Analyzing the Indian Economic Slowdown

Part I- A presentation to NMCCA

Vikram M SampatReliance Industries Ltd.

August 19, 2012 Navi Mumbai

Analyzing the Indian Economic Slowdown

Background

Advantage India…..

Areas for improvement…..

Conclusions

Background

What is a slowdown?

India – Historic GDP growth trends

Global perspective

Current trends

What is slowdown?

Significant reduction in rate of GDP growth

GDP growth remains positive

Slowdown is not a recession

Employment and productivity may decline

Is India experiencing a slowdown?

Indian slowdown?

Falling GDP growth – 5.3% is the lowest rate in 7 years

Indian economy : Believed to be in slowdown

India – Historic GDP trends

1951-65 1965-81 1981-88 1988-20110

1

2

3

4

5

6

7

8

4.1

3.1

4.6

6.7

Phase 1 Phase 2 Phase 3 Phase 4

Source: www.rbi.org, Aravind Panagaria

4 phases of economic growth identified

First 3 phases relate to socialist India

Period up to 1970s characterized by Hindu rate of growth

Economic liberalization post 1985 brought about a shift in economic growth

Significant growth impetus post 1988

1988 – 2011 : Economic performance

Source: www.rbi.org, Aravind Panagaria

Liberalization started by Rajiv Gandhi & Narsimha Rao Govts.

GDP growth broke past trends post 1988

2003-2008 : Highlight years with highest growth

Widely believed to be a new level of growth

Growth has slowed down marginally since then

1988-90 1990-93 1993-97 1997-2003 2003-08 2008-110

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2

3

4

5

6

7

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9

10

6.3

4

6.8

5.2

8.9

7.7

Was 2003-08 a break from trend or a new trend?

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Global Perspective - GDP trends

Strong global economy over 20

years. Robust economic growth

Low inflation rate

Low real interest rate

Past 5 years have seen

exceptional growth US has witnessed stable growth

Falling growth rate in Euro area

Strong performance from Asia

2003-08 - A golden period

US Unemployment – Jobless recovery

Source: Bureau of Labor Statistics

Technology boom

Unemployment – A structural problem?

Despite strong performance, jobs return slowly

Unemployment rate, %

Population Profile

Þ US has moved to a developed market age profile

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Trouble makers : Interest rates

Source: Tuatara Management Limited, 4 July 2008

Loose monetary policy for too long after 2001 recession US Fed was the big culprit with one year at 1% Allowed excessive liquidity build-up through borrowings US monetary policy tightening was very sluggish between 2004-06

Þ Policy decision to maintain low interest rates…..

Trouble makers : US savings

Was the US consuming

too much?

So was the developed world

Source: US Dept of Commerce

Þ … led to unusually high consumption in developed world

13

Trouble makers : US reserves

US Financing itself through

emerging market reserves

Excessive US current account

deficits

Þ … with excessive reliance on deficits and borrowings

Assets securitization

CDOs used to keep exposures off balance sheets

Greatly enhanced secondary markets for loans

Provided 20-30% of Inv. banks profits before the meltdown

Banks and rating agencies failed to adequately scrutinize borrowers but escaped responsibility for defaults

Þ … and “innovative” financing to keep the show going

Derivatives - CDS

Started as an insurance At peak volume outstanding of $62 trillion, CDS volumes much higher than

underlying bonds issues Cos like AIG wrote far too many contracts. Lehman party to 7-10% of market

trades, increasing risk index and catalyzing banking busts Not settled through exchange – posed severe counter – party risks

Measures health of CDS dealers

Þ All this was a combustible mixture!!

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Stock markets

Global equity markets witnessed record growth

Þ Equity Valuations reached a record high

Investors turned to

commodities in search of

high returns and catalyzed

record high commodity

prices

Commodity markets could

not sustain the pressure

Rapidly rising commodity

prices stoked inflation across

the board

Þ Greed got the better of the system

Commodity prices

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Inflation triggers

Growing consumption

demand led to steep rise in

food and non-food inflation

Inflation which was earlier

contained due to aggressive

manufacturing by Asia/China,

could no longer be controlled

once commodity, house and

food prices shot up

Þ Rising prices for food and commodities triggered inflation

Inflation

High commodity prices kicked in inflation in developed and emerging markets

Food, housing and commodity boom triggered inflation

20

Rising inflation Hike in the interest rates

Source: Tuatara Management Limited, 4 July 2008

Trigger for sub-prime

Þ Break-down of loan-consumption cycle

Impact on the equity markets (Worlds Equity Market Cap)

Credit Crunch leads to withdrawal of funds from equity markets, leading to a drastic fall in indices

Fall in overall consumer demand further leads to fall in the stocks

India – Following Global Trends

Indian and China following

global GDP trends

Slowing growth in US & EU have

impacted exports

Slowdown : A fallout from global trends?

Global overview - Summary

Indian economic boom during 2003-08 coincided with and was

helped by the global economy boom

Bust in 2008 has been followed by severe crisis, which is still

continuing in Europe

Indian economy has been impacted due to the bust.

Indian growth has returned to pre-boom period performance

Indian economy increasingly linked to global economy

India mirroring global cycles

India - Current GDP Trends

Significant reduction in GDP

− Contraction in manufacturing

− Slower growth in services

− Slowdown in investment

Other concerns

− Bludgeoning fiscal deficit

− High inflation

− Rupee depreciation

− European crisis

India – On the edge

Advantage India…..

Economy

Liberal Society

Democracy

Demography

Economy – Size & potential

Large and growing economy

Growth driven by internal consumption

Liberalized industry & financial system

India – Robust GDP growth

Second fastest growth rate consistently in large economies Stable growth World’s largest democracy with advanced (but slow) legal structure

Savings & Investment

High savings and investment rates

Supported by sophisticated financial markets

ICOR-4 Thus savings can support 8% GDP growth

Savings to support investments

GDP Structure - Drivers

GDP led by services based on:

− Strong IT infrastructure

− English speaking population

− Young population & favourable demographics

− Strong education systems

GDP structure driven by educated populace and free society

FII inflows

Favoured FII destination

Demography & demographics dividend

Only 5.5% of population over 65 years Median age – 26 years : over 52% below

25 years By 2030, around 62 – 63% of Indian

population will be in working age with lowest dependency ratio

Large and growing middle class Demographics are not destiny