global cost infalation

INTRODUCTION Trends vs. Cycles: Tendencies

Short Term Cyclical fluctuations (Project) => Trend Classify every uptrend as cyclical (‘overheating’)

Long Term Trends Medium Term Performance: 2003-04 to 2007-08 Short Term: Inflation – Global cost push Role of Policy reform:

Sustaining growth Raising productivity/ offsetting cost increases

02 August 2008 2General: AV

Economic Growth Perspective Phase I: 1950-1 to 1979-80

Two sub-phases (50to 65; 66 to 79)

Phase II: 1980-81 to 1993-4 Start: Policy regime change End (a) Crises year(1990-91). (b) Reform initiation

1991-2 (c) Adjustment/recovery (1992-3 to 1993-4)

Phase III: 1994-5 to ? 1994-95: Statistical significant growth break Rising trend growth


Figure 1: Three Phases of Growth(Phase III Result of radical reform)


-5%

-3%

-1%

1%

3%

5%

7%

9%

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

GdpmpGr GdpGrTrend GdpTndHpf

Recent Developments: Past five years ( 2003-4 to 2007-8)

Growth Acceleration GDP Average Income / Per capita GDPmp (PcGdp) Avg. Private Consumption (PvtCons)

Aggregate Growth drivers Supply side Demand Side

Sector drivers of growth


Growth acceleration: ( 2003-4 to 2007-8)

In the next three figures:- Cyclical movement around Rising trend

HP filtered trend

GDPmp: Avg. growth of 8.9% Per Capita gdp growth has doubled

To 7.3% (from 3.7% in 1980-1991) Average income will double in ten years

Avg. Private Consumption Gr rt: Almost doubled


Fig 2:Growth Acceleration-Gdp


3%

4%

5%

6%

7%

8%

9%

10%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

GdpmpGr GdpGrTrend GdpTndHpf

Fig 3: Per Capita Income


2%

3%

4%

5%

6%

7%

8%

9%

1992-3

1993-4

1994-5

1995-6

1996-7

1997-8

1998-9

1999-00

2000-1

2001-2

2002-3

2003-4

2004-5

2005-6

2006-7

2007-8

Grow

t

h

rat

e

(%)

Per Capita Income (PcGdpmp)

PcGdp

PcGma5y

Fig 4: Per Capita Consumption


Aggregate Demand Growth Dynamics: Investment Led growth

Growth of Demand Investment growth rate doubled Pvt consumption & imports accelerated Govt. Consumption-slowed

Role of private Consumption important but declined below that of Investment for first time

External : Short period of positive contribution (low oil prices) over

Govt Consumption: Lower contribution


Fig 6: Investment Led


15%

20%

25%

30%

35%

40%

Gdcf -

GDP ratio & moving avg (%)

Gdcf/Gdp MaGdcf/gdp

Fig 5: Investment Led Growth

02 August 2008 General: AV 12

6.1%5.3%

8.9%9.5% 9.2%

18.0%

5.0% 4.7%

7.0%6.2%

5.6%

4.5%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

91-2to97-8 98-9 to 02-3 03-4to07-8

Gdpmp GDCF PFCEdm GFCE

CONTRIBUTION TO DEMAND


55.0%57.7%

47.8%

34.0%

26.9%

60.1%

11.6% 12.0%

5.4%

-7.6%

13.6%

-14.7%-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

92-3to97-8 97-8 to 02-3 02-3to07-8

PFCEdm GDCF GFCE Net exports

Supply Side: Investment & Savings Investment growth led by

Fixed investment i.e. not inventory build up Private Investment i.e. Profitable

Increase in productive capacity of the economy Savings rate also rose: Private & Public sectors Saving rises with income/investment

Lag during sharp acceleration


Investment: Total, Fixed & Private (ratio to GDP)


15%

20%

25%

30%

35%

40%

2001-2

2002-3

2003-4

2004-5

2005-6@

2006-7*

2007-8

Investment-Ratios (% of GDP)

GCF/GDP GFCF/GDP IKpvt/Gdp

Supply Side: Savings Savings rate also rose by 9.8% (2003-4 to 2007-8)

Avg. 33.3% of GDP from 23.6% in previous 5 yrs

Private and Public Increment (4 yrs) 5.1% & 3.4% respectively Contributed(60:40)

Saving Rate: 36.1% of GDP in 2007-8 Maintenance of Investment and Saving Rate at 2007-8

levels enough to give average growth 0f around 9% Possible with deceleration in gr of profits, saving &

investment to 9%.02 August 2008 16General: AV

FDI : Inward and outward


0

5

10

15

20

25

30

35

FDI

(

US

$

bil

l

i

o

n)

FDI Inbound FDI Outbound

Sources of Growth


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

NDP/Lhp Kstock/Lhp TFPGhp

Sector Drivers Manufacturing

GDP/Value Added Investment: GCF, GFCF

Communication Competition and efficiency

Trade, Agriculture, Construction Labor intensive


Drivers of Growth


manufacturing16%

trade14%

communication11%

agriculture(crop)10%

construction10%

real estate,ownership of dwellings & business

services8%

banking & insurance8%

other services7%

transport by other means

6%

Rest10%

Contribution to Growth (2002-3 to 2007-8)

Sector Drivers of Growth Acceleration in Value Added: Increase in growth rate

Highest for Manufacturing and construction Followed by storage & agriculture.

Investment Growth: Manufacturing 30.5% per year Capital stock (end 2007-8 over end 2002-3).

Construction(1.92 times) Manufacturing (1.75 times), rade, Hotels & Restaurants (1.62 times).


Efficiency of Investment

.

1992-3 to 2003-4 2004-5 2005-6 2006-7 2003-4 to Change

ICOR 2002-3 (act) (act) (rev) (est) 2007-8

Manufacturing 11.1 8.6 9.5 10.5 8.3 9.2 -1.9

Construction1.5 1.3 1.0 1.0 1.4 1.2 -0.4

Telecommunication2.2 0.5 0.6 0.6 0.4 0.5 -1.7


Summary: Medium term gr trend Growth has accelerated in last five years While Consumption growth remained robust, the

acceleration was Investment led External sector was a drag on demand because of oil

(and other) price increases Private investment particularly corporate is leading

investment and growth Domestic Saving rate has increased inline with I Telecom, Construction, Manufacturing were the

leading sectors 11th Plan target of 9% average growth will be met


INFLATION: Global effects Kemal Dervis Exim lecture(18/3/08): Global Cost push

Global Commodity Price Shock All commodity index Food price Index

Edible oil (Palm): Net Importer Effect on India: Primary food & edible oils

Iron Ore: Net exporter Mineral Oil: Net Importer

Impact on Indian Inflation Comparison: India(Wpi), USA(Pppi), UK(Ppi Manf)


Global Cost Push?


-10%

0%

10%

20%

30%

40%

50%

60%

70%

All Food

Global Supply: Edible Oil(Palm)


350

450

550

650

750

850

950

1,050

1,150

2005M4

2005M5

2005M6

2005M7

2005M8

2005M9

2005M10

2005M11

2005M12

2006M1

2006M2

2006M3

2006M4

2006M5

2006M6

2006M7

2006M8

2006M9

2006M10

2006M11

2006M12

2007M1

2007M2

2007M3

2007M4

2007M5

2007M6

2007M7

2007M8

2007M9

2007M10

2007M11

2007M12

2008M1

2008M2

2008M3

2008M4

2008M5

2008M6

World Price of Palm Oil ($/MT)

Palm oil

Global Supply Shock: Iron Ore


60

70

80

90

100

110

120

130

140

150

2005M4

2005M5

2005M6

2005M7

2005M8

2005M9

2005M10

2005M11

2005M12

2006M1

2006M2

2006M3

2006M4

2006M5

2006M6

2006M7

2006M8

2006M9

2006M10

2006M11

2006M12

2007M1

2007M2

2007M3

2007M4

2007M5

2007M6

2007M7

2007M8

2007M9

2007M10

2007M11

2007M12

2008M1

2008M2

2008M3

2008M4

2008M5

2008M6

World Price of Iron Ore(cents/MT)

PironOre

Global Supply Shock: Oil Price


100

120

140

160

180

200

220

240

260

2005M6

2005M7

2005M8

2005M9

2005M10

2005M11

2005M12

2006M1

2006M2

2006M3

2006M4

2006M5

2006M6

2006M7

2006M8

2006M9

2006M10

2006M11

2006M12

2007M1

2007M2

2007M3

2007M4

2007M5

2007M6

2007M7

2007M8

2007M9

2007M10

2007M11

2007M12

2008M1

2008M2

2008M3

2008M4

2008M5

2008M6

Global Oil Price Index (IMF)

Poil

Rate of Growth: Iron Ore & Oil


-20%

0%

20%

40%

60%

80%

100%

PironOre Poil

Contribution to change in WPI


-1

1

3

5

7

9

11

13

03.04

03.06

03.08

03.10

03.12

04.02

04.04

04.06

04.08

04.10

04.12

05.02

05.04

05.06

05.08

05.10

05.12

06.02

06.04

06.06

06.08

06.10

06.12

07.02

07.04

07.06

07.08

07.10

07.12

08.02

08.04

08.06

Pman Pfl Pprf Pprnf Pmnrl

Acceleration in Inflation during 2008 H1 over 2007 H1: Contribution of different commodities

WPI Inflation during H1 2007 (i.e. from December 2006 end to June 2007 end) was 2.7%.

Inflation during H1 2008 (i.e. from December 2007 end to June 2008 end) was 9.9%(est).

Of the 7.2% increase in inflation this year, 2/3rd was due to 3 sets of commodities: Edible oils (including) oils seeds and oil cakes) Iron and Steel (including iron ore) Mineral Oils and refinery products


Inflation in India (WPI) and USA(PPI)


-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2007.01

2007.02

2007.03

2007.04

2007.05

2007.06

2007.07

2007.08

2007.09

2007.10

2007.11

2007.12

2008.01

2008.02

2008.03

2008.04

2008.05

2008.06

IndiaWpi UsaPpi

Inflation: India-WPI Manf, UK-PPI Manf, USA PPI Ind


-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%2007.01 2007.02 2007.03 2007.04 2007.05 2007.06 2007.07 2007.08 2007.09 2007.10 2007.11 2007.12 2008.01 2008.02 2008.03 2008.04 2008.05 2008.06

UsPpiInd UkPpiMnf IndWpiMf

Inflation Convergence: US & India

19th Junel 2008 34Mumbai Isec: AV

-3

-1

1

3

5

7

9

11

13

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Infl

a

t

i

o

n

(%)

India Ppfce US Pcons

Diff:India-US Poly. (Diff:India-US)

CPI(unme) & Gdp Pvt Cons deflator


1%

3%

5%

7%

9%

11%

13%

97q1 97q2 97q3 97q4 98q1 98q2 98q3 98q4 99q1 99q2 99q3 99q4 00q1 00q2 00q3 00q4 01q1 01q2 01q3 01q4 02q1 02q2 02q3 02q4 03q1 03q2 03q3 03q4 04q1 04q2 04q3 04q4 05q1 05q2 05q3 05q4 06q1 06q2 06q3 06q4 07q1 07q2 07q3 07q4 08q1

CPI unml Pfce def

Monetary Policy and Inflation Cost Push and Monetary accommodation!

Monetary Policy includes exchange rate policy Important only for its effect on objectives

Monetary Policy Objectives Production/Growth & Inflation – emphasis varies Socio-Political Tolerance level of Inflation Primary Focus Today- Inflation & Expectations

Capital flows main driver of RM gr. (prt. Q4 2007-8) M3 gr. exceeded peaks of 92.10 (98.10) in 07.10 M3ma gr. exceeded peaks of 95.04 and 98.04 in 07.01


Monetary Accommodation?


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

11%

13%

15%

17%

19%

21%

23%

94.05

94.10

95.03

95.08

96.01

96.06

96.11

97.04

97.09

98.02

98.07

98.12

99.05

99.10

2000.03

2000.08

2001.01

2001.06

2001.11

2002.04

2002.09

2003.02

2003.07

2003.12

2004.05

2004.10

2005.03

2005.08

2006.01

2006.06

2006.11

2007.04

2007.09

2008.02

2008.07

Mone

y

(rea

l)

gro

w

t

h

Mone

y

(M3)

Gro

w

t

h

M3 M3rlc

Real Interest Rate Convergence: US-India


-4

-2

0

2

4

6

8

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Inte

r

e

s

t

rat

e(

%)

US1yr India364d Dif:Ind-Us Poly. (Dif:Ind-Us)

Inflation & Interest rates Inflation Trajectory

Medium Term: Down to normal level in a year Short Term: Depends on Oil prices

Real Interest rates Short term: Decline Medium Term: U shaped pattern to normal in a year

Aggregate Inflation: Who is hurt Poor- unskilled wage lag. Every one cannot be hurt unless GDP declines!


Growth/Production objective:Policy and Institutional Reform March 2008 Forecast: 8% to 9% (8.5 -/+ 0.5) Oil shock and Production(IIP) data:

Revised forecast: 7.75% to 8.75% (8.25% -/+ 0.5)

Productivity enhancing reforms can help moderate cyclical downturn and inflation upturn.

Motivation for revisiting/reviving pending reforms Energy Sector: Oil shock Investment Environment


Medium-Long term implications Natural Resources

Non-renewable (Oil, selected minerals): Rising relative price => Need for User efficiency, Technical change

Renewable : Land-intensive agriculture crops (cereals) Extensive margin (e.g. forest clearing) constrained by climate

and environment concerns. Race between productivity and global demand. Relative prices could stabalise at higher levels


Balance of Payments Capital Flows

Trends and Volatility (FDI, FII, ECB) Current year: Below trend- FII (Global risk/liquidity

preference vs. liquidity). Medium Term: Surplus capital flows/reserve accum.

Current Account Invisibles: Non-factor services (software) & prviate

remittances low volatility around rising trend Exports (G&S) to Oil/natural resource exporters will

increase, perhaps with a lag. CAD : U-shape


Excess Capital Flows-over CAD (% of GDP)


-1%

0%

1%

2%

3%

4%

5%

6%

7%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Capi

t

a

l

Flo

w

s

(

%GD

P)

Excess Capital flow Portfolio (FII)

Linear (Excess Capital flow) Linear ( Portfolio (FII))

Current Act and Goods & Services Deficit


-3%

-2%

-1%

0%

1%

2%

3%

4%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Pay

m

e

n

t

s

Bal

a

n

c

e(

%

G

D

P)

Goods &Services Def Curnt Act Def

Poly. (Goods &Services Def) Poly. (Curnt Act Def)

Long Term: Sustaining Growth Reforms essential for sustaining 9% for two decades. Policy Reform

Structural change: Labor market flexibility Competition: Decontrol, free entry

Industry(sugar, fertilizer), mining(coal), infrastructure (electricity - open access), financial services.

Education and Skills: Regulated (transparency, rating) entry (freer), controls (minimal)

Urban Land policy (land use, supply, development, utilities)


Sustaining Growth: Institutional reform

Public and Quasi-Public goods & services National Networks: Drinking Water, Waste (solid and

liquid) Universal Primary education-outcome (not enrolment) Civic/Urban services

Social service delivery: Empowerment Debit/credit (smart card): PC WP 2002 Multi-application smart card (UID): 2005, 2006, 2007


References Precursor:

India’s Economic Growth: From Socialist Rate of Growth to Bharatiya Rate of Growth, Working Paper No. 122, ICRIER, February 2004.

Two Phases (4 sub-phases), Third phase statistically insignificant.

Heuristic Theory and Empirics! Policy Regimes, Growth and Poverty in India: Lessons of Government Failure and

Entrepreneurial Success!, Working Paper No. 170, ICRIER, October 2005. The Dynamics of Competition: Phasing of Domestic and External Liberalisation in

India,” Working Paper No. 4/2006-PC, Planning Commission, April 2006. Propelling India from Socialist Stagnation to Global Power: Growth Process, Vol. I

(Policy Reform, Vol. II), Academic Foundation, New Delhi, 2006. “Maco-economic Management of Indian Economy: Capital Flows, Interest Rates and

Inflation, Working paper No. 2/2007-DEA, Ministry of Finance, November 2007. Economic Survey, 2007-8, February 2008


global cost infalation

Education

private investment

gdp growth

average growth

sustaining growth

fixed investment

growth accelerationgdp02

maintenance of investment

private consumption