India macro reports

Under the financial crisis in 2008, India has brought out the following monetary and fiscal policies to alleviate the crisis’ impact and influence on the Indian economy.
(I) Monetary Policy
To reduce the impact of the financial crisis on India, India’s Central Bank has successively resorted to means such as cutting interest rate reduction, increasing credit support, loosening foreign credit restrictions and boosting financial support for real estate and export etc. to strengthen financial support for the real economy.
The 1st initiative was to ease monetary policy and increase mobility. Starting from Oct. 2008, the Reserve Bank of India has lowered bank-lending rates fives times in succession on Oct. 20, 2008, Nov.1, 2008, Dec. 6, 2008, Jan.2, 2009 and Mar.4, 2009 respectively. On Oct.10, 2008, the Central Bank decided to lower the benchmark Lending rate from 9% to 8%, which was eventually lowered to 5% by Mar.4, 2009 following five times reduction in succession. Another initiative of the Central Bank was to reduce the cash reserve ratio to 7.5% twice on Oct. 6, 2008 and Oct. 10, 2008. The ratio was then lowered to 5.5% on Nov. 1 the same year.
The 2nd was to strengthen financial support for various departments of the national economy. India’s Central Bank has successively increased 5.617 trillion rupees for non-bank financial institutions, housing finance companies, the export sector and other institutions. This move helped to greatly ease the liquidity crunch resulted from economic downtown and capital outflows. In addition, the Reserve Bank of China provided up to 40 billion rupees to the National Housing Bank in Oct. 2008, requiring public banks to launch a housing loan stimulus policy of 0.5-2 million rupees. Later in Nov the same year, the Bank canceled real estate lending restrictions and permitted loans from foreign institutions. India also relaxed its restrictions on overseas commercial loans and lifted corporate bond investment upper limit from 6 billion dollars to 15 billion dollars. An additional 220 billion rupees credit support was provided to export, 2 % lower than the benchmark-lending rate. On Nov. 1, 2008, banks were allowed to lend from the Central Bank loans less than 1 of the deposit and 400 billion rupees were injected into the banking system. On Nov. 16, banks’ trade credit financing would be doubled via prime rate to 220 billion rupees while the repayment period was extended to 9 months. Also, the policy support for mutual funds and non-bank financial institutions was extended to Mar. 2009. In Dec. 2008, the Central Bank began allowing enterprises to repurchase the outstanding convertible foreign currency bonds by rules and took advantage of the low-cost environment of foreign credit markets to clear high-interest debts. Later in Jan. 2, 2009, the Central bank made a decision to provide 250 billions rupee credit to non-bank financial companies via specific channels and allow all states to raise 300 billion rupees from the credit market. Via the injection of liquidity and loosening of monetary policies, the Reserve Bank of India’s stimulus policies fully met the liquidity needs of various industries in the national economy and eased the negative impact of the financial crisis on economic growth.

(II) Fiscal Policy
In addition to providing liquidity support via monetary policies, the Indian government also resorted to fiscal stimulus to increase financial spending, accelerate infrastructure construction, reduce taxes and increase export support. India's central government has successively introduced 3 sets of fiscal stimulus polices in Dec. 2008, Jan. 2009 and Mar. 2009. The first was launched on Dec. 7, 2008 with a program totaling 307 billion rupees. The entire amount of fiscal stimulus spending reached 1.8% of GDP, including additional 200 billion rupees expenditure in fiscal 2009. The central excise duty was reduced by a unified rate of 4% regardless of the type of goods except petrochemical products, tobacco products and products with special tax rate. This was accompanied by the overall 4% drop in the central value-added tax and providing small subsidies, tax rebate and export guarantees for textiles, leather products, jewelry, seafood and other labor-intensive industries export. In addition, Indian government provided a stimulus package of over 200 billon rupees to encourage exports, including the return of part of the excise duty levied on export commodities and the provision of 7% preferential export credit for handicrafts, textiles, jewelry, leather exports and SMEs. In the filed of export tariffs, 8% export tariffs on iron powder was fully canceled and the iron ore export tariffs was reduced to 5% from 10%. Indian government also authorized India Infrastructure Finance Ltd. to issue 100 billion rupees of tax-exempt bonds which would be mainly put on highways, ports and other infrastructure projects.

The 2nd Fiscal Stimulus
Introduced on Jan. 2, 2009, the policies mainly include utilizing 2 trillion rupees (about $ 50 billion) to ensure economic growth. This fund would be primarily used to support automobile manufacturing, real estate industry, infrastructure projects and small and medium enterprises. Re-impose special tariffs on some imported steel products and cement, abolish measures of exempting zinc alloy and iron alloy from basic tariffs that were adopted to curb inflation. To encourage exports, the government has increased the export tax rebate for textiles and other goods.

The 3rd fiscal stimulus package
Introduced on Feb. 25, 2009 launch, the policies mainly include reducing the service tax rate from 12% to 10% and lowering the consumption tax rate by 2% (only applicable to goods with a current consumption tax rate of 10%). In addition, the consumption tax rate implemented from Dec. 2008 was lowered by 40% and would be extended to Mar. 31, 2009 while the tariff-free policy for naphtha import was extended to Mar. 2009.

II. Main Effects of the Stimulus Packages
The main results of the Indian economy stimulus are reflected in the following aspects.

(I). Slowing down the downtrend in economic growth.

2007-2008
2008-2009
2009-2010

Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Agriculture
4.3
3.9
8.1
2.2
3.0
2.7
-0.8
2.7
2.4
Industries
9.2
9.1
8.2
6.2
6.0
6.1
2.3
1.4
5.0
Services
10.8
10.3
10.3
11.8
10.2
9.8
10.2
8.6
7.8
GDP
9.2
9.0
9.3
8.6
7.8
7.7
5.8
5.8
6.1
Source: Economic survey 2008-2009, p. 2
The downward trend in economic growth was curbed through a series of fiscal stimulus and monetary policies. The rapid downward trend in India's economy in the fourth quarter of 2008 has been contained with the quarterly growth beginning to accelerate. India's economy in year 2007-2009 and 2007-2008 fiscal year maintained a growth of 9.0% when calculated with constant prices. While in 2008-2009 fiscal year, starting from the3rd quarter, India’s economic growth saw a rapid decline to 5.8% from 7.7% of the 2nd quarter. Under the economic stimulus effect, starting from the 4th quarter of 2008, India’s economic growth rate picked up from 5.8% at the 3rd quarter to 6% at the 1st quarter of 2009-2010 fiscal year, successfully curbing the downward trend of rapid economic growth. The growth rate of the 1st, 2nd and 3rd quarter of 2009-2010 fiscal years reached 6.5%, 6.8% and 7.9% respectively, showing a gradually increasing trend. In the three industries, the agricultural growth rate surged from 0.8% in the 3rd quarter of 2008 to 2.4% in the 1st quarter of 2009-2010, accompanied by an industrial growth from 2.3% to 5.0% while the service industry witnessed a decline to 7.8% from 10.2%. Causes of this phenomenon was that loose fiscal and monetary policies helped to increase market demand for industrial and agricultural goods and reduce financing costs while loosened mobility made financing easier, promoted enterprise cash low and improved agricultural and industrial economic growth. By contrast, the service sector growth was relatively stable which was much related with the service demand and residents’ individual income level. In consequence, government’s economic stimulus produced smaller impact and was still in adjustment.

(II) Improved Business Efficiency
Table 3: Corporate Performance: Manufacturing Sector (Year-on-Year Growth in Per Cent)

According to India's Ministry of Industry and Commerce survey of 1,870 companies, Indian companies saw a significant improvement in business efficiency in 2009-2010 when enterprise net profit margin rocketed from -57.3% in Q3 of 2008 - 2009 to 21.8% in 2009-2010 fiscal year. The main impetus behind Indian companies’ economic growth was that after the outbreak of the financial tsunami, oil and mineral prices began to drop while at the same time, the unemployment rate increased resulting in a decline in the average wage level among Indian companies and a reduced employment costs. However, it should be noticed that corporate profit rising was accompanied by a sales decline, indicating a still gentle market demand. This also became the adverse impact factors from enterprise operation in the next year.

(III) Improved International Payment Situation
India was in a deficit international payment state in 2006-2007 and, under the impact of the financial crisis, India’s balance of payments amounted to -$ 92.164 billion in 2007-2008 from -$ 36.606 billion of 2006-2007. As affected by export tax rebates, export subsidies and other stimulus policies, India’s balance of payments showed a favorable balance in 2008-2009. The balance of payment improvement was mainly due to the capital inflow increase amidst capital projects. Despite the preferential policies to encourage exports in current accounts, the current account deficit remains with the difference expanded from -$91.626 billion in 2007-2008 to -$119.403 billion in 2008-2009. The current situation has not fundamentally improved. Nonetheless, due to the high growth of the Indian economy, foreign capital is still optimistic about the prospects for India, and therefore under the capital account, the inflow situation has greatly improved Indian International balance of payments.

The negative effects of Indian economic stimulus policies are mainly reflected in two aspects. Firstly, the government's budget deficit is too large; second, domestic inflationary pressure is on the increase and has to tighten again.
(I) Government Deficit Remains High
Under the financial crisis, due to the lowered business efficiency, increased unemployment and reduced government revenue, the government’s countertrend spending increase will undoubtedly increase the difficulty of the government's fiscal balance. Indian government will encounter enormous future deficit pressure.
(II) Increasing Inflationary Pressures
Though loose monetary policies helped to increase India economic mobility, lower the impact of the financial crisis on the economy in the short run, but the economic stimulus is also double-edged sword. It imposed higher and higher inflationary pressures in to stimulate the economy in economic operation while achieving the economic growth effect. Despite India's wholesale price index (PI) is still negative, the CPI indexes of four categories have all exceeded 10% and are 11.7%, 12.9%, 12.9% and 12.7% respectively. Inflationary pressures are on the increase. Overall, despite the monthly wholesale price index peaked at 12.8% in Aug. 2008, it decreased all the way with the outbreak of the financial tsunami and was barely positive at 0.5% until Sep. 2009. However, seen from the four CPI monthly indexes, the figure is still fluctuating around 10% from 2008 to date. And take CPI for example, the food proportion in which is up to 47.18%. India is faced with a growing inflationary pressure with rising food prices.

Although India’ loose Monetary Policies and economic stimulus policies is helpful in slowing the short-term downward trend in Economic growth, they cannot solve the economy's long-term problems. Theoretical basis of economic stimulus policies lies in Keynes's theory of effective demand, that is, replace residents spending through increased government spending, expand aggregate demand through the multiplier effect and promote economic recovery. Practices have proven that Keynesian economic theory cannot solve fundamentally the long-running economic problems, such as restructuring and income distribution etc. The stagflation in the 1970s is strong evidence. Keynesian theory can help to change the economy trajectory in a short run but cannot change the long-term economic trend. Macroeconomics is a system and entirety and the change in investment or consumption and other parameters alone cannot change the laws governing macroeconomic operation. In the course of forced stimulus, negative effects, such as inflation and government deficit expansion etc. are bound to occur. Therefore, stimulus under the financial crisis comes at a cost. In the long run, a stronger stimulus effect will mean a bigger negative cost. The foundation of economic growth still lies in the real economy while economic stimulus is expedient which cannot be used as a long-term development strategy.

In addition, India’s loose monetary policies and Economic stimulus policies also cannot solve global economic imbalances.
Problems began in 2000 when the global economy entered into a period of accelerated development. Meanwhile, imbalances in the global economy is getting worse while the US-led developed countries as the countries of consumption developed a growing number of trade deficit. By contrast, the developing countries led by the BRIC countries accumulated more and more trade surplus as the producing countries, contributing to global economic imbalances. Global economic imbalances boosted the proliferation of worsened mobility worldwide. After the breakout of the financial crisis, countries have adopted a series of loose fiscal and monetary policies which made the global liquidity more rampant and created a monetary base for the high global inflation. As a consequence, far from solving the economic imbalances, the economic stimulus policies disappointedly worsened the imbalances due to the substantial mobility released by the policies and casted a shadow for the real recovery of the world economy. India still follows its original economic development mode and has not solved the problem of economic restructuring, not to mention the deep-seated contradictions in economic operation. As a result, with the gradual withdrawal of the stimulus policies, the artificially suppressed contradictions will make the fragile recovery stuck once they breakout.

The negative effects gradually began to emerge after 2009-2010. Following the slowdown induced by the global financial crisis in 2008-2009, the Indian economy responded strongly to fiscal and monetary stimulus and achieved a growth rate of 8.6 per cent and 9.3 per cent respectively in 2009-2010 and 2010-2011, but due to a combination of both external and domestic factors, the economy decelerated growing at 6.2% and an estimated 5% in 2011-2012 and 2012-2013 respectively. Furthermore, because of its twin deficits – current account and fiscal deficits, the Indian rupee touched a lifetime low of 68.85 against the US dollar on August 28, 2013. The rupee plunged by 3.7 percent on the day in its biggest single-day percentage fall in more than two decades. Since January 2013, the rupee has lost more than 20 percent of its value, the biggest loser among the Asian currencies. By the end of 2012, India's current-account deficit accounted for the proportion of GDP reached 6.7%, seriously threatening India's lending capacity in the international market. International agencies, such as S&P, Moody's, have not been ruled out of India's sovereign credit rating downgrade. So In 2014, India’s Central Bank announced its liquidity-tightening measures to curb the rupee devaluation, resulting in a financing cost rise for banks to raise fund from the Central Bank. It announced in yesterday’s announcement to increase both the marginal standing facility and bank interest rate from 8.25% to 10.25%. The Central Bank will also sell 120 billion rupees (about $ 2 billion) national debt through open market to absorb liquidity. We can cautiously conclude that India’s Central Bank has significantly tightened its monetary policy. I think India’ Monetary Policies, Either too Loose or too Tight, have restrained its long-term economic growth, deterred the realization of the target for sustainable economic development. Since 2009, India's nominal GDP increased faster than the trend level of around 12% and India’s Central Bank made an unexpected pause after years of high growth and high inflation. This integrative however, was intended to stabilize the currency rather than achieving the economic growth target or an inflation target. India's Central Bank’s currency-stabilizing policies may be able to limit investors to sell rupees, but may at the cost of a sharp slowdown in both real and nominal GDP growth. By then, India will be forced to choose between monetary stability and macroeconomic stability. In a sense, India's Central Bank has implemented excessively loose monetary policies over the years evidenced by an excessively fast nominal GDP and inflation growth. However, at the same time, it shifted to excessive tight monetary policies all of a sudden to promote the appreciation of the Indian Rupee. Quite disappointingly, India’ self-contradictory monetary policies failed to achieve the intended purpose in the end.

My Suggestions are listed below:
The regulatory mechanism of monetary policies needs to be changed. Rupee should be allowed to fluctuate freely and a nominal GDP growth rate of 8% should be set. India’s Central Bank needs to abandon the policy of intervention in currency Markets, enabling a fully free rupee fluctuation and setting a nominal GDP target value. This target value is most appropriate at 8%. The Central Bank should announce that the nominal GDP growth rate will gradually be slowed to 8% in the next five years and that setting 8% at the growth target is of vital importance. If India’s economic growth in 2014 exceeds 11%, then in the next four years, India's nominal GDP growth should require an accelerated slowdown. This is the concept of setting economic growth target where you need to consider the past economic growth. After 2018, India's Central Bank can maintain an 8% growth in nominal GDP. Such a policy will make the currency more stable in name than in history. Thus, it can significantly improve macroeconomic stability. In addition, the nominal GDP growth target will also bring additional effects. It can make the Indian rupee’s currency value more stable under the current monetary policy and also more predictable. The current monetary policy will lead to significant fluctuations in foreign exchange, thus resulting in money market confusion

2. Structural reform is needed. India can start the reform by eliminating the too high trade tariffs and gradually opening up of the economy.
India is in desperate need of reform. This covers the urgent need of setting a nominal GDP target vale and also the large-scale structural reforms. India needs to reduce government intervention in the economy. The reason for India’s economic growth in the 1990s is that it carried out supply reform. However, in the past decade, the pace of India’s reform has seen a sharp slowdown and the reforms in some areas even developed backwards. It should be noted that, since 2009, India's inflation rate has been high with a GDP deflator about 7 %-8 %. Meanwhile, the country's nominal GDP growth rate has slowed. Its monetary policies have made the country's economy contract accompanied by a deteriorated supply situation. This all result in a sharp decline in real GDP growth in India.