macroeconomics problem in india
TRANSCRIPT
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Renu KohliTokyo, May 21st, 2012
The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian
Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent.
ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of theiruse. Terminology used may not necessarily be consistent with ADB official terms.
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Outline
Current Macroeconomic Issues and Policies
How does the current slowdown impact the banking
Does all this change the long-term structural growth
story
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Economic performance: Brief profile
GDP growth averages 8.3% since 2003-04, from 6% in nineties
Well-diversified, evenly balanced, solid moorings: Investment shares rose from24% to 39% in 6-7 years; Savings jumped from 23.7% to 37%.
CAD between 1-2.5% of GDP for most part: Export growth >20% in the five
years to 2008; Import growth rapid, averaging 30% during 2003-2008; Oilmpor s a ou e s pace.
Weathered the crisis well as result: Ample policy space allowed appropriate policy
.
But the recovery has not sustained
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Growth has been slowing in 2011-12
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Weak investment driving current slowdown
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Inflation reigns high; recent slowing only from base effects
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Structural basis to inflation; temporary supply shocks
-capita income between 2004-05 and 2009-10
Consumption shift towards higher intake of proteins
Terms of trade shift towards agriculture
sca ax ty
Subsidy and welfare-schemes induced boost to consumption and ruralincomes
Global price increases in oil, commodities and food
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Supply-side response?
Long term decline in yields, stagnant productivity
consumption: pulses, edible oils, etc.
Heavy rain dependence, small holdings
Lack of public investment: weak rural infrastructure
ar et mper ect ons, ne c ent supp y c a n
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Large fiscal deficits, slow pace of consolidation
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Subsidies dominate spending; low public capex
2012/5/29 10Source: IMF Staff Report, 2012
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Revenues growth-dependent; borrowings rising
2012/5/29 11Source: IMF Staff Report, 2012
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Monetary responses to check inflation
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Monetary policy framework
Liquidity adjustment facility (LAF) key element in the operating framework ofmonetar olic
Single policy rate - Repo - signals stance; operates within corridor set by Bankrate and reverse repo rate (1%)
Objectives: Growth with price stability.
Operating targets: overnight call money rate (weighted average);
Operating objective: contain this rate around the repo rate within the corridor.
Other instruments to mana e ersistent li uidit : outri ht o en market
operations (OMO), cash reserve ratio (CRR) and market stabilisation scheme(MSS)
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How does it work in practice?
Monetary transmission substantially more effective in a deficit rather thana surplus liquidity situation; Most effective at the short-end of the yield
curve
Magnitude of liquidity ideal for effective monetary transmission [+ - 1%of net demand and time liabilities (NDTL) of banks] varies.
any s or ons mpe e sync ron za on
Rate controls on small savings deposits,
Statutory appropriation of bank reserves
Level of lender com etition
Asset-liability mismatches at banks
Recent deregulation of savings bank deposit rate
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Monetary policy transmission
Factors affectingliquidity: Government borrowings; intervention; low depositrowth
India: Yield curve (in percent)
10
Mar
2012Nov 20119
10
Apr
2012
Jan
2012
8
8
7
ON 3M 1Y 5Y 10Y
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Exchange rate policy: growing flexibility
Intermediate regime: does nottar et an articular REER level
Incorporated reserveaccumulation-cum-intervention
-inflows/outflows and avoidexcessive appreciation
Period of hands-off since 2009:no intervention or reserveaccumulation in this period
Current intervention to manageoutflow and currency pressures
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Wide, unsustainable external deficit
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Poor quality of financing
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controls
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Capital Controls: Current state of liberalization
Capital account still partially liberalized: Post crisis shift on use of capital
Equity: Unrestricted but 2 exceptions Restricted to approved FIIs. FIIs can only take equity participation up to 24% of firms capital, but can
FDI encourage; some sectors barred
Debt flows restricted:
FIIs participation in government & corporate bond market is capped., ,
beyond this, it is contingent on specific RBI approval. End-use restrictions apply. Banks/non-bank FIs - upto 50% of Tier I capital or US$10 million; short-term
portion of funds capped at 20% of unimpaired Tier I capital. GAAP limits apply.Likewise pattern for non-banks financial institutions.
Price/quantities varied to manage surges and ebb of short-term capital Interest rate wedge prevents arbitrage despite some porosity Reasonable success in navigating the trilemma
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Policy framework on capital flows
Explicitly stated capital account management framework
mp e po cy space or mu p e ns rumen s, .e. quan a ve m s, pr cebased as well as administrative measures
Short term debt: quantitative restrictions; only for trade transactions
Original sin, viz. excessive foreign currency borrowings by domesticentities, particularly the sovereign, avoided
Prudential regulations to prevent excessive dollarization of balance sheetsof financial sector intermediaries, especially banks
Cautious a roach to liabilit dollarisation b residents
Significant liberalization of permissible avenues for outward investmentsfor domestic entities.
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Macroprudential tools extensively used in India
These have been reasonably effective in preventing buildup ofimbalances, e.g. asset price bubbles
Key tools: risk weights; provisioning requirements; sectorexposure limits; LTV ratios, margin requirements and the buildup of foreign currency liabilities
ere espec a y use a ea o t e to restra n vers on ocapital inflows into asset price and credit boom
external sector policies and managing the capital account
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To contain asset price inflation: Stock prices
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Illustration: Recent policy responses to capital outflows
Since Sept. 2011: Intervention in forex marketto stabilize and manage expectations
.sovereign and corporate bonds ($5bn to $15
bn; $5 bn to $20 bn respectively)
Dec 2011: Prohibiting exporters fromcancellation and rebookin of forwardcontracts to check speculation (still remains inplace)
May 2012: Exporters were asked to liquidatehalf of their dollar holdings within a fortnight
May 2012: Intra-day trading limits for banksfixed at five times the limits on net overnightopen positions of banks (to check volatility)
Nov 11 & Apr 12: Interest rates on rupee andforeign currency deposits of NRIs
Apr 2012: Deregulation interest rate caps onforeign currency export credit raised abroad by
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Indian banks
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Future direction of capital account liberalization:
ey ssues an oa a ea
CA architecture corresponding to real economy; financial stability
Macroeconomic framework FDI flows:
Polic liberal barrin some sectors
Structural factors need to be addressed
Political convergence in some spheres
Portfolio flows QFIs: Implications; recent developments
Investments in debt Risks
Short-term vs long-term flows
Outflows
Access to financial markets NDF
Rupee for trade invoicing
CDS
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Banks impacted by the slowing growth
Global crisis shock
Weak economic recovery inadvanced economies
Pre-crisis credit boomaggressive lending by banks
Inflation; Monetaryti htenin
Current growth slowdown
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Trend in Growth Rate of Slippages and Gross NPAs
v s- -v s ross oans vances
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NPAs: Sector shares and growth rates, Sept 2011
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Impact: Profitability has fallen; capital dented
Change in CRAR and Net NPA
(End-Dec. 2011 over End-March 2011)
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Credit overhang: NPLs and restructured loans
2012/5/29 32Source: UBS Research
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Risks for banks ahead
Rising NPAs have been a big concern in 2011-12 turning public sectorbanks focus upon recovery
But a slowing economy is rapidly increasing the incidence of bad loans.
Material risks will arise in FY13 according to most analysts: NPAs likely tomigrate to lower categories (e.g. D2/D3/loss assets); higher incrementalprovisioning (25-75 bps)
Public sector banks, e.g. Union Bank, IOB, SBI, PNB and BoI have added
0.8-1.1% of advances into sub-standard and D1 categories over FY09-11. rms un er stress, ow pro a ty o mater a re uct on n nterest rates
imply a 20% jump in NPAs in FY13 while credit growth is expected averagejust 16-17%.
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FY13: while interest rates have fallen after 50 bps monetary easing in April,deposit rates still high. Deposit growth
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Corporate deleveraging still incomplete
2012/5/29 34Source: UBS Research
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What is the potential for long-term growth?
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Fundamental, structural drivers of growth
Attractive demographics: Falling dependency ratios, rising labor force
High savings rate: Around 35% of GDP, India is now well above the emerging
similar dynamics to those that launched East Asias growth in the 1960s and
1970s. Higher infrastructure investment: Significant need for investments in
infrastructure like air orts, orts, roads, ower, and railwa s is likel to rovideinvestment opportunities. Planned - $1 trilion over 2012-17; some analystsestimate infrastructure investment of US$2.5trn in the next 15 years.Productivity improvements through small policy changes at existing technology can
deliver GDP growth of 8-9% pa for the next 10-20 years ,finance, are relatively low;, implying room for high-growth investment ideas
Global drivers expanding tradable sector Vibrant private entrepreneurship
The rural segment: Convergence
Diffusion and dispersion: top to bottom; centre to periphery
Inclusive growth dynamics boost and positive spillovers
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Potential spoilers and risks
Political shortcomings: bureaucratic restrictions and regulation
Poor state of infrastructure
Education, skills and literacy gaps
But often, such constraints can serve as sources of future growth as bottlenecksare gradually removed, e.g. China in the 1980s.
Potential areas of macroeconomic concern: State of national sheet: Fiscal deficits persistent and structural; current account deficit
stands out for its vulnerability to short-term, volatile financing. Inflation
Reversing the weakening savings-investment rates
Rising energy dependency
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