Shocking Third Quarter GDP Growth Rate!

Yesterday CSO released estimates of gross domestic product for the third quarter (October-December) of 2011-12. It stated that “Quarterly GDP at factor cost at constant (2004-05) prices for Q3 of 2011-12 is estimated at Rs. 13,39,603 crore, as against Rs. 12,62,794 crore in Q3 of 2010-11, showing a growth rate of 6.1 per cent over the corresponding quarter of previous year.” It also said that 2009-10 & 2010-11   Quarterly estimates along with the Growth Rates are revised now.  CSO said that “The revision in annual estimate of 2009-10 is mainly on account of using ASI data for 2009-10 and the new series of IIP for 2010-11 in the manufacturing sector.”   The Sector wise figures for the third quarter were more surprising when it stated that “The growth rate in ‘agriculture, forestry & fishing’, ‘mining and quarrying’ and ‘manufacturing’ is estimated at 2.7 per cent, (-) 3.1 per cent and 0.4 per cent, respectively in this period. (over 2010-11 at constant prices)”

My perspective:

 Many may think what’s Shocking in this GDP growth rate and Why it is titled so? It is shocking because despite of the higher inflation rate which remains at 7.65% CPI (YOY combined rate i.e. both rural and urban rate for the month January, 2012) [Note: 8.92% of Wholesale inflation during Q3] we had achieve the GDP growth rate of 6.1% growth rate for the Third Quarter.  This means that total GDP at Factor Cost (at 2004-05/ Constant Prices) for 2011-12 (April – December) is at 6.9% which was lower compared to 8.1% in 2010-11 for the same period (April-December).

The estimate shows that there is a decline in Gross Fixed Capital Formation (GFCF), both in terms of current and constant prices it had declined from 29.8 & 32.3 in 2010-11 to 27.6 and 30.0 in 2011-12 respectively for the same period (Q3). This is really a concern in the long run. If India aims to achieve the Growth of 7.0% then GFCF plays a vital role. Many people, Economist and Policy makers in India are presently looking forward for the upcoming Union Budget. The upcoming Budget plays vital role for people in India and also for their Growth rate. We need to wait and watch what’s new in the upcoming Union Budget that will drive the economy towards (so called) faster and inclusive growth         

RBI's Third Quarter Review of Monetary Policy 2011-12

RBI’s Third Quarter Review was announced on this Tuesday (i.e. 24.01.2012). The Press statement on the Policy Review stated that “Based on an assessment of the current macroeconomic situation, we have decided to:

Ø   Cut the cash reserve ratio (CRR) of scheduled banks by 50 basis points from 6.0 per cent to 5.5 per cent of their net demand and time liabilities (NDTL). This will be effective the fortnight beginning January 28, 2012.

Ø   This reduction in the CRR will inject around Rs. 320 billion of primary liquidity into the system.

There is no change in the policy interest rate. Accordingly, the repo rate under the liquidity adjustment facility (LAF) remains at 8.5 per cent.

          Consequently, the reverse repo rate under the LAF, determined with a spread of 100 basis point below the repo rate, will continue at 7.5 per cent, and the marginal standing facility (MSF) rate, determined with a spread of 100 bps above the repo rate, at 9.5 per cent.”

The Monetary Policy Stance said that three broad contours of our monetary policy stance. These are:

Ø   to maintain an interest rate environment to contain inflation and anchor inflation expectations;

Ø   to manage liquidity to ensure that it remains in moderate deficit, consistent with effective monetary transmission;

Ø to respond to increasing downside risks to growth.

The RBI’s expected outcome from these policy move are as follows:

Ø First, liquidity conditions will ease.

Ø Second, downside risks to growth will be mitigated.

Ø Finally, medium-term inflation expectations will remain anchored on the basis of a credible commitment to low and stable inflation.

This time RBI had come with risks to our projections of growth and inflation for 2011-12 and it had listed Seven as follows:

1.  Sovereign debt concerns in the euro area pose a major downside risk to the overall growth outlook.

2.  Slowdown of capital flows in the face of a widening current account deficit.

3.  Global energy prices continue to pose a risk to growth and inflation due to geo-political factors and the global macroeconomic situation.

4.  There are signals of increasing risk aversion by banks, which could adversely affect credit flow to productive sectors of the economy.

5.  Inflation in respect of protein-based items remains high due to structural imbalances. In the absence of appropriate supply responses, risk to food inflation will continue to be on the upside.

6. There is a large element of suppressed inflation as domestic prices of some administered products do not reflect the underlying market conditions. Revision in domestic administered prices will add to inflationary pressures, although I should note that such revisions are necessary to maintain the balance between supply and demand. 

7. The fiscal deficit of the government could potentially crowd out credit to the private sector.  Moreover, slippage in the fiscal deficit has been adding to inflationary pressures and it continues to be a risk for inflation.

My Reflection:

          I am glad to see that RBI had finally found out some major risk factors to their Growth projections and Inflation. Hats off RBI!!!  At the same time, it’s surprised many people by cutting CRR rate by 50 basis points from 6.0 per cent to 5.5 per cent. Many people would have expected no action from RBI; but this move would have surprised many, if not many, at least me. I think it would have been better if RBI had not taken any policy measure at this juncture. The new injection of Rs. 320 billion in the economy may lead to increase in inflation again, which slowly cooling down. We need to wait and watch how the Economy reacts for this RBI's policy measure. I am also, looking Forward for the Annual Monetary Policy 2012-13 in order to know RBI’s Inflation Projections for the financial year 2012-13.  

Greek debt is running out of time - Unending Austerity Measures - When it will End?

The Austerity Measures for Greece is still continuing without any opposition. In Greek Mythology there was a king named Sisyphus, who condemned by the Gods to roll a boulder up a hill for all eternity. The name is used now to describe a never-ending Task. This is what now happening in Europe in the case of Greece. There was talks between European officials, during last Friday (i.e. 13.01.2012), aimed at reaching agreement with creditors to cut Greece's debt burden.

The talks are seeking to slice €100 billion ($126.7 billion) from the Greek government's €350 billion in debt without delivering an ultimatum to private bondholders, who together hold more than €200 billion of bonds. (For Full Article here)

Greece's continued access to bailout loans depends not only on delivery on its austerity promises but also on negotiations with private creditors on a bond swap deal aiming to cut its debt by 100 billion euros ($129 billion.) It needs to get an agreement soon if it is to secure more rescue loans, with a bond repayment of 14.5 billion due on March 20 that the country currently lacks the cash to pay. (For Full Article here)

The International Monetary Fund (IMF) is planning and proposing to lend a $1 trillion to insulate the global economy against any waning of Europe’s debt crisis, according to an official at a Group of 20 nations.  The interesting part is that IMF is pushing China, Brazil, Russia, India, Japan and other oil-exporting nations to make the huge contribution for this lending. It is expected that the agreement would stuck at the meeting of G-20 Finance Ministers and Central bankers which is going to held on February 25-26 in Mexico city.

My Perception

The IMF as a financial watch dog is doing its work more sincerely than any other institution across the globe. But, the real question is, whether it can avoid the financial catastrophe in Europe. Those who follow the Greece Crisis knows that the officials from the European Union and International Monetary Fund, which are lending money to Greece to keep it from bankruptcy, is expected to coerce the government to have faster cost-cutting measures. Greece had access to the bailout loans not only on the delivery of its austerity promises but also on the negotiations with the private creditors on bond swap deal aiming to cut its debt by 100 billion Euros. Remember that, Greece needs second bailout of 130 billion euros in order to pay its creditors. Despite that, IMF is ready and planning to lend $ 1trillion to wane the Europe’s debt crisis. The question which is frequently asked by many people is how long the current and additional austerity measures will be carried out. Interestingly, many of the European countries itself are not ready for further austerity measures. 

I again and again repeat the quote of Ludwig Von Mises, from his book Human Action, "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

People may say sooner (or) later, that in order save Euro we may not continue the austerity measures.  Greece should be either ready for Voluntary abandonment, if at all it wants to save Euro and other European nations else there may be total Catastrophe.

INDIA’S R&D EXPENDITURE AS A PERCENTAGE OF GDP

Recently, in the 99^th Indian Science Congress (ISC), Prime Minister of India Dr. Manmohan Singh said that “Over the past few decades, India's relative position in the world of science had been declining and we have been overtaken by countries like China." The prime minister also emphasised the need for increasing spending in the science sector. "As far as resources are concerned, the fraction of GDP spent on research and development in India has been too low and stagnant. We must aim to increase the total R&D spending as a percentage of GDP to 2% by the end of the 12th Plan Period from the current level of about 0.9%,"

Prime Ministers announced the Six Key Objectives of S&T for the Twelfth Five Year Plan. Yesterday (04.01.2012), one of Senior Official of the Government of India said in an interview that it’s good that PM had announced 2% of GDP for R&D. He also stated that “India is spending only 0.8% of GDP whereas Germany is spending nearly 6-8% of GDP and most of the developed nations are spending more than 4% of their GDP on R&D”.

My reflection

After hearing the Interview, I got perplexed on the figure of expenditure as a percentage of GDP; which resulted in small research on R&D expenditure as a percentage of GDP. No doubt, India is spending only 0.80% of GDP; but what about the remaining countries. Here is what I found, as per world bank, India spends 0.80%, Germany spends 2.54% of their GDP, France spends 2.04%, USA spends 2.72% of their GDP, UK spends 1.82% of their GDP, China spends 1.44% of GDP, Brazil spends 1.10%, South Africa 0.93% and Russian Federation spends 1.12% of their GDPs.

The Senior Government official should be  little careful and also should have done some research before making such a public statement. India is trying its level best to do good in R&D, here are the few budget measures which was announced during last year budget speech: 

1. To further encourage R&D across all sectors of the economy, weighted deduction on expenditure incurred was enhanced from 150 per cent to 200 per cent.
2. Weighted deduction on payments made to National Laboratories, Universities or IITs or a specified person, with a specific direction that the said sum shall be used for scientific research undertaken under an approved programme was also enhanced from 125 per cent to 175 per cent.
3. Payments made to associations engaged in research were allowed as weighted deduction of 175 per cent. The income of such approved research associations shall also be exempt from tax.

   Despite these measures, India spends very less on R&D even among the BRICS nations. India is still lacking behind among BRICS nations which is really a concern because even the small BRICS nation like South Africa and Brazil are spending more than what INDIA does. Even though, India is slowly emerging as one of the focused  R&D  place across the globe it still needs to go a long way to become real R&D hub. 

Do India really lag behind other BRIC nations?

In Telegraph, during last month, Jim O'Neill written an article titled "Jim O'Neill: BRICs' rapid growth tips the global balance" In that article he said that "My only regret on the first BRICs analysis of 2001 is that we weren't bolder. Between 2001 and 2010, the BRIC economies' GDP rose much more sharply than I had thought possible even in the most optimistic scenario" [Note: Jim O'Neill was the one who coined the term BRIC, in December 2001. To describe the four biggest developing economies, Brazil, Russia, India and China.]


Recently (i.e. 7 December,2011), an Article Titled "India most disappointing among BRIC nations: Goldman's O'Neill". The chairmen of  Goldman Sachs Asset Management, Jim O'Neil, said on Tuesday that "Growth in all four BRIC economies has surpassed expectations in the decade since the term came into existence but India's record on productivity, FDI and reform has been the most disappointing". He further stated that "All four countries have become bigger (economies) than I said they were going to be, even Russia. However there are important structural issues about all four and as we go into the 10-year anniversary, in some ways India is the most disappointing," The glacial reform pace has hit India's hopes for double-digit economic growth, O'Neill said, adding: "India is as bad as Russia is on governance and corruption and, in terms of use of technology, Russia is in fact much higher than India."(Source: Economic Times.)


My reflection


If anyone who follows the news on India would know that the first and foremost reason, for Jim O'Neill statement on India (i.e. "India is most disappointing among BRIC nations"), is because of  decision on FDI on retail had been put on hold by the Government of India.  As per OECD Q2 report, FDI inflow to BRIC nations are as follows:  Brazil US $15 billion, Russia US $10 billion, India US $13 billion and China US $60 billion. 


Many may agree with Jim O'Neill in comparison as well as taking the present situation in consideration. But, India, did do well among BRIC nations considering its circumstance and limitations. No doubt, that the world had expected more from India, which India failed to fulfill. From Jim O'Neill statement one can see that he had expected India to take the lead among BRIC nations. 


Jim O'Neill said that "India is as bad as Russia is on governance and corruption..................", but, when we see the latest Ranking on  Corruption Perception Index 2011, we can see that India is far better than Russia (India ranks 95 (3.1) and Russia ranks 143 (2.4)). India may not be good at governance and technology, but they are not lagging behind any other BRIC nations. 

Can Europe Revive and Euro Survive?

In last week edition (i.e. 11.11.2011) of Economist an Article entitled "Staring into the Abyss" with sub-sentence "The Euro Crisis might wake Europe up. But more likely, argues Edward Carr, it will be lead to compromise and decline". The article gives us more clear picture on the on going Euro Crisis and how Europe should take necessary steps to get out of the crisis. The authour says that "The euro zone still has the capacity to stop this run on its banks and governments. As a block, it is less indebted than America and its public-sector deficit is lower." and also he feels that "It has the money to fortify its banks against the default of Greece—and Portugal and Ireland, if need be. And it is minded by the European Central Bank (ECB), which can in principle stand behind those vulnerable governments by buying their debt in unlimited quantities on the secondary market." 

The authour further states that "While the world waits for Europe to make up its mind, catastrophe is in the air. It could take many forms. A country might storm out of the euro—which the treaty forbids, but who could stop a determined government? European banks might suffer a fatal loss of confidence. Italy or Spain might become unable to borrow on decent terms. Or a government trying to impose austerity might be replaced by one that rejects it. Any of these could cause contagion and plunge the world economy into depression." In the article, it is stated that ' ...... writes David Marsh, authour of a history of the Euro, "Europe's Melancholy Union." ' It concluded that "Can Europe turn back from the abyss? Only if the core countries will support the rest as they submit themselves to radical political, social and economic reform. Nobody should be under any illusions about how difficult that will be." 

My Reflections

The present Euro crisis is becoming deeper with vigour. The ongoing Euro Crisis will be one of the biggest crisis ever happened in the history. Before going further, I would like to quote few important phrases and quotes.


I remember the quote of Friedrich August Hayek in his paper (later published as a book) entitled "Denationalisation of Money - The Argument Refined". The paper/book was An Analysis of the Theory and Practice of Concurrent Currencies. In that paper/ book, F.A. Hayek had mentioned that

"During the Middle Ages, however, the superstition arose that it was the act of government that conferred the value upon the money. Although experience always proved otherwise, this doctrine of the valor impositus was largely taken over by legal doctrine and served to some extent as justification of the constant vain attempt of the prince to impose the same value on coins containing a smaller amount of the precious metal." (chapter III, The Origin of the Government and Prerogative of Making Money)

As we all know the fact that the Euro was introduced coercively & its purchasing power is determined by the group of experts. If we re-read the above paragraph of Hayek then we can understand  clearly what exactly happens when we move from one currency to the other (whereas here, in case of Euro, many currencies to one singly currency). It's not easy to determine the value of purchasing power when group of countries moved to one single currency, yet, we should really appreciate the Euro nations who had done it more tactfully without any haphazard, esp., at that point of time. 

As I quoted earlier somewhere in my earlier posts, that in 1999, the year leading up to the launch of the euro, Milton Friedman stated that he did not believe the Eurozone could last ten years and even as late as December 2005 (less than one year before he died at 94 years of age). He said that  

"The euro is going to be a big source of problems, not a source of help. The euro has no precedent. To the best of my knowledge, there has never been a monetary union, putting out a fiat currency, composed of independent states. There have been unions based on gold or silver, but not on fiat money—money tempted to inflate—put out by politically independent entities" (Interview with New Perspectives Quarterly Magazine, 2005)

He also stated (after one year of launch of Euro) that 

"If we look back at recent history, they’ve tried in the past to have rigid exchange rates, and each time it has broken down. 1992, 1993, you had the crises. Before that, Europe had the snake, and then it broke down into something else. So the verdict isn’t in on the euro. It’s only a year old. Give it time to develop its troubles."

Now, coming back to my reflection of existing crisis, still many economist believe that Europe have more resilient and also believe that Euro may survive . No doubt that (as the authour of the above mentioned article said) "Euro zone has the money to fortify its banks ...... ", but, the spread of crisis had already become wider. If Euro zone should come out of this crisis (remember the recovery cannot be quick) then   the major countries of the Euro zone should make more sacrifice  and should give complete support to the suffering nations. But these cannot happen easily, because, no Euro zone countries (as of now) are ready to support the crisis affected nations and they don't want there countries to suffer.

Two important things should happen if Euro wants to survive, as I always said earlier, Greece should default. Many people may feel this is too pessimistic view, but, if this does not happen now, it will happen later and that will affect the Europe and Globe severely. Secondly, the major Euro zone countries should  fortify the banks in order to give more support and save other weaker nations (except Greece, because the spread of crisis is much deeper than what they expect to be). Even if they follow these steps, we cannot say that the Europe will revive and Euro can survive. 

As the proverbs say "Time is the Healer; Time is Great Physician", so only time can say whether Europe will revive and Euro can be saved. Let's see how the Group of Experts act to save Euro and Europe.

Europe is in Jinx - Greece should Default!

Europe, Europe, Europe!!!!! Europe is everywhere in the news for the past few months, since Greece Crisis. The Trouble is creeping up faster than expected and faster than inflation. As everybody knows that it was started in Greece and spreading rapidly all over Europe now. Yesterday (i.e. 31.10.2011), Organisation for Economic Co-operation and Development (OECD) slashed its growth forecasts for some of the world’s biggest economies. It said that the “without decisive action the outlook is gloomy”. At the G20 Summit the OECD had warned that bold action needs to be taken to ward off another recession in Europe.

In its forecast, OECD said that the economic growth in the Eurozone would stall at 0.3 percent next year but only after just 1.6 percent growth in this year (the current forecast is down from the OECD’s May forecast of 2 percent growth in 2012). It is believed that this will remain weak in the US, while emerging markets will see slower growth than before the financial crisis began. It also said that the growth in G20 nations will have a gradual decline of 3.8 percent in 2012 from 3.9 percent this year, although it is expected to accelerate to 4.6 percent in 2013. The OECD added that the scenario could be worse if the Eurozone rescue deal fails to restore confidence in market. 

In its appropriate policy response it suggested the following to resolve the Euro area crisis: 

1. Important to clarify and implement fully and decisively the measures which was already announced. 
2. It should break the link between sovereign debt and banking distress.
3. To deal with Greece.
4. Europe should ensure that the sovereign debt crisis does not spread to other European countries.
5. To secure appropriate capitalisation and funding for banks

It further added that “Detailed information is needed on how the package will be implemented” which was announced last week (i.e. on 26.10.2011) to resolve the crisis.

My Reflection:

I am not surprised by the OECD forecast, but, I am surprised by the policy response for the crisis. If one follows the European crisis from the beginning then one can easily point out some of these policy responses without any further analysis of the present condition. What really startled me was that the OECD, being one of the world reputed organisation, had made such naive suggestions as a policy response to Euro Area along with a note that detailed information about the package is needed on how it will be implemented. Many of the people, not only from Economics background, know that if Europe wants to move from crisis then it has to deal with Greece and it should stop the sovereign debt crisis spreading to rest of the European countries. It is really astounding to hear these things from a world reputed organization. I know that I am not expert on any of these lines, but as a student of economics and also the person who follows the happenings I feel that something can be added. They are as follows: 

1. If the Europe needs to avoid another recession, then the foremost thing it has to do is to strengthen its banking system along with sound monetary policy (keeping in mind that one policy is for all the Euro countries, so more careful measures of policy needs to be taken). 

2. To restore the people's confidence in the system, the policy measures should be in such a way that it should generate more employment and also should stimulate the investment activity in the economy.

3. The foremost thing which I feel should happen at least now is allow Greece to Default. I again repeat the quote of Ludwig Von Mises, from his book Human Action, "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."  

Perfect quote, "..... a voluntary abandonment or later as a Final and Total Catastrophe ......." , even though he said this for credit expansion, this  is perfectly suitable for Greece considering the depth of the current crisis. The time has come and it is now, that Euro should allow Greece to default else the entire Europe will definitely fall in another recession which may lead to another global crisis soon. Let the time and the policy makers decide the fate of the Europe and the Global Economy.