Global Crisis and the Indian Economy- On a Few Unconventional Assertions Sugata Marjit Centre for Studies in Social Sciences, Calcutta July,2009

MOTIVATION How Global Recession has impacted Indian Economy at a Macro Level? Looking at the issue of Industrial Recession and its relationship with overall GDP growth. Argue that Pre recession excessive liquidity growth was fuelling bubbles and putting pressure on monetary policy of the RBI. Thus a check on liquidity flow had a positive effect as well. Does recession in the organized sector spill over to the unorganized sector?

Certain Stylized Facts GDP has grown at 6.7% in Industry and Exports have been hit hard. Grew nonetheless on a yearly basis. Rates dropped significantly. Service Sector has done reasonably well.

Key Indicators

Query 1: To what extent Industrial Recession is reflected in Slowdown of GDP Growth Rate? To what extent Sectoral Slowdown is supposed to be reflected in overall GDP Growth Rate? Given shares of each sector in GDP, overall growth rate of GDP is unlikely to respond substantially to a significant slowdown in the industrial sector. Consider two pessimistic scenarios a 3% drop or a 4% drop from 9% ( done before the results were announced).

Table: 1 Sectoral Growth Rate Analysis Sector Growth Rate Growth rate of gdp at 6% Growth rate of gdp at 5% Agriculture (keeping growth rate of Industry & Services unchanged ) Industry (keeping growth rate of Agriculture & Services unchanged) Services (keeping growth rate of Agriculture and Industry unchanged)

Growth rate of GDP at 6%Growth rate of gdp at 5% Sectors 1st case: Growth rate of Services unchanged 2nd case: Growth rate of Agriculture unchanged 3rd case: Growth rate of Industry unchanged 1st case: Growth rate of Services unchanged 2nd case: Growth rate of Agriculture unchanged 3rd case: Growth rate of Industry unchanged Agriculture Industry Services Table 2: Sectoral Growth Rate Analysis

Table 3: Sectoral Growth Rate Analysis Sectoral Growth Rate Sectors (AE) GDP estimated to grow at around 7% Growth rate of GDP at 6% Growth rate of GDP at 5% Growth rate of GDP at 4% Agriculture Industry Services Source: Summary of Estiates of GDP at Constant ( ) Prices, CentralStatistical Organisation Macroeconomic and Monetary Development, Reserve bank of India

Table 4: Quarterly Growth Rates of Different Sectors Source: Macroeconomic and Monetary Development, RBI Q1Q2Q3Q1Q2Q3 Agriculture Industry Services GDP at factor cost

Query 2: Excess Liquidity and Bubbles Just before Global Recession became operational, for quite some time RBI had to face the problems of Excessive Liquidity Growth, sharp increase in Money Supply Growth Rate and related problems. Therefore, in a way Liquidity Shortage gave RBI and Monitoring Authority some breathing space.

Casual Hypothesis Hypothesis Excess Liquidity may lead to bubbles. If it can not be contained, then Recession induced Shortage of Liquidity brings the Asset Prices in line with the fundamentals. But how to check for bubbles in share or asset prices such as real estate? If there are bubbles, do they respond to the regime of Excess liquidity. Can we look for structural breaks? Difficult proposition to prove, but a worthwhile query.

Two examples The Stock Market scenario – A Simple method to track Bubbles – Relationship between Adjusted Closing Price and EPS with a three period lead. High share price today must be in expectation of high EPS in future. Relationship between the price and performance. There are anomalies for quite a few shares, but we do not know (yet) that such deviations are sensitive to the pressure of excess liquidity ( need to work out)

Excess Liquidity may increase distortion in Real Returns – If liquidity growth is uniformly distributed ( from aggregate demand side ) across sectors relative real return to capital in different sectors will remain the same. Over longer run returns should move towards each other, but if liquidity is unevenly distributed through policy the gap may continue to widen, distortions may increase. Expectations play a role. Too much emphasis on real estate lending could be the cause of distortion. Liquidity shortage may cure this to some extent.

Query 3: The role of Unorganized Sector which absorbs more than 90% of work force – How resilient is this one to recession? Data are yet to be available But is formal and informal highly related? Possibly not.

Correlation Coefficient of the growth rates of different variables between formal and Informal Sector: to Fixed assetsoutstanding loangross value addedWages per worker Correlation Coefficient ® p-values * *Significant at 10% level of significance to Fixed assetsoutstanding loangross value addedWages per worker Correlation Coefficient p-values