Identifying Next High Growth Economies

EGMPE 01

Macroeconomic Environment and

Global/International Environment

Prof. D. Tripati Rao

Indian Institute of Management Lucknow
tripati@iiml.ac.in, June 03/04, 2024

Fashioning Economic Models: The Questions!

1. Why the Indian elephant trammeled ?
 Why nations fail?
 Lessons for sustaining growth!!
 Democracy, Markets & Growth
2. India’s Tryst with Trust
– The Economic Vision for Precocious, Cleavaged
India: Growth vs. Inequality

3. Market/Policy Reforms
 Goldilocks Economy to Stagnation to Recovery
 Making the Elephant Dance again!

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 Sawcha, Sundar and Swastha
Kaushal Bharat!
4. Decoding Slowdown Conundrum!
– Rights (5Rs), Entitlements & Policy Paralysis
5. Turning the Wheel
– Aab Acche Din!
• Entitlement versus Empowerment
– Beti Bachao, Beti Padhao, Swachh Bharat
– Start-Up and Stand-Up India (SKDC)
– Enabler(s) – JAM, GSTDeify or Demonize
Demonetization
– Make in India or Made for India!!
» Big-Push Infra, PLI

Macroeconomic
Structure, Process and Performance
 Macroeconomic Structure
– a top-down view of the ECONOMY
– study in AGGREGATE: Y, U (L), and P
 Macroeconomic Process
1. Sustained Higher Growth in Very Long Run
2. Reaching Potential Output level in Long Run
3. Economic Stabilisation in Short Run: Business Cycle
 Macroeconomic Performance & Policy
–Monetary, fiscal & exchange rate policy
– Trade, BoP & exchange rate
 Reflection on: organised & simplified structure
 Difference in degree not in kind

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 The 5 E’s of (MACRO)ECONOMICS

• Economic Growth
increased ability to produce goods & services
• Productive Efficiency
producing at a minimum cost (waste)
• Allocative Efficiency
producing more(less) of what people want(don’t)
• Equity
fair distribution of income/goods/services
• Full Employment
using all available resources optimally

Macroeconomic & Social Policy Framework of Economy

Policy Policy Policy Private
Authority Instruments Economic Agents
Money
Supply Households
Central Monetary
Firms
Int. Rates Influence
Bank Banks (FIs)
On
Taxation Behavior
Fiscal Of
Ministry Public Exp.
Macroeconomic
of Controls thr.
Physical outcomes
Finance Regulations
Output
Exp. On Employment
Social Health Price(s)
Education &
Social
Welfare

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4
 Economic & Business Swings??
1. Changes in Consumption (C)
 confidence/sentiment/ tax policies
2. Changes in Investment (I)
 money supply (credit)/tax policies/uncertainty
3. Changes in Government expenditure (G)
 policy decision/environment
4. Changes in Net Exports (NX)
 world economy business cycles

Many a Slip between the Cup and the Lip

Exogenous Shocks
• Tech Innovation Trend Path
• Natural Shocks Potential GDP

O
U
T Output
P Peak Gap
U
T

Actual GDP

Trough

TIME

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 Economic Recession & Unemployment

Macroeconomic and Business Environment Indicators

 Any data/statistics that can help to predict future
financial or economic trends or to confirm past events.
 Main Aggregates
 GDP Growth, Unemployment Rate & Inflation
 C, S & I (as a % of GDP)
 3 types of indicators:
1. Leading Indicators
are a measurable set of data which can help in
anticipating/predicting future economic events. The term
“leading indicator” is defined as a measurable economic
factor that changes before the economy starts to follow a
particular pattern or trend.
Ex: yield curve, real estate, and new housing and
construction activity, PMI, money supply

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Macroeconomic and Business Environment Indicators
 The lipstick indicator
by Leonard Lauder, Estee Lauder cosmetic company
 rising sales of lipstick are an indicator of troubled times.

2. Lagging Indicators
can only be known after the event or confirm a pattern that
is in progress.
Ex: Unemployment rate
3. Coincident Indicators
that usually change simultaneously with general economic
conditions or occur in real-time and help to clarify or
visualise the state of the economy.
Ex: RBI’s 6 and 9 CEII

Coincident Economic Indicator for India (CEII)

6 CEII
1. Production of consumer goods
2. Non-oil non-gold imports
3. Auto sales
4. Rail freight
5. Air cargo
6. Government receipts

 9 CEII, in addition:
1. IIP-core
2. Exports
3. Foreign tourist inflows

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 Consumer & Business Confidence Survey
1. Current Situation Index (CSI)
 consumers’ perceptions & expectations
 covering 6 metropolitan cities & 5000 households
1. employment scenario; 2. price situation; & 3. their
own income & spending
2. Business Expectations Index (BEI)
 weighted (share of GVA of different industry group)
net response of nine business indicators:
(1) overall business situation; (2) production; (3) order
books; (4) inventory of raw material; (5) inventory of
finished goods; (6) profit margins; (7) employment; (8)
exports; and (9) capacity utilisation.

CSI and BSI

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 BSI

CSI

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• Consumer confidence has been on a path of sustained
recovery
• Current situation index (CSI) rose by 3.4 points to 98.5
• its highest level since mid-2019
• Consumer confidence for the year ahead improved further
• higher optimism
• FEI also its highest level since mid-2019
• Households’ sentiments improved for both the current
period as well as the upcoming year
• outlook on discretionary spending improved
• better income situation compared to a year ago and
expected further rise in income in the year ahead

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 BCI

BCI

• Manufacturing companies remain highly optimistic

on production, capacity utilisation, order
books, employment conditions and overall business
situation
• Input cost pressures are likely to persist during
H1:2024-25 and selling prices are expected
to move in tandem

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Heat Map of High Frequency Indicators of
Indian Economy

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 Constituents of GDP
Year C I G X M Errors GDP

1951-52 93.24 11.02 5.77 7.65 9.39 -8.30 100.00

1961-62 87.41 14.89 7.24 4.23 5.85 -7.92 100.00

1971-72 81.37 16.76 10.17 3.60 3.93 -7.96 100.00

1981-82 77.17 21.84 10.12 5.83 8.42 -6.54 100.00

1991-92 67.93 22.49 11.64 8.35 8.35 -2.06 100.00

2001-02 65.22 25.65 12.40 12.38 13.25 -2.41 100.00

2011-12 56.03 35.52 11.70 24.64 29.85 1.97 100.00

2012-13 60.25 34.91 11.76 24.00 30.74 -0.18 100.00

2013-14 59.38 35.14 11.81 24.82 28.41 -2.74 100.00

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14
Advanced vs. EMEs: India Stands Out!

Share of GDP in Different Sectors

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GVA Growth and GDP Components

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AD Side: Underlying Drivers of Growth

AS Side: Real GVA Growth

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AS Side: Real GVA Growth

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 Indicators of Demand

Enhanced Capacity Utilisation & Business Sentiment

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 Index of Industrial Production
Growth

Manufacturing PMI

The S&P Global India Manufacturing PMI increased to a 3-month top of 58.6 in August 2023 from 57.7 in
July, surpassing market estimates of 57.5 while indicating the 26th straight month of growth in factory
activity. New orders rose the most since January 2021; while output gained for the 26th month, and to the
greatest extent in nearly 3 years. Also, export sales expanded at the fastest rate in 9 months amid robust
demand from, among others, China and the US. Buying levels rose sharply to hit the fastest growth in
over 12 years. Meantime, employment went up the least in 4 months but was above the series trend.
Buying levels rose sharply and at one of the fastest rates in over 12 years. Delivery times were shortened
for the 6th month. On prices, input cost rose the most in a year, while factory gate charges rose at the
slowest pace in 4 months. Finally, sentiment remained historically elevated despite the degree of
optimism slipping to a 3-month low, due to inflation concerns. source: Markit Economics

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 Services PMI

The S&P Global India Services PMI dropped to 60.1 in August 2023 from an over 13-year high of 62.3 in the previous month,
aligning closely with market forecasts of 61. Both new orders and output remained at elevated levels. Output growth was one
of the strongest observed in 13 years, while new exports continued to rise for the twenty-fifth consecutive month, driven by a
series-record surge in new export business. Employment slightly increased, with the rate of job creation reaching its highest
point since November. As for prices, output price inflation accelerated to the joint-strongest in over six years, as strong
demand conditions facilitated the passing on of cost increases to clients. Input price inflation, although moderating since July,
remained higher than output changes, primarily due to rising food, input, and labor costs. Finally, optimism reached its peak
so far this year, as firms were confident that their production would continue its positive growth in the next
year. source: Markit Economics

The IHS Markit India Services PMI (Purchasing Managers' Index) is based on data compiled from monthly
replies to questionnaires sent to purchasing executives in around 350 private service sector companies.
The index tracks variables such as sales, employment, inventories and prices. A reading above 50
indicates that the services sector is generally expanding; below 50 indicates that it is generally declining.

Employment Rate

Employment Rate in India increased to 45.20 percent in the first quarter of

2023 from 44.70 percent in the fourth quarter of 2022. source: Ministry of
Statistics and Programme Implementation (MOSPI)

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 Unemployment Rate

Unemployment Rate in India decreased to 8 percent in July from 8.50

percent in June of 2023. source: Centre for Monitoring Indian Economy

Unemployment Rate

Hiring activity in IT-Software & Software Services declined by 33%,

Banking and Financial Services along with Retail witnessed decline in
hiring by 1% and 5% respectively.

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Indian Economy Slowdown

Indian Economy Slowdown

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24
Indian Economy, Slowdown, Recovery & Uncertainty
The investment rate declined in 2012-13 and 2019-20
• slackening corporate investment rate
• weak domestic and external demand
1. Structural Reasons:
• jobless(ness) growth/rural wage stagnation/weak
business confidence
2. Global Turbulence
• Geopolitical Uncertainty
• Brexit & Trump’s Protectionist Policy
3. Policy Disruptions: Demonetization & GST
4. Pandemic: Covid 19
5. Russia-Ukrain War: Energy & Food Inflation
6. Ongoing Israel-Hamas-Iran conflict
7. Aggressive Central Banks & Inflation Anchoring

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 Inflation & Price Index
 Inflation
 the rate of change in prices
 Price Indices
 GDP Deflator
 WPI:– Wholesale Price Index (PPI?)
 CPI:– Consumer Price Index
 GDP Deflator
 Index of avg. price of all goods & services produced
 Distinguishing Real from Nominal GDP
 Ratio of Nominal to Real [of that Year]
 Widely based Price Index

Wholesale Price Index

 Rate of change in Wholesale Prices
 Base Year (2011-12), 676 commodities, weekly
 Major Constituents
 Primary Articles (Food), Fuel & Manufactured
Products
 24.4% (15.3%), 13.2% & 55.1%
 Inclusion: raw materials/semi-finished/imports
 Exclusion
 Education, services, health & banking
 Transport & communication
Leading Indicator of the Economy
http://www.eaindustry.nic.in/cpres_note.pdf &
http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=457

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 Consumer Price Index
 Rate of change in Average Retail Prices contained in
consumer basket (working class family)
Base Year (2016), 463 items, 317 markets, monthly
Major Constituents: food (39.17%), cloth (5.4%),
housing, fuel & light (21.37%) & other services (38.45%)

 Inclusion:– services & imported goods

 Exclusion
 capital & intermediate goods, & raw materials
 Types:CPI-IW,CPI-UNME,CPI-AL,CPI-(R&U)
 Measure of Cost of Living Index (DA)
Concurrent Indicator of the Economy

Difference between WPI & CPI

1. Food has a larger weight in CPI
 39% in CPI-IW to 69 % in CPI-AL
 it has a weight of only 25% in WPI

 CPIs are more sensitive to changes in food prices

2. Fuel group has larger weight in WPI

 13.2% in WPI but 5.5 to 6.8% in CPI

3. Services are not covered under WPI

 they are, to different degrees, covered under CPIs

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 Core Inflation

 Core Inflation
exclusion of prices of volatile products
 supply determined
mostly driven by supply shocks
energy and agricultural/food prices
 excluding agricultural (food) & energy (fuel)
 Relaxation of administered prices
 needs a negative demand shock

WPI Inflation

WPI shrank by 0.52% y-o-y in Aug 2023, compared with market estimates of a 0.6 percent
decline after a 1.36% dropped in the prior month. It was the fifth period of deflation but the
softest deflation in the sequence, mainly due to falls in basic metals, textiles, chemicals, and
food products. Prices dropped less for fuel & power (-6.03% vs -12.79% in July) and
manufacturing (-2.37% vs -2.51%), mainly for textiles (-8.46% vs -8.96%), basic metals (-5.71%
vs 6.09%), chemical and chemical products (-7.03% vs -7.10%), rubber and plastics products (-
1.85% vs -3.20%), and food products (-3.60% vs -3.97%). Meanwhile, primary articles (6.34% vs
7.57%) and food (5.62% vs 7.75%) advanced softer. On a monthly basis, WPI were up 0.33% in
Aug, following an upwardly revised 2.01% rise in July.

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 WPI Inflation

WPI is divided into three groups: Primary Articles (22.6%) Fuel and Power (13.2%) and Manufactured Products (64.2%). The
Food Index from the Primary Articles and Manufactured Products groups accounts for 24.4 percent of the total weight. The most
important components of the Manufactured Products group are Basic Metals (9.7 percent of total weight); Food products (9.1
percent); Chemicals and Chemical products (6.5 percent) and Textiles (4.9 percent). Within the Primary Articles group, the most
important component is Food Articles (15.3 percent).

Inflationary Expectation

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 CPI Inflation

Retail price inflation in India eased to 6.8% in Aug 2023 from 7.4% in July which was the highest since April 2022, and below market
forecasts of 7%. Food inflation fell to 9.9% from 11.5% which was the highest since January 2020. Cost of vegetables (26.1% vs 37.3%),
cereals (11.9% vs 13.0%), pulses (13.0% vs 13.3%) and milk (7.7% vs 8.3%) increased at a slower pace while prices rose faster for spices
(23.29% vs 21.6%). Meanwhile, smaller increases were seen in cost for housing (4.4% vs 4.5%), miscellaneous (4.9% vs 5.1%) and
clothing and footwear (5.2% vs 5.6%) while prices of fuel and light went up more (4.3% vs 3.7%). Despite the slowdown in August, inflation
stayed above the central bank target of 2-6% for a second month. Monsoons have been below normal due to El Nino, impacting
agricultural production and prompting a spike in food prices, specially vegetables. The government then subsidised vegetable prices and
ban exports of some cereals including sugar and rice. source: Ministry of Statistics and Programme Implementation (MOSPI)

Inflationary Trends in India (%)

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Drivers of CPI Headline Inflation

Drivers of Inflation (Y-0Y)

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 Drivers of Inflation (Y-0Y)

Drivers of CPI Excluding Food & Fuel Inflation

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 Interest Rate

The EXCHANGE Rate

Prices in Different Currencies
Exchange Rate – e = DC/FC
units of domestic currency required to purchase
one unit of foreign currency
or
domestic price of foreign currency

 Forex Market
 Generic term for worldwide institutions for
trading different currencies

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 BOP Accounts: Analytics
BOP:– resident country transactions with the rest of world
 Current Account (CA) (Income & Expenditure)
Merchandise Trade Account (X & M)
Trade in GOODS
Invisibles (Services + Transfers + Net Invst. Income)
 Capital Account (KA) (Borrowing & Lending)
1. Purchase & sale of assets:– stocks, bonds & land
FI, assistance, pvt. borrowings, rupee debt service
2. Official Settlement Account (Compensating)
 Reserves, IMF, SDR
 External Account Balance
 CA + KA = 0, but if, CA = KA

BOP Accounts: RBI Balance Sheet

 Current Account (CA)
1. Merchandise Trade Account (X & M)
2. Invisibles
1. Services
2. Transfers
3. Income
 Capital Account (KA) (Borrowing & Lending)
1. Foreign Investment (FDI + FII)
2. Loans (for instance, ECBs)
3. Banking Capital
4. Rupee Debt Service
5. Other Capital

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 BOP Accounts: Imbalances
Overall Balance
CAD = KAS
KAD = CAS
 BOP Surplus
CAS + Net Private Capital Inflow
increase in Official Reserves
 BOP Deficit
CAD + KAD
Central Bank looses Forex Reserves

Y = C + I + G + NX
S – I = (G + TR – TA) + NX

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 Trade Current Account (CA) Capital Account (KA) Imports (m)

Year X/GDP M/GDP Net Invisibles/GDP CAD/GDP Foreign Inv/X Foreign Inv/GDP M/Reserves (m)

2009-10 13.4 22.1 5.9 -2.8 35.9 4.8 11.1

2010-11 14.9 22.6 5.0 -2.7 22.9 3.4 9.6
2011-12 16.8 27.0 6.0 -4.2 16.3 2.7 7.1
2012-13 16.7 27.4 5.9 -4.8 17.8 3.0 7.0
2013-14 17.0 24.9 6.1 -1.7 11.2 1.9 7.8
2014-15 15.4 22.5 5.7 -1.4 23.8 3.7 8.9
2015-16 12.8 19.1 5.2 -1.1 15.5 2.0 10.9
2016-17 12.4 17.3 4.3 -0.7 17.8 2.2 11.3
2017-18 11.7 17.7 4.2 -1.8 17.0 2.0 10.9
2018-19 12.4 19.0 4.5 -2.1 8.9 1.1 9.6

Major Drivers of Export Growth (2021-22)

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Major Drivers of Import Growth
(2021 over 2019-20)

Composition of India’s CAB

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 External Vulnerability Indicators

Major Drivers of Export Growth (2021-22)

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 Money alone is the Villain,
in the whole drama called Inflation

– Milton Friedman

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 79

Re-Montisation!
Zimbawe
A Case of Macroeconomic Mismanagement!

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