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From: sanjeev nayyar
From: sanjeev nayyar
Per Author the downturn in 2000s had many redeeming features – a current account surplus, low inflation and lots of liquidity with banks.Current Account was in surplus then because domestic savings was higher than domestic investment. Moreover high FD did not lead to high inflation or a high CAD. Interest on bank deposits was > inflation so people kept money in deposits unlike today.
I remember that interest rate in the 2000s were in single digits. I got my car loan in 2004 at 8%. It is important that Governments spend money to create Assets that lead to higher incomes and productivity.
WITHOUT SAYING SO THIS ART GIVES CREDIT TO THE NDA GOVT.
A tale of two economic downturns by Manas Chakravarty in MINT – 15/4/13
The downturn in the early 2000s had many redeeming features which the current downturn lacks
Now that most people believe the economy is at or near the bottom during the current cycle, it would be interesting to compare a few current economic indicators to where they were at the bottom of the previous cycle in the early 2000s, after the end of the technology boom.
But isn't the current downturn, coming as it does after a global financial crisis, much worse than the slowdown after the tech wreck? True, but then it's already five years since the financial crisis started and the global economy has had time to recover. According to numbers provided by the International Monetary Fund, the global economy grew by 2.35% in 2001 and 2.87% in 2002, well below the growth estimate of 3.2% for 2012 and the forecast of 3.5% for 2013. In short, the external situation then was worse than it is now. Note that export growth showed a small decline during 2001-02, while exports during April 2012 to February 2013 have showed a decline of 4% from a year ago.
Real gross domestic product (GDP) growth in India was 5.5% in 2001-02 and 4% in 2002-03. Compare that to GDP growth of 5% in 2012-13. But the reason growth was lower in 2002-03 was because there was a severe drought that year and agricultural output contracted sharply. Industry and services growth, however, was more than that in 2012-13. It might make more sense, therefore, to compare 2012-13 with 2001-02, when industry growth was lower and services growth a bit higher. The bottom for both industry and services during the tech bust was in 2001-02.
Let's start with the fiscal deficit. The central government's fiscal deficit was a high 6.2% of GDP in 2001-02 and 5.9% of GDP in 2002-03. That's above 2012-13's fiscal deficit of 5.2%. The revenue deficit too was much higher then. But subsidies were much lower as a percentage of total expenditure.
The high fiscal deficit and the lack of export growth should have spilled over to the current account, but instead we had a current account surplus in 2001-02 and the following two years, in sharp contrast to the yawning deficit we have now. The reason was a sharp rise in so-called invisibles, especially software services and remittances. In contrast, the latest balance of payments data show stagnation in both software services exports and in inward remittances. Also, the imports to GDP ratio was much lower then, soft crude prices being the main reason. Looked at another way, the current account was in surplus in the early 2000s because domestic savings at the time was higher than domestic investment.
Moreover, the high fiscal deficit in the early 2000s did not lead to high inflation. Annual average wholesale price inflation (WPI) in 2001-02 was less than half of what it was in 2012-13. The difference in the rates of consumer price inflation is even starker. In 2001-02, average consumer price inflation for industrial workers was a mere 4.3%. For 2012-13, consumer price inflation is in double digits. Also interesting is the fact that the WPI for manufactured products showed no increase in 2001-02. Inflation in food articles, which has been very high in recent times, was muted in 2001-02. Even in 2002-03, a drought year, food prices were kept firmly in check.
So a high fiscal deficit in the early 2000s did not lead to an increase in the current account deficit or to high inflation. This time around, though, inflation has become a structural problem.
Now consider the growth in bank credit. At the end of March 2002, year-on-year growth in non-food credit was much lower than at the end of March 2013. The reason is simple. GDP at current prices in 2001-02 was a mere 8.8%, compared with 13% in 2012-13. The borrowing needs of firms are linked to inflation and banks finance nominal rather than real growth.
But while the difference in credit growth is easily explained, what are the reasons for the difference in the credit-deposit ratio of banks? On 29 March, the credit-deposit ratio was a very high 77.8%. Contrast that with the low credit-deposit ratio of 53.81% on 29 March 2002. The reason is rather obvious: the growth rate of deposits in 2001-02 was far higher than the growth in credit.
In 2001-02, interest rates for bank deposits of tenor one to three years were between 7.5% and 8.5%, much above the inflation rate. People therefore had no problem keeping their money in bank deposits. In contrast, in 2012-13, the interest rate on bank deposits of similar tenor was 8.75-9.25%, below the rate of consumer price inflation. Therefore, bank deposits have not been a hedge against inflation in recent times.
The central bank's policy rate was at 6% at the end of 2001-02, but that was substantially higher than the inflation rate. Currently, the policy rate is 7.25%, lower than the rate of consumer price inflation and only slightly above the WPI rate. The real policy rate, therefore, was higher during the last downturn. This time, with inflation so high, the policy rate can't be brought down much, as the Reserve Bank of India has said several times. In contrast, by March 2003, the policy rate had been reduced by another one percentage point. That was because average WPI inflation fell to even lower levels in 2002-03 than in the previous year.
So the downturn in the early 2000s had many redeeming features—a current account surplus, low inflation and lots of liquidity with banks. This time around, we do not have those comforts.
Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at capitalaccount@livemint.com
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sanjeev nayyar
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