1 “ India is a great economy now, we are posed to lead the world into the next century and regain our golden bird status. We will walk alone and show the world that …... We are the best” Choudhary Nathu Ram
Dec 17, 2014
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“ India is a great economy now, we are posed to lead the world into the next century and regain our golden bird status. We will walk alone and show the world that …... We are the best”
Choudhary Nathu Ram
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INDIA AND THE DECOUPLING HYPOTHESIS
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INTRODUCTION
GREATER INTEGRATION WITH THE WORLD
FINANCIAL INTEGRATION IS VISIBLE
TRADE AND SERVICES HAVE AMALGAMATED
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INTRODUCTION
INTEGRATION WITH BUSINESS CYCLE SYNCHRONISATION ?
HIGH ECONOMIC GROWTH - DECOUPLED
ARE WE FOOTLOSE AND ON OUR OWN ?
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INTRODUCTION
INCREASING TRADE INTENSITY-BUSINESS CYCLE SYNCHRONISATION
EVERYONE SEEMS TO BE TALKING ABOUT DECOUPLING
NO THEORY OR CONSENSUS ON DEVELOPING NATIONS
DECOUPLING – THE GREAT DEBATE
DIVERGENT PERFORMANCE OF ECONOMIES IN 2008 ECONOMIC CRISIS
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INTRODUCTION
EARLIER STUDIES – INCREASED SYNCHRONISATION
SOME FIND INCREASED CORRELATION
RECENT STUDIES REVEAL A MIXED TREND
OTHERS FAVOUR DECOUPLING
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INTRODUCTION
ANECDOTAL EVIDENCE FOR INDIA
WE WILL LOOK AT BOTH SIDES OF THE COIN : WHICH SIDE IS THE TOAST BUTTERED
SYSTEMATIC EVIDENCE IS LIMITED
GRAPHICAL ,STATISTICAL ,ECONOMETRIC DATA TO PROVE/DISPROVE THE HYPOTHESIS
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CONTENTS
THE DECOUPLING HYPOTHESIS
WHAT IS A BUSINESS CYCLE
REASONS TO SAY YES
BUSINESS CYCLE SYNCHRONISATION
WHAT DOES IT IMPLY
REASONS TO SAY NO
TESTING THE HYPOTHESIS
CONCLUSION
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THE HYPOTHESIS
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DECOUPLING HYPOTHESIS
The decoupling hypothesis is the idea that business cycles in emerging market economies have become more independent from business cycles in advanced economies in recent years. Decoupling essentially amounts to a structural break in the degree of business cycle interdependence between the two groups of economies
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HYPOTHESIS
ECONOMIES OF WORLD ARE INDEPENDENT OF EACH OTHER
INDIA’s GROWTH RATE OF 9-10% REFLECTS THRIVING DOMESTIC ECONOMY
TROUBLES IN WEST MIGHT PROVE TO BE ADVANTAGEOUS FOR INDIA
OUTSOURCING OF SERVICES
ONLY 22% OF INDIA’s ECONOMY IS EXPORT RELATED
EMERGING MIDDLE CLASS
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HYPOTHESIS
THE BUBBLE WAS FORMING
SKYROCKETING PRICES OF REAL ESTATE
STOCK MARKETS ROSE RAPIDLY
INCREASED PARTICIPATION OF MIDDLE CLASS IN STOCK MARKETS
MUTUAL FUND INDUSTRY BOOMED FROM $5 BILLION TO $40 BILLION
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HYPOTHESIS
STOCK MARKET BUBBLES TEND TO BE SELF CONTAINED
DECOUPLING THEORY MIGHT HAVE HELD UP IN CASE OF JUST STOCK MARKET BUBBLE
CREDIT BUBBLES LEAD TO A ‘DOMINO EFFECT’
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HYPOTHESIS
INDIAN STOCK MARKET ON A STEADY DECLINE
FOREIGN BANKS STARTED PRESERVING THEIR OWN CAPITAL
FLIGHT OF FOREIGN CAPITAL
GETTING LOANS FROM OUTSIDE HAVE BECOME DIFFICULT
INDIAN ECONOMY HAS SLOWED DOWN
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“When liquidity dries up, it doesn’t matter where you are”
Jamshid Pandole
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REASONS TO SUPPORT OR REJECT THE HYPOTHESIS
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REASONS FOR SAYING “YES”
EMERGING ECONOMIES COULD BE ‘DE-LINKING’ FROM THE DOMINANT ECONOMIES
PICKING UP OF ECONOMIC GROWTH IN INDIA
INCREASED IMMUNITY FROM IMPACT OF AN ECONOMIC DOWN - TURN
STRONG COMPLIMENTARITY BETWEEN EXPORTERS OF MANUFACTURING GOODS AND PRIMARY GOODS
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REASONS FOR SAYING “YES”
INDIAN RURAL ECONOMY STRONG ENOUGH
SMALLER EXPORT SECTOR RELATIVELY LESS RELIANT
STRENGTH OF RURAL ECONOMY- PRIMARY CAUSE OF DECOUPLING
INDIA TOWARDS MIGRATION
Cont…
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ROBUST INDIAN FINANCIAL SYSTEM
SAVINGS RATE
WILLINGNESS TO TAKE FISCAL CONSOLIDATION
LOW HOUSEHOLD DEBT
LOW FUNDING COST FOR HUGE INVESTMENT
AVAILABILITY OF EQUITY AND DEBT FUNDING
STRONG CONSUMPTION OVER THE NEXT DECADE
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REASONS FOR SAYING “NO”
IN 1990’s PRIVATE CONSUMPTION 67% OF GDP,SHARE OF EXPORTS 9% AS COMPARED TO 59% & 24.5% OF GDP IN 2008-09
INCREASED BUSINESS CYCLE SYNCHRONISATION OF INDIAN ECONOMY WITH THE DEVELOPED WORLD
EVERY 1% DECLINE IN WORLD GDP GROWTH LEADS TO AROUND 3.71% DECLINE IN INDIAN EXPORTS
EVERY 1% DECLINE IN WORLD GDP RESULTED IN 4% DECLINE IN INDIAN SOFTWARE EXPORTS
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REASONS FOR SAYING “NO” cont…
SHARE OF MANUFACTURED EXPORTS ROSE FROM 27.1%(1990-91) TO 52.2%(2000-01) & FURTHER TO 72.3% (2008-09)
IN 2008-09, EXPORTS PLUS IMPORTS OF GOODS & SERVICES FORMED AT LEAST HALF OF THE GDP
THE SERVICES EXPORT TO GDP RATIO ROSE FROM 3.2%(1990-91) TO 15.1% (2008-09)
SHARE OF FDI IN INVESTMENT INCREASED FROM 7% IN 2007 TO 8% IN 2008
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BUSINESS CYCLE AND ITS SYNCHRONISATION
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BUSINESS CYCLE
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BUSINESS CYCLE THEORIES
KEYNESIAN THEORY
REAL BUSINESS CYCLE THEORY
POLITICAL BUSINESS CYCLE THEORY
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BUSINESS CYCLE
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BUSINESS CYCLE SYNCHRONISATION
DEMAND CHANNEL- DEMAND SHOCKS IN ONE ECONOMY LEAD TO INCOME SHOCKS IN ITSTRADING PARTNERS
MONETARY POLICY IS A CHANNEL FOR COMOVEMENT BETWEEN COUNTRIES
BUSINESS CYCLE CONVERGENCE
FINANCIAL MARKETS LINKAGES AND CONTAGION
INCREASED FINANCIAL INTEGRATION SYNCHRONIZES CAPITAL FLOW
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GRAPHICAL AND STATISTICAL TESTING
OF HYPOTHESIS
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EXPLAINATION OF TERMS
TREND-trend of the GDP
output gap of each country- output gaps represent business cycles for a country. The output gap = (nominal GDP-trend GDP)/trend GDP
Euclidean distance : Euclidean distance equals to the absolute value of the difference between the output gap of the emerging-market economy (either individually or as a group) and the output gap of a group of advanced-market economies
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GRAPHICAL METHOD
Hence Euclidean distance takes into account the difference in amplitude and thus offers an innovative way of measuring synchronization. When Euclidean distance equals to zero, the business cycles are perfectly synchronized. Any other value (positive due to absolute sign) means imperfect synchronization and therefore the larger the distance, the larger the business cycle interdependence.
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1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
0
0.5
1
1.5
2
2.5
3
3.5
India-EU
Euclidean distance
trend
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
0
0.5
1
1.5
2
2.5 India-USA
Euclidean distance
trend
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
0
0.5
1
1.5
2
2.5
3
3.5
India-World's advanced Economies
Euclidean distance
trend
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
0
0.5
1
1.5
2
2.5
3
3.5
India-G7
Euclidean dis-tance
trend
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ECONOMETRIC EVIDENCE
SERIES OF REGRESSION USING THREE VARIABLES
INTERCEPT (ALPHA), TWO COEFFICIENTS (BETA) & (GAMMA)
EMERGING MARKET OUTPUT GAP, ADVANCED MARKET OUTPUT GAP & DUMMY VARIABLE
NEGATIVE GAMMA CONFIRMS DECOUPLING HYPOTHESIS
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2000 2001 2002 2003 2004 2005 2006 2007
USA β 0,35 (0,07)0,32
(0,009)0,25
(0,018)0,27
(0,017)0,32
(0,09) 0,36 (0,06)0,41
(0,04)0,29
(0,017)
structural break γ-0,91
(0,005)2,98
(0,02) 1,30 (0,08)0,85
(0,021)1,99
(0,003)
-1,26
(0,043)
-0,77
(0,023)0,28
(0,005)
E.U. β 0,35 (0,07)0,30
(0,012)0,27
(0,014)0,34
(0,06)0,36
(0,05) 0,35 (0,06)0,35
(0,06)0,32
(0,09)
structural break γ-0,02
(0,009)0,69
(0,003) 1,50 (0,07)1,70
(0,09)4,71
(0,02)0,61
(0,055)0,72
(0,005)1,47
(0,003)
World’s advanced Economies β 0,38 (0,05)
0,34 (0,08) 0,30 (0,01)
0,36 (0,05)
0,39 (0,041)
0,38 (0,046)
0,38 (0,047)
0,35 (0,06)
structural break γ 0,06 (0,09)0,67
(0,037) 1,39 (0,07)3,38
(0,01)1,28
(0,021) 1,59 (0,05)2,47
(0,005)1,23
(0,003)
G-7 β 0,35 (0,07)0,31
(0,01)0,27
(0,014)0,33
(0,07)0,37
(0,05) 0,36 (0,06)0,36
(0,06)0,32
(0,09)
structural break γ0,16
(0,009)0,76
(0,034) 1,41 (0,07)4,24
(0,11)
-0,420
(0,19) 0,31 (0,02)0,31
(0,005)1,36
(0,03)
ECONOMETRIC METHOD OF TESTING
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TESTING RESULTS
BOTH GRAPHICAL AND ECONOMETRIC TESTING POINT TO A GREAT EXTENT OF COUPLING WITH THE WORLD ECONOMY
SOME PARAMETERS SHOWED A SLIGHT DECOUPLING FROM THE US ECONOMY
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THE VERDICT
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GROUPS MANDATE
PROVE OR DISPROVE THE HYPOTHESIS
CHECK THE DIVERGENCE OF OUR GROWTH PATH
STUDY THE BUSINESS CYCLE SYNCHRONISATION
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CONCLUSION
DECOUPLING HYPOTHESIS –A MYTH
DECOUPLED -WORLD BANKING SYSTEM TO A GREAT EXTENT
PRUDENCE OF OUR POLICY MAKERS AND CENTRAL BANKER
THIS SELECTIVE RISK AVERSION SAVED US
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TRIPARTITE BLOW
HIGH INTERST RATES
MANAGEMENT OF FOREX
INFLATION
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GROWTH SNUBBED
IIP FIGURES AT
5.6% ARE AT THEIR LOWEST IN 9 MONTHS
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RECOMMENDATIONS
TREAD CAREFULLY ON INTEREST RATE HIKES
REMOVE SUPPLY SIDE BOTTLENECKS
MONETARY POLICY ALONE WILL NOT CONTROL INFLATION
IMPROVE INFRASTRUCTURE BY 200%
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RECOMMENDATIONS
REDUCE DEPENDENCE ON IMPORTED OIL
STEM OUT CORRUPTION-BLACK MONEY DILLEMA
IMPROVE FARM PRODUCTIVITY-WEAN SUBSIDIES GRADUALLY
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“ India is a great economy now, we are posed to lead the world into the next century and regain our golden bird status. We will walk alone and show the world that …... We are the best”
Choudhary Nathu Ram
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STOCK MARKET RETURNS OF INDIA Vs EMERGING ECONOMIES
Emerging Markets are shown by the green line, the USA by the blue line, and non-US developed stock markets by the orange line
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BUSINESS CYCLE
PERIODS OF EXPANSION AND CONTRACTION
TROUGH RELATES TO ECONOMIC DECLINE
PEAK REFERS TO ECONOMIC EXPANSION
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The growth of the Indian economy has become more tightly correlated to world growth in the last decade. While the correlation was 0.43 in the1980s and 0.59 in the 1990s, the slow and steady opening up of the economy led to an increase in this correlation to 0.92 during the period 2001-08
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THE TEST FOR DECOUPLING – THE GLOBAL CRISIS 2008
EVIDENT FINANCIAL & COMMERCIAL INTERDEPENDANCY BETWEEN INDIA & US
TIGHTENING OF LIQUIDITY IN DOMESTIC MARKETS & CONSTRAINTS IN ACCESS TO EXTERNAL FINANCING
INDIRECT EFFECT OF SUB PRIME CRISIS IN FORM OF LARGE CAPITAL OUTFLOWS
DROP IN US DEMAND LED TO AN END TO EXPORT DRIVEN GROWTH & DISRUPTION OF INTRA ASIAN TRADE