Reviewing Macro-economic Developments and Understanding Macro-Economic Policy Module 5 Contemporary Themes in India’s Economic Development and the Economic Survey Arvind Subramanian Chief Economic Adviser 1 2017-06-14 Reviewing Macro Developments (Module 2) MINISTRY OF FINANCE GOVERNMENT OF INDIA
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Reviewing Macro-economic Developments and ......Reviewing Macro-economic Developments and Understanding Macro-Economic Policy Module 5 Contemporary Themes in India’s Economic Development
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I. Why is it important to monitor the economy in real-time: ingredients of any macro-economic assessment through the lens of the last three Economic Surveys
II. Framework for measuring these trends: domestic and external factors affecting the recent trends and future outlook for
(A) Inflation
(B) Output
III. Current scenario as an illustration: Policy response: assessing the stance of fiscal and monetary policy
2
I. Ingredients of Any Macro-
Economic Assessment
3
Ingredients of Any Macro-Economic Assessment
• Inflation
• Growth: Overall and sectoral
• Fiscal deficit
• External Sector1. Foreign exchange reserves
2. Capital flows
3. Exchange rates
• Financial Sector1. Credit growth
• Implications for the appropriate stance of fiscal and monetary policy
(Go to figure)
(Go to Figure)
(Go to Figure)
4
Current Account Deficit Should be Kept Below 3% of GDP; Foreign reserves should be at “comfortable” levels
250
260
270
280
290
300
310
320
330
340
350
360
370
380
May-0
9
No
v-0
9
May-1
0
No
v-1
0
May-1
1
No
v-1
1
May-1
2
No
v-1
2
May-1
3
No
v-1
3
May-1
4
No
v-1
4
May-1
5
No
v-1
5
May-1
6
No
v-1
6
Forex at the advent of financial
Indicator Norms Current Status
Import Cover 3 Months ~12 months
Short term external debt cover ratio 1 1.8
-5.0
-4.5
-4.0
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
2011-12 2012-13 2013-14 2014-15 2015-162016-17
H1
Current Account deficit
(percent of GDP)
Foreign exchange reserves (USD Billion)
5
FDI Desirable, Portfolio Investment Volatile…
6
-20
-10
0
10
20
30
40
50
2000
-01
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
20
06
-07
2007
-08
2008
-09
2009
-10
2010
-11
2011
-12
2012
-13
2013
-14
2014
-15
20
15
-16
2016
-17
US
$ b
illio
nNet FDI Net Foreign Portfolio Investment
Bilateral Nominal or Nominal Effective or Real Effective Exchange Rates
Nominal Exchange Rates: Rs/USD and NEER Real Effective Exchange Rate
• In the 2014-15 Survey, we contrasted the prevailing macro-economic indicators with the 2013 near-crisis situation to bring out the achievement of macro-economic improvement.
• The 2013 near-crisis situation affected five emerging markets (Fragile Five) so a cross-country, across-time comparison was done.
• In 2014-15, since inflation had been a challenge, we highlighted what we felt was a possibly structural change in the determinants of inflation: namely rural wage inflation.
8
Improving Macroeconomic Stability: Comparing India with “Fragile Five”
The Survey relied on an
overall macro-vulnerability
index (MVI), combing:
1. Fiscal deficit
2. Current account deficit
3. Inflation.
9
0.0
5.0
10.0
15.0
20.0
25.0
20
10
201
1
201
2
201
3
201
4
201
5
Brazil Indonesia South Africa TurkeyIndia Russia Mean MVI
Improving Macroeconomic Stability: Comparing India with “Fragile Five”
• Rational investors take
into account not just
macroeconomic stability
but also growth, which
crucially determines
rewards and returns.
• The Survey captured this
using a rational Investor
Ratings Index.
10
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
201
0
201
1
201
2
201
3
201
4
201
5
Brazil IndonesiaIndia ChinaRussia Mean (BBB)Mean (A Rating)
Fast Credit Growth and Past Crises
11Source: GFSR, IMF (April 2017)
Poor Standards: Assessing India’s and China’s Credit Ratings
5
6
7
8
9
10
11
70
90
110
130
150
170
190
210
2010201120122013201420152016
TSF*/GDP
GDP growth(RHS)
A+
AA-
Rating
upgrade by
S&P in
December
2010
BBB-
China
5
6
7
8
9
10
11
70
90
110
130
150
170
190
210
2010 2011 2012 2013 2014 2015 2016
Credit /GDP
GDP growth(RHS)
BBB-
AA-
India
*Total Social Financing (Source: IMF Article 4 Report for China) 12
Single Deflation (current methodology) Volume extrapolation
GVO 0.0
GVI -50.0
GVA 32.0 0.0 53
2. In Some Services Sectors (20% of Total GVA), Real GVA Growth Measured by Deflating Nominal Growth by Overall WPI Rather than CPI-services Deflator or Some Other Services-Related Deflator