The Eurozone Crisis and its Affect on the Indian Economy
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The Eurozone Crisis and its Affect on the Indian Economy

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Paper written for a class on the Indian Economy. Please comment if you found this information useful.

Paper written for a class on the Indian Economy. Please comment if you found this information useful.

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    The Eurozone Crisis and its Affect on the Indian Economy The Eurozone Crisis and its Affect on the Indian Economy Document Transcript

    • Running Head: INDIAN ECONOMY The Eurozone Crisis and its Impact on India Benjamin S. Cheeks International School of Management, Paris Author Note This paper was submitted to fulfill the requirements of Indian Economy, INEC 7017. I would like to thank the faculty and staff at Amity University, Noida, for their support and dedication to make the first ISM – Amity Seminar a success. I would also like to thank Dr. Don Mathews from the Coastal College of Georgia for his valuable insight into macroeconomic theory. Correspondence concerning this paper should be addressed to Benjamin S. Cheeks. Email: bencheeks@hotmail.com
    • INDIAN ECONOMY 2 Abstract The epicenter of the global financial crisis moved to Europe in 2010 and became the eurozone crisis. As the crisis drags on, global growth has slowed. Early in the crisis, the Government of India along with the Reserve Bank of India (RBI) implemented fiscal stimulus in the form of tax breaks and government spending as well as liquidity measures such as lowering interest rates and reducing cash reserve ratio to help India manage the crisis. Additional policy measures to open up financial inflows such as FDI, FII, and NRI Deposits soon followed. Despite setbacks in financial inflows between 2008 and 2010, the Indian economy rebounded in the timeframe of 2010-2011, growing at an impressive 9.32%. However, as the crisis continues, growth in India has slowed to 4.8%; the slowest in a decade. Years of deficit spending has increased government debt, raised inflation, and depressed the rupee, a fact that exacerbates the current account deficit. Inflation and the current account deficit have limited monetary policy tools. Political stalemate, strong regional parties and government corruption have limited the fiscal policy tools. Business and Consumer confidence is falling. The crisis has forced India to look at its trade policy and find other regions to direct their imports. It has accelerated reforms for FDI, FII, and NRI Deposits further opening the economy to the outside investor. It has shined a light on the corruption, bureaucracy, and poor infrastructure and brought them to the forefront of conversation. Keywords: Indian economy, euro crisis, India Trade, India FDI, India FII, NRI Deposits, business confidence
    • INDIAN ECONOMY 3 The Eurozone Crisis and its Impact on India The eurozone consists of 17 member states, all of whom have adopted the euro (€) as their common currency. The current members are: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Since 2009 the eurozone has been embroiled in a financial crisis that has made it difficult for certain member states to pay or refinance their debt without aid from the other member states, the European Central Bank, and the International Monetary Fund. The crisis is often referred to as the eurozone sovereign-debt crisis or just the eurozone crisis. Mody & Sandri (2012) describe how the eurozone crisis evolved. From the introduction of the euro in January of 1999 until July of 2007, the risk premia on the debt of eurozone member states moved in tandem, with little difference across the member states. It was this assumption of homogeneity between the countries that set the stage for the crisis. Mody & Sandri (2012) explain how the eurozone crisis evolved in three phases. The first phase of the crisis began in July of 2007 when the United States sub-prime market began to show signs of weakness. At this time, the risk premia on bonds issued by the eurozone sovereigns began to rise from historically low levels. At this time, the assumption of homogeneity prevailed and the yields rose largely in tandem. The second phase of the crisis began with the rescue of Bear Stearns by the US Federal Reserve in March of 2008. Along with the rescue, came the realization that governments would have to support their distressed banks. With this new view, the spreads on sovereign debt began to diverge as investors considered the stress in each member state’s financial sector and growth prospects. The third phase of the crisis came with the nationalization of Anglo Irish in 2009. The rescue of this bank gave investors an insight in the amount of fiscal support that may be required for the
    • INDIAN ECONOMY 4 financial sector. This third phase accelerated in May 2010 with the Greek bailout and continues today. Figure 1. Increase and dispersion of eurozone sovereign spreads (Mody & Sandri, 2012). The effects of the crisis are not limited to the eurozone. As one of the world’s largest trading blocks, the impact can be felt globally. This paper will explore the impact of this crisis on the Indian economy, review key responses by the Government of India (GoI), and discuss additional responses the GoI should consider. Framework for the Analysis Trade channels, financial channels and confidence channels will be analyzed in this paper. Trade Channels In this paper, an analysis of India’s foreign trade has been undertaken to see the impact of the global financial crisis on international trade. The paper studies India’s foreign trade by analyzing imports, exports and region-wide trade in detail. The analysis has been performed by comparing all variables before, during and after the global financial crisis.
    • INDIAN ECONOMY 5 Financial Channels The second channel through which the eurozone crisis could impact India is through financial channels. This paper analyzes the inflow of Foreign Direct Investment (FDI), the inflow of Foreign Institutional Investors (FII), and finally the deposits and remittances of Non-Resident Indians (NRI). Confidence Channels In addition to the effects of the traditional trade and financial channels, a change in the confidence channel could not only accelerate the transmission of macroeconomic shocks, but also amplify their effects. In a 2009 speech by Duvvuri Subbarao (2009), the Governor of the RBI, when referring to the Global Financial Crisis stated, “The contagion of the crisis has spread to India through all the channels – the financial channel, the real channel, and importantly, as happens in all financial crises, the confidence channel.” To analyze the change in business confidence, the paper reviews survey results from the NCAER Business Confidence Index, the FICCI Overall Business Confidence Survey, the Dun & Bradstreet Business Optimism Survey, and the CII Business Confidence Index. For consumer confidence, the Nielsen Global Survey of Consumer Confidence and Spending Intentions is reviewed. Policy Response In order to mitigate the effect of the eurozone crisis on the Indian economy, the Government of India as well as the RBI took a number of conventional and unconventional responses. This paper will explore a number of these actions. Additional Measures to Consider
    • INDIAN ECONOMY 6 This paper will also recommend additional actions that the Government of India and RBI can take as well as discuss current constraints that limit the Government’s effective implementation of these measures. Analysis Trade Channels Global shocks are traditionally transferred through the trade channels. As the Indian economy has become more integrated with the world economy, Indian imports and exports are more synchronized with the rest of the world. Mohanty (2009) explains that from 1970- 1991, Indian imports and exports were not significantly synchronized with a low correlation of 0.38. However, between 1992 and 2009, the correlation has increased significantly to 0.80 during the period from 1992 to 2009. Europe and the eurozone are significant markets for India and one would expect the crisis to decrease exports to these regions. Total trade of goods. India trade weathered the first two years of the global financial crisis. Total trade of goods increased 32.6% in 2007-2008 from the previous year with exports growing at 28.9% and imports at 35.1%. In 2008-2009, total trade increased at a slower pace of 17.4% from the prior year with exports growing at 13.7% and imports growing at 19.8%. The eurozone crisis was truly felt in 2009-2010. Total trade actually decreased in US dollar terms by 2.9% with exports shrinking 3.5% and imports 2.6%. While this seems drastic, according to a press release by the World Trade Organization (2010), global trade dropped 12.3% in 2009 on a volume basis and a whopping 23% in US dollar terms. The decline in 2009-2010 was short lived and India’s total trade rebounded; chalking up year-over-year gains of 30.8% in 2010-2011 and 28.1% in 2011-2012. However,
    • INDIAN ECONOMY 7 preliminary data for the 2012-2013 shows that overall trade showed another decline. This time with total trade falling 4.8%, with exports falling 6.0% and imports falling 4.0%. 0 100 200 300 400 500 600 700 800 900 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 USD(billions) Exports(US$bn) Imports(US$bn) Total Trade Figure 2. India total trade of goods in US$ billions (Planning Commission, Government of India, May 2013). From the perspective of total trade, the eurozone crisis hit India’s total trade in 2009- 2010. Trade rebounded the following two years, but as the crisis continued into 2013, trade has once again fallen is US dollar terms. Trade with the European Union and the eurozone. As the eurozone member states and the European Union as a whole are at the epicenter of the eurozone crisis, it is important to look at trade between India and these two regions. According to data available from the European Commission (2013), in 2008, India made up 2.4% of total exports for the European Union and 1.9% of imports. However, during the same year, The European Union (EU) accounted for 20.8% of Indian exports and 13.9% of Indian imports (Department of Commerce GoI , 2013).
    • INDIAN ECONOMY 8 Since 2007-2008 exports to the eurozone and the EU make up a smaller percentage of total exports as India looks for new export markets. 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 (P) Exports to eurozone 25.48 29.73 27.39 35.66 40.40 38.23 Exports to EU 34.54 39.35 36.03 46.04 52.56 50.36 eurozone as % of total exports 15.6% 16.0% 15.3% 14.2% 13.2% 12.7% EU as % of total exports 21.2% 21.2% 20.2% 18.3% 17.2% 16.8% Figure 3. Exports to eurozone and EU in US$ billions (Department of Commerce GoI, 2013). - 100.00 200.00 300.00 400.00 500.00 600.00 700.00 800.00 900.00 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 (P) Total Trade total Eurozone Trade total EU Trade Figure 4. EU-India trade and eurozone-India trade (European Commission, 2013, and Department of Commerce Government of India, 2013). As with total trade, exports to the EU and the eurozone recovered in 2010-2011 and 2011-2012. However, the growth rate to these regions was below the overall growth in exports causing the percent of exports to these regions to continue to fall. In the year 2012- 2013, exports to the EU and the eurozone fell by 4.2% and 5.4% respectively. Both numbers were higher than the overall decline in exports of 1.8% resulting in a further reduction in
    • INDIAN ECONOMY 9 exports to these regions as a percent of total exports. Since the large decline in exports during 2009-2010, trade in the EU and eurozone rebounded. However, for the next 2 years, the growth was below the trend in India, causing exports as a percent of total exports to fall. As the crisis continues and global growth slows, trade to these regions appears to be faltering. Composition of exports. It is also important not only to look at the total exports in terms of US dollars but to also consider the make-up of these exports to determine whether or not the profile of goods exported to the EU and eurozone has changed. The table below shows the top categories of items exported from India to both the European Union and the eurozone for the years 2005-2006, 2009-2010, and 2012-2013. These five categories make- up approximately 80% of the total exports for each of the years. The data clearly shows that the profile of items exported from India to the EU and eurozone has remained relatively stable over the past eight years. Therefore, while the eurozone crisis has impacted overall trade and specifically trade to the EU and eurozone, it has had little impact on the profile of goods exported. 2005-06 2009-10 2012-13 RMG Cotton Incl. Accessories Petroleum (Crude & Products) Petroleum (Crude & Products) Petroleum (Crude & Products) RMG Cotton Incl. Accessories Gems & Jewelry Gems & Jewelry Transport Equipments RMG Cotton Incl. Accessories Machinery And Instruments Gems & Jewelry Transport Equipments Transport Equipments Machinery And Instruments Machinery And Instruments Figure 5. Top five Indian exports to the EU, 2005-2006, 2009-2010, and 2012-2013 (Department of Commerce GoI, 2013). Trade in services. The previous analysis looked only at trade in goods. Country- wide data is not readily available for trade in services, so it must be analyzed broadly. The RBI refers to trade in services as one of the invisibles on India’s overall balance of payments. Services consist of Travel, Transportation, Insurance, Software Services, Business Services,
    • INDIAN ECONOMY 10 Financial Services, Communication Services, and the catch alls Miscellaneous and GNIE (Government Not Included Elsewhere). Research by Borchert & Mattoo (2010), shows that trade in services tends to be more resilient to change than to trade in goods. This is due to several factors. First, services see less cyclical demand. Secondly, services are less dependent upon external finance. Finally, few explicitly protectionist measures have been taken so far in the industry. In India, total trade of services increased 11.4% in 2008-2009 from the previous year with exports growing at 17.3% and imports at 1.1%. As with trade in goods, the trade in services began to feel the impact of the eurozone crisis in 2009-2010. In that year, total trade decreased in US dollars terms by 1.2% with exports shrinking 9.4% with import growth of 15.3%. Total trade in services turned around in 2010-2011 with a total growth of 39%. Exports grew by 38.4% that year and imports by 40.0%. As the eurozone crisis continued, trade in services has slowed. Total trade increased by a minuscule 0.6% in 2011-2012 and a slightly higher, but still disappointing, 2.7% in 2012-2013. It seems that even India’s world- class service sector cannot escape the impacts of the eurozone crisis. - 50.0 100.0 150.0 200.0 250.0 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 US$billions Service Exports Service Imports Total Service Trade Figure 6. India total trade of services in US$ billions (Planning Commission, Government of India, May 2013).
    • INDIAN ECONOMY 11 Financial Channels The second channel through which the eurozone crisis could impact India is through financial channels. Foreign Direct Investments (FDI), Foreign Institutional Investors (FII), and Non-Resident Indians Deposits (NRI) are reviewed in this section. Foreign direct investment. FDI is an important source of financing and technology for developing countries. The OECD Benchmark Definition of Foreign Direct Investment (2008) explains the importance of FDI: By the very nature of its motivation, FDI promotes stable and long-lasting economic links between countries through direct access for direct investors in home economies to production units (businesses/enterprises) of the host economies (i.e. the countries in which they are resident). Within a proper policy framework, FDI assists host countries in developing local enterprises, promotes international trade through access to markets and contributes to the transfer of technology and know-how. In addition to its direct effects, FDI has an impact on the development of labour and financial markets, and influences other aspects of economic performance through its other spill-over effect. (p. 20) There are many European countries that have investments in India. The Planning Commission, Government of India (May 2013), shows that from April 2000 to March 2013, the eurozone accounted for 15.1% of India’s FDI with the entire European Union accounting for 25.2% of FDI. When determining the source of FDI into India, it should be pointed out that due to tax advantages, nearly 40% of FDI inflows to India originate in Mauritius; making the true source of the investment difficult to identify. The same could be said for much of the 10% that flows in from Singapore. Therefore the eurozone and the European Union as a whole could account for a larger share than noted above.
    • INDIAN ECONOMY 12 2008 2009 2010 2011 2012 European Union 977.8 386.8 509.2 558.3 418 Total World 1,911.20 1,107.10 1,445.10 1,619.00 1,422.70 % of Total FDI Outflows 51.2% 34.9% 35.2% 34.5% 29.4% Change In EU FDI Outflows -60.4% 31.6% 9.6% -25.1% Change in Total FDI Outflows -42.1% 30.5% 12.0% -12.1% Figure 7. EU and total world FDI outflows in US$ billions (Bertrand, 2013). Focusing in on FDI Inflow to India from 2008 to March 2013 shows that while FDI decreased by 9.9% in 2009-2010 and another 7.7% in 2010-2011 before finally rebounding in 2011-2012. The most recent year, 2012-2013 has also been a slow year, seeing FDI fall 20.8% from the year before. - 50,000 100,000 150,000 200,000 250,000 300,000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 US$(millions) Annual FDI Flows Cummulative 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 Annual FDI Inflows 41,873 37,745 34,847 46,556 36,860 Cummulative Total 134,070 171,815 206,662 253,218 290,078 YoY % Change 20.2% -9.9% -7.7% 33.6% -20.8% Figure 8. Annual and cumulative FDI inflow to India 2001-2013 (Planning Commission, Government of India, May 2013). The 20.8% fall in 2012-2013 is slightly higher than the 12.1% decline in FDI globally (Bertrand, 2013). It likely does not reflect on India as a destination for FDI, but rather the
    • INDIAN ECONOMY 13 slowdown of FDI flows in general. This is supported from the fact that the United Nations survey for 2012 (United Nations Conference on Trade and Development, 2012) shows that India ranked third as the top prospective economies for FDI. In addition, the Ernst & Young Attractiveness Survey for 2012 shows 73% of business leaders are keen to invest in India in the near future. Foreign institutional investment. Foreign Institutional Investment (FII) is an investment in securities in India made by an institution established or incorporated outside India. FII flows are critical to help a country to manage its current account deficit. However, FII flows are fickle and can move quickly into or out of a country. With FII, it is difficult to pinpoint the origin of the investment. Therefore, FII numbers are reviewed in aggregate rather than country or region specific. Looking at data for FII from 2008 to March 2013 shows that FII flows have been very erratic over the past five years. Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 FII Flows US$(millions) 20,328 15,017 29,048 29,422 16,812 27,583 %YoY Change FII Flows -26.1% 93.4% 1.3% -42.9% 64.1% Figure 9. FII flows to India, April 2007 to March 2013 (Planning Commission, Government of India, May 2013). Several studies have shown that FII flows to India are related to stock market return. Chakrabarti (2001) concluded in his study that FII flows are correlated with contemporaneous returns in the Indian markets. Mukherjee, et al (2002) found that returns in the Indian equity market are indeed an important (and perhaps the single most important) factor that influences FII flows into the country.
    • INDIAN ECONOMY 14 Apr-Mar Apr-Mar Apr-Mar Apr-Mar Apr-Mar 2008-09 2009-10 2010-11 2011-12 2012-13 %YoY Change FII Flows -26.1% 93.4% 1.3% -42.9% 64.1% %YoY Change Sensex Flows -37.9% 80.5% 10.9% -10.5% 8.2% Figure 10. Percent YoY change in Sensex and FII flows (Planning Commission, Government of India,May 2013). NRI deposits. NRI Deposits are an important source of financing India’s current account deficits. The RBI (2010) states that 18% of total remittances come from Europe and therefore could be directly impacted by the eurozone crises. Apr-May Apr-May Apr-May Apr-May Apr-May Apr-May Apr-May 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 NRI Deposits 41,240 43,672 41,554 47,890 51,682 58,608 70,823 % YoY change 13.7% 5.9% -4.8% 15.2% 7.9% 13.4% 20.8% Figure 11. Annual NRI deposits April 2006 to May 2013 (Reserve Bank of India 2012, and Reserve Bank of India 2013). NRI Deposits have remained strong throughout the Global Financial crisis and the eurozone crisis. They have increased every year with the exception of 2008-2009 when they fell 4.8%. Mohapatra and Ratha (2009) attribute this limited effect to several factors. First, falling asset prices in India, rising interest rate differentials, and a depreciation of the local currency attracted investments from NRIs. Second, many of the migrants that lost jobs are not leaving but taking lower paying jobs with other employers. Third, the employment prospects for Indian migrants has remained relatively stable during the crisis due to the fact that many Indian migrants work in sectors that have not been hit as hard by the crisis. These sectors include health care, retail, and professional and technical services sectors. Finally, remittance flows tend to be more resilient when the migration destinations are diverse. The rather large increase in 2012-2013 may be attributed to weakening of rupee and deregulation of interest rate on NRI Deposits.
    • INDIAN ECONOMY 15 Confidence Channels This channel shows confidence changes in business and consumer sentiment. So even if an economy’s macroeconomic conditions and outlook look favorable, the decline in confidence can disrupt the economic conditions. Policy makers around the world understand the importance on confidence in the market. This is demonstrated by the G20 Leaders Declaration when they convened in Los Cabos on June 18-19, 2012. In the first 19 declarations, the word confidence was used six times. Most notably in the declaration, “All G20 members will take the necessary actions to strengthen global growth and restore confidence” (The White House, 2012). Business confidence. The following business confidence indicators are obtained through business surveys with the goal to evaluate and forecast on a short term the status of the economic activity, by economic sectors and as a whole. These indicators are built on the company managers’ subjective responses to a series of questions regarding the past and future status of their own activity. Business confidence surveys are important tools for policy makers. Gagea (2002) has shown that industrial confidence indicators can provide important information on the status and evolution of economic activity. These indicators are closely monitored by the RBI. The discussion relates to the change in the indices over the past year and with brief commentary on the most recent survey.
    • INDIAN ECONOMY 16 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 180.0 200.0 A pr-09 Jul-09 Oct-09 Jan-10 A pr-10 Jul-10 Oct-10 Jan-11 A pr-11 Jul-11 Oct-11 Jan-12 A pr-12 Jul-12 Oct-12 Jan-13 A pr-13 NCAER- Business Confidence Index FICCI Overall Business Confidence Dun & Bradstreet Business Optimism CII Business Confidence Index 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 180.0 200.0 A pr-09 Jul-09 Oct-09 Jan-10 A pr-10 Jul-10 Oct-10 Jan-11 A pr-11 Jul-11 Oct-11 Jan-12 A pr-12 Jul-12 Oct-12 Jan-13 A pr-13 NCAER- Business Confidence Index FICCI Overall Business Confidence Dun & Bradstreet Business Optimism CII Business Confidence Index Figure 12. Scores for Indian business confidence from April 2009 to April 2013 (FICCI,2013). NCAER business confidence index. The NCAER MasterCard Worldwide Index of Business Confidence is based on a survey which measures business confidence on four indicators. According to this index, Consumer Confidence in India decreased to 114 in the first quarter of 2013 from 135 in the first quarter of 2012. Historically, from 2009 until 2013, India Consumer Confidence averaged 135 reaching a high of 162 in October of 2010 and a low of 80 in April of 2009. In the latest survey, constraining factors were listed as increasing input costs and the increasing current account deficit (Voyagers World, 2013). FICCI overall business confidence. FICCI‘s Business Confidence Survey surveys Indian companies belonging to a varied array of sectors such as textiles, cement, financial services, chemicals, metal and metal products, automobiles, FMCG, electrical equipment and
    • INDIAN ECONOMY 17 machinery, paper and paper products. According to this index, Business Confidence in India increased to 61.2 in the first quarter of 2013 from 57.7 in the first quarter of 2012. Historically, from 2009 until 2013, India Consumer Confidence averaged 63.8 reaching a high of 162 in January of 2011 and a low of 51.5 in July of 2012. In the latest survey, (FICCI, 2013) listed constraining factors such as rising cost of raw materials and labor, inadequate infrastructure, and the high cost of credit. Dun & Bradstreet business optimism. The D&B Business Optimism Index is arrived at on the basis of a quarterly survey of business expectations. The survey is conducted on a sample of companies that are selected randomly from D&B’s commercial credit file. According to this index, Business Confidence in India decreased to 141.6 in the first quarter of 2013 from 150 in the first quarter of 2012. Historically, from 2009 until 2013, India Consumer Confidence averaged 145.4 reaching a high of 183 in April of 2011 and a low of 90 in April of 2009. An analysis of the latest survey by Dun & Bradstreet (2013) stated that, “Factors such as high fiscal deficit, dismal investment activity, high current account deficit, weak consumer spending and inertia in policy reform have led to deterioration in the business climate.” CII business confidence index. The Confederation of Indian Industry (CII) Business Confidence Index is based on responses from 175 members. A majority of the respondents 53% belonged to large-scale companies, 14.8% were from medium-scale ones and 25.2% and 7% each from small-scale and micro firms, respectively. Further, 67.2% of the respondents were from the manufacturing sector, while 31% and 1.7% were from the services and primary sectors, respectively. According to this index, Business Confidence in India decreased to 51.3 in the first quarter of 2013 from 52.9 in the first quarter of 2012. Historically, from 2009 to 2013, India Consumer Confidence averaged 59.1 reaching a high of 67.6 in July of
    • INDIAN ECONOMY 18 2010 and a low of 48.6 in January of 2012. In the most recent CII survey, BS Reporter (2013) reported that high levels of corruption, persisting inflation, lack of reform, escalated interest rates, and political uncertainty are major concerns. All four reports present similar findings. Confidence fell dramatically after the global financial crisis and then the eurozone crisis. However, much like trade, condition improved considerably through mid-2011. As the eurozone crisis has dragged on and European leaders continue to “kick the can down the road”, global growth has slowed having a continued negative impact on Indian business confidence. Constraining factors such as increasing input costs, inertia in policy reform, high interest rates, and the large current account deficit were common themes across the surveys. Consumer confidence. Similar surveys are given to consumers to evaluate their current levels of confidence. Carol (1994) shows that that measures of consumer confidence are correlated with real consumption and therefore may have some short-term forecasting ability. Figure 13. Indian consumer confidence scores as measured by the Nielsen global survey of consumer confidence and spending intentions from September 2009 to March 2013 (Trading Economics). The Nielsen global survey of consumer confidence and spending intentions. The Nielsen Global Survey of Consumer Confidence and Spending Intentions utilizes the Internet
    • INDIAN ECONOMY 19 to track consumer confidence, job prospects, personal finances and spending intentions. Consumer confidence levels above 100 indicate optimism and below 100 indicate pessimism. Consumer Confidence in India decreased to 120 in the first quarter of 2013 from 121 in the fourth quarter of 2012. Consumer Confidence in India is reported by Nielsen. Historically, from 2009 to 2013, India Consumer Confidence averaged 119 reaching an all time high of 131 in December of 2010 and a record low of 92 in March of 2010. Consumer confidence in India has been on a slow decline since the beginning of 2011. However, it should be noted that in the latest survey, India has the second highest consumer confidence rating in the world at 120 (Trading Economics, 2013). Policy Response - Trade Channels Gupta (2010) divides measures to promote exports into two broad categories, price measures and non-price. Price factors would include things such as devaluation of currency and various indirect and direct tax benefits. Tax benefits have been the one of the key measures the Indian Government has used to stimulate exports since the financial crisis. Since the start of the financial crisis, the Government of India has made several price responses in order to help the export sector. These include things such as duty refunds, low interest loans, and tax waivers for exporters. Roy & Kala (2013) report in the Wall Street Journal that the recent $555 US million export stimulus package offers a 2% financial incentive on exports to the United States, Europe and Asia. In order to encourage exporters to seek out alternative markets, it is also expanding the program to include exports to African and Latin American countries. The stimulus package also extends for the same period a low- cost loan program for exporters and a waiver of taxes on imported capital goods. Gupta (2010) lists non-price factors as things such as comprises the upgradation of quality of product, fast delivery of consignment, and post-sale services. These factors are
    • INDIAN ECONOMY 20 more long lasting as they are more difficult for competing nations to emulate. On the non- price side, the government’s response has been muted. It has however relaxed minimum export requirements in certain industries. Discussing trade in India would not be complete without mentioning Special Economic Zones (SEZ). SEZ are geographical regions within India to setup the export of goods and provide employment. These zones usually benefit from reduced or no tariffs as well as reduced to no taxes in order to make exports more competitive. SEZs were dealt a blow recently following an imposition of an Alternative Minimum Tax as well as a Dividend Distribution Tax. According to the Ministry of Commerce, India (n.d.), there are currently 156 SEZs operating in India with another 588 approved. One of the major difficulties in setting up additional SEZs is the ability to obtain large tracts of uncultivable land to set up an SEZ. The government has responded to this limitation by reducing the minimum land requirement, but land acquisition remains an issue. Additional Measures and Limitations – Trade Channels On the price side, the Government of India is restricted on more aggressive measures than those they have already undertaken due to the high fiscal deficit. Reuters (2013) reported that 2013 fiscal deficit to be 4.9% of GDP. However, on the non-price side, the GoI has opportunity in streamlining logistics to reduce transportation and transaction costs. Nordas, H., Pinali, E., & Grosso, M,. (2006) found that a 10% increase in transport costs reduces trade volume by 20 and that the tariff equivalent per day in transit is equal to 0.8%. They also mention studies that show a 5 to 25% reduction in trade value for every 10% increase in time for exports, depending on sector and export destination. The Government of India could also negotiate new free trade agreements. They currently are discussing Free Trade Agreements with a number of countries/regions;
    • INDIAN ECONOMY 21 including the EU, Thailand, and Australia. However Free Trade Agreements must be negotiated carefully to ensure domestic production does not suffer or that domestic industries are overshadowed by their international competitors Policy Response – Financial Channels At the onset of the financial crisis, the Government of India initiated a large stimulus package containing tax breaks and increased government spending to offset the effects of the slowdown. The RBI took measures to ensure proper liquidity was maintained. These measures included lowering the repo and reverse-repo rate as well as reducing cash reserve requirements through 2009. This policy was reversed in 2010 and 2011 as inflationary concerns weighed on the economy. However, after disappointing growth in 2012, the RBI has reduced rates three times in 2013. Figure 14. Indian interest rates and CRR (Kshitij Consultancy Services). To help keep FDI flowing, the GoI either opened FDI or raised the FDI maximum investment in areas such as insurance, telecommunications, retail, pensions, commodity trading, and broadcasting.
    • INDIAN ECONOMY 22 In order to encourage more FII, the RBI has increased the limit for investment in long-term government and corporate securities. In addition, they have reduced the lock-in period for the corporate bonds and infrastructure debt funds. In order to stimulate additional NRI Deposits, the RBI has increased the interest rate paid on these deposits. Additional Measures and Limitations – Financial Channels. The financial channel is facing many limitations at the moment. These include an elevated fiscal deficit, a rising current account deficit, inflation above the RBI target, and a falling rupee. The GoI has made positive steps toward addressing the fiscal deficit. Reuters (2013) reported the fiscal deficit for 2013 was 4.9% and is narrower than 2012 that came in at 5.8%. On the current account side, in addition to the policy to stimulate capital inflows, the GoI has raised duties on gold imports. In addition, the RBI has implemented a policy requiring companies with in the SEZ to repatriate their funds within one year of the date of sale. High inflation has kept the RBI from being aggressive in reducing interest rates. In the most recent quarter, inflation appears to be cooling. However, it is currently the depressed rupee that is preventing the RBI from reducing interest rates further. To make India a more attractive destination for foreign investment, the government must take more steps to make doing business in India easier. Some basic recommendations are to invest in market-driven infrastructure, crack down on corruption, reduce bureaucratic hurdles, and loosen rigid labor laws. These recommendations are not original. Most Indians that you talk to would point out the exact things. However, at the moment, India is wrapped in political deadlock due to recent allegations of corruption among top governmental officials
    • INDIAN ECONOMY 23 and the emergence of strong regional parties. These strong regional parties also make coordination difficult between state and central government. Policy Response – Confidence Channels Recently, the Government of India has done little to boost business or consumer confidence. If anything, it seems to have done the opposite. Dhume, & Milligan (2012) from reported: As economic growth slows to below 6% and yet another corruption scandal gridlocks governance, are Indians losing faith in their politicians? A spate of recent articles suggests that’s certainly true of Prime Minister Manmohan Singh. Once seen as an incorruptible champion of economic liberalization, Singh has recently been termed The Underachiever (Time Magazine), and a “dithering, ineffectual bureaucrat” (Washington Post) presiding over a corrupt government that “has passed no substantial laws” (The Economist). Conclusion Former president of the European Central Bank, Jean-Claude Trichet (2013) wrote in the New York Times, “The epicenter of the worst global financial crisis since World War II, located in the United States since 2007, crossed the Atlantic at the beginning of 2010. As Fed Chairman Ben Bernanke told me at that time: “Now it is your turn.” Early in the crisis, the Government and India along with the RBI implemented fiscal stimulus in the form of tax breaks and government spending as well as liquidity measures such as lowering interest rates and reducing cash reserve ratio to help India manage the crisis. Additional policy measures to open up financial inflows such as FDI, FII, and NRI Deposits soon followed. Despite setbacks in financial inflows between 2008 and 2010, the Indian economy rebounded in 2010-11 growing at an impressive 9.32%. However, as the crisis
    • INDIAN ECONOMY 24 continues, growth in India has slowed to 4.8%; the slowest in a decade. Years of deficit spending has increased government debt, raised inflation, and depressed the rupee, a fact that exacerbates the current account deficit. Inflation and the current account deficit have limited monetary policy tools. Political stalemate, strong regional parties and government corruption have limited the fiscal policy tools. Business and Consumer confidence is falling. Everything is not all bad though. In 2012-13, the fiscal deficit decreased to 4.9% of GDP down from 5.9% of GDP the past two years. The latest wholesale inflation reading was a 42 month low of 4.7%. Indian remains a preferred destination for FDI and there is still room to further open the Indian economy to investment. NRI Deposits had risen to a record $70 billion US in 2012-13. The eurozone crisis has been a drag on the world economy and India has slowed with it. However, it has had some positive impacts. As trade with the EU and eurozone slows, India is forced to look to other export markets for their goods. To date this has been successful as total trade with the EU continues to fall as a percentage of total trade. The crisis has increased the urgency of reforms for FDI, FII, and NRI Deposits further opening the economy to the outside investor. It has shined a light on the corruption, bureaucracy, and poor infrastructure and brought them to the forefront of conversation. The GoI must address these issues in order to restore confidence in the international community. Projects to improve infrastructure can stimulate the industrial sector and reduce transportation costs making Indian exports more competitive. Indian has huge resources at its disposal to overcome the crisis, let’s just hope it finds the political will to do so.
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