5%•Statutory liquidity ratio (SLR) from 25% to 24%•Repo rate reduced from 9% to 4.75% & reverse repo rate from 6% to 3.25%•Special window for banks in their lending to mutual funds, NBFCs and housing finance companies•Refinance facility for banks from the central bank & dollar swap arrangements, etc.

0

1

2

3

4

5

6

7

8

9

10

Mar

31,

04

Oct

2,0

4

Apr 2

9,05

Jan

24,0

6

Jul 2

5,06

Dec

23,

06

Jan

31,0

7

Mar

3,0

7

Apr 1

4,07

Aug

4,07

Apr 2

6,08

May

24,

08

Jun

25,0

8

Jul 1

9,08

Aug

30,0

8

Oct

20,

08

Nov

3,0

8

Dec

8,0

8

Jan

17,0

9

Apr 2

1,09

Reverse repo rate Repo rate Cash Reserve Ratio

30

RBI Liquidity InjectionActual/Potential Release of Primary Liquidity

since Mid-September 2008 (US$ billion)

1 Cash Reserve Ratio (CRR) Reduction 32.7

2 MSS Unwinding 12.9

3 Term Repo Facility 12.2

4 Increase in Export Credit Refinance 5.2

5 Special Refinance Facility for SCBs (Non-RRB) 7.9

6 Refinance Facility for SIDBI/NHB/EXIM Bank 3.3

7 Liquidity Facility for NBFCs through SPV 5.1

Total (1 to 7) 79.2

Memo: Statutory Liquidity Ratio (SLR) Reduction 8.2

Nearly US$80 billion, over 7% of GDP of liquidity release

31

Assessment of Policy Response

32

Assessment of Fiscal Policy Response

• Anticipated the Crisis! • limited fiscal headroom: High fiscal deficit: 11 % to

GDP • Too late because of the state of denial that came from

the theory of decoupling and strong fundamentals Looking forward• Government could monetize fiscal deficit• Increase in public debt-- 2008-09: 85 % to GDP• Credit Rating downgrading could hamper capital

inflows and could raise the cost of borrowing

33

Assessment of Monetary Policy Response

• Aggressive and appropriate

• But has had limited impact so far– may show effect with lag

• Commercial bank’s lending rates are still high at around 10 %

• Reduction in policy rates is not filtering in to the retail market, because of following reasons:– The risk averse attitude of commercial banks – Increase in Government borrowings– crowding out

34

Fiscal Policy and Fear of Crowding Out

0123456789

10

Jan,

08

Feb,

08

Mar

, 08

Apr,

08

May

,08

Jun,

08

Jul,

08

Aug,

08

Sep,

08

Oct

,08

Nov

,08

Dec

,08

Jan,

09

Feb,

09

Mar

,09

10 year bond yield

35

Potential Measures for Reigniting Growth

36363636

Potential GDP Growth and Output Gap (1997-8 to 2007-8)

Potential output growth: 8.7% in 2007-08

8.4% in 2006-07

8.1% in 2005-06

Note: HP filter technique as proposed by Hodrick and Prescott (1997)

Output Gap %

Tightening of monetary policy aimed to narrow output gap

3737

Potential Measures for Rebalancing the Growth

• Fiscal options are not available

• Another round of Policy rate cuts should be considered

• Initiate Second Generation Structural Reforms to increase the potential rate of growth. These should focus on:– Infrastructure – Implementation capacity– Education – liberalization and quality– Business/investment environment– Public health: Delivery and Quality– Agriculture

38

THANK YOU

Selected Leading Economic Indicators

• LEI Consists of:– (i) production of machinery and equipment– (ii) non-food credit– (iii) railway freight traffic– (iv) cement sales – (v) net sales of the corporate sector – (vi) fuel and metal prices – (vii) real rate of interest – (viii) BSE sensex and – (ix) exports

Index of Leading Economic Indicators (LEI)….

• Composite index constructed for 1997-08 with quarterly growth series

• Principal component index (PCA) method– Weights assigned through iteration process based on the

contribution to total variation in the composite index• LEI predicts future growth based on the past, 5-quarter

in advance• Cannot capture the effects of sudden external shocks

having immediate impact on growth– East Asia crisis, 1997-98– Dotcom bust and September 11 incident in 2000-01 and 2001-02– Crop failure in 2002-03 – Current shock of US financial crisis in 2008-09 and 2009-10

41

Collapse of ExportsQuarter on Quarter Growth rate

- Exports saw a drastic fall (Quarter 4, 2008). - WTO Projects 9% decline in World Trade in 2009.

Source: OECD

-25 -20 -15 -10 -5 0

Canada

France

Germany

Italy

Japan

U. K

USA

Brazil

China

India

42

NPAs of selected Indian Banks, NPAs% to Total Advances

Source: Prowess CMIE

Bank’s Name NPAs as % of Total Advances Direction of Change

Dec-07 Mar-08 Jun-08 Sep-08 Dec-08

Andhra Bank 1.35 1.07 1.15 1.03 0.89 ↓

Bank Of Baroda 2.11 1.84 1.86 1.62 1.50 ↓

Bank Of Maharashtra 2.77 2.57 2.49 2.37 2.30 ↓

Punjab National Bank 4.11 2.74 2.82 2.37 2.28 ↓

Corporation Bank 1.71 1.47 1.46 1.36 1.24 ↓

Dena Bank 3.09 2.45 2.47 2.32 2.28 ↓

I D B I Bank Ltd. 2.24 1.87 1.98 1.87 1.71 ↓

Oriental Bank Of Commerce 2.73 2.31 2.18 1.93 1.66 ↓

Syndicate Bank 2.86 2.71 2.84 2.55 2.39 ↓

Uco Bank 3.33 2.97 2.82 2.58 2.42 ↓

Allahabad Bank 2.06 2.00 1.87 1.93 1.93 =

Bank Of India 1.90 1.68 1.64 1.53 1.63 =

Canara Bank 1.54 1.31 1.31 1.31 1.94 ↑

Indian Overseas Bank 1.87 1.63 1.73 2.47 2.4 ↑

Kotak Mahindra Bank Ltd. 2.88 2.88 3.17 3.16 4.08 ↑

State Bank Of India 2.82 3.04 2.54 2.51 2.61 ↑

Central Bank Of India 4.37 3.16 3.03 2.79 2.81 =

H D F C Bank Ltd. 1.20 1.30 1.50 1.60 1.90 ↑

I C I C I Bank Ltd. 2.96 3.30 3.72 4.18 4.14 ↑

4343

Fiscal DeficitItem 2007-08 2008-09 (E)I. Not Provide for in Budget

Salary increase and Arrears 22100Farm Loan waiver 25500Rural employment Guarantee Scheme and Food Subsidy 15564Tax Reduction for Petroleum Products 22500Total cash outgo on second supplementary demand for grants 42480Recapitalization of banks 10000Addition to fiscal deficit as % to GDP 2.5

II. Off Budget ItemsBonds for Oil companies 11953 65942Bonds for Fertilizer Companies 7500 35220

Off budget As % to GDP 0.4 1.9III. Fiscal deficit as in the Budget- Centre 2.8* 2.5**IV. Fiscal deficit as in the Budget- states 2.3*** 2.1**V. Additional borrowing for the states 30000VI. Additional borrowing for the states as % to GDP 0.60VII. Revenue loss due to expected Reduced tax receipts (% to GDP) 1.00Total Fiscal Deficit 5.5 10.60

Note: * Provisional, ** Budget Estimates, *** Revised Estimates

Values in Rs. Crore

Global Economic Crisis: The Indian Perspectiveicrier.org/pdf/Presentation_Pankaj_Vashisht_SessionII.pdf · Global Economic Crisis: The Indian Perspective ... Reserve Bank of India

Documents