Analyzing the Indian Economic
Slowdown
Part I
- A presentation to NMCCA
Vikram M Sampat
Reliance 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
8
6.7
7
6
5
4
 First 3 phases relate to
socialist India
4.6
4.1
3.1
3
2
1
0
1951-65
1965-81
1981-88
1988-2011
Phase 1
Phase 2
Phase 3
Phase 4
Source: www.rbi.org, Aravind Panagaria
 4 phases of economic growth
identified
 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
10
8.9
9
7.7
8
7
6.8
6.3
6
 GDP growth broke past
trends post 1988
5.2
5
4
4
 Liberalization started by
Rajiv Gandhi & Narsimha
Rao Govts.
 2003-2008 : Highlight years
with highest growth
3
2
1
0
1988-90
1990-93
1993-97 1997-2003 2003-08
Source: www.rbi.org, Aravind Panagaria
2008-11
 Widely believed to be a new
level of growth
 Growth has slowed down
marginally since then
 Was 2003-08 a break from trend or a new trend?
Global Perspective - GDP trends

Strong global economy over 20 
years.
Past 5 years have seen
exceptional growth
 Robust economic growth
 US has witnessed stable growth
 Low inflation rate
 Falling growth rate in Euro area
 Low real interest rate
 Strong performance from Asia
 2003-08 - A golden period
8
US Unemployment – Jobless recovery
Unemployment
rate, %
Technology
boom
Source: Bureau of Labor Statistics
 Despite strong performance, jobs return slowly
 Unemployment – A structural problem?
Population Profile
 US has moved to a developed market age profile
Trouble makers : Interest rates

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
Source: Tuatara Management Limited, 4 July 2008
 Policy decision to maintain low interest rates…..
11
Trouble makers : US savings
 Was the US consuming
too much?
Source: US Dept of Commerce
 So was the developed world
 … led to unusually high consumption in developed world
Trouble makers : US reserves
 Excessive US current account
deficits
 US Financing itself through
emerging market reserves
 … with excessive reliance on deficits and borrowings
13
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
 … and “innovative” financing to keep the show going
Derivatives - CDS
Measures health of CDS dealers

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
 All this was a combustible mixture!!
Stock markets

Global equity markets witnessed record growth
 Equity Valuations reached a record high
16
Commodity prices
 Greed got the better of the system

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
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
 Rising prices for food and commodities triggered inflation
18
Inflation
 High commodity prices kicked in inflation in developed and emerging markets
 Food, housing and commodity boom triggered inflation
Trigger for sub-prime
 Rising inflation
 Hike in the interest rates
Source: Tuatara Management Limited, 4 July 2008
 Break-down of loan-consumption cycle
20
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
 Demographics are not destiny Large and growing middle class