India and decoupling hyposthesis
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India and decoupling hyposthesis

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puts everything into one ppt to study the great decoupling hypothesis

puts everything into one ppt to study the great decoupling hypothesis

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  • The second approach of testing is the econometric evidence of the decoupling hypothesis. The procedure consisted of a series of regressions that included three variables for each regression; the EM output gap, the AM output gap and a dummy variable which was constructed to check for a structural break during a sub-sample of recent years (2000-2007).Consequently each regression provided with three variables, the intercept α (alpha) and two coefficients β (beta) and γ (gamma), for each year within the sub-sample tested for a structural break. The gammas are a direct test of the decoupling hypothesis provided that they are statistically significant.Thus when the coefficient gamma is negative, there is lower degree of business cycle interdependence between the tested countries/groups and decoupling hypothesis is confirmed.

India and decoupling hyposthesis India and decoupling hyposthesis Presentation Transcript

  • “ India is a great economy now, we are posed to lead the world into the next century and regain our golden bird status. We will walk alone and show the world that …... We are the best”
    ChoudharyNathu Ram
  • INDIA AND THE DECOUPLING HYPOTHESIS
  • INTRODUCTION
    GREATER INTEGRATION WITH THE WORLD
    TRADE AND SERVICES HAVE AMALGAMATED
    FINANCIAL INTEGRATION IS VISIBLE
  • INTRODUCTION
    INTEGRATION WITH BUSINESS CYCLE SYNCHRONISATION ?
    ARE WE FOOTLOSE AND ON OUR OWN ?
    HIGH ECONOMIC GROWTH - DECOUPLED
  • INTRODUCTION
    INCREASING TRADE INTENSITY-BUSINESS CYCLE SYNCHRONISATION
    NO THEORY OR CONSENSUS ON DEVELOPING NATIONS
    DECOUPLING – THE GREAT DEBATE
    DIVERGENT PERFORMANCE OF ECONOMIES IN 2008 ECONOMIC CRISIS
    EVERYONE SEEMS TO BE TALKING ABOUT DECOUPLING
  • INTRODUCTION
    EARLIER STUDIES – INCREASED SYNCHRONISATION
    RECENT STUDIES REVEAL A MIXED TREND
    SOME FIND INCREASED CORRELATION
    OTHERS FAVOUR DECOUPLING
  • INTRODUCTION
    ANECDOTAL EVIDENCE FOR INDIA
    SYSTEMATIC EVIDENCE IS LIMITED
    WE WILL LOOK AT BOTH SIDES OF THE COIN : WHICH SIDE IS THE TOAST
    BUTTERED
    GRAPHICAL ,STATISTICAL ,ECONOMETRIC DATA TO PROVE/DISPROVE
    THE HYPOTHESIS
  • THE DECOUPLING HYPOTHESIS
    WHAT DOES IT IMPLY
    REASONS TO SAY YES
    CONTENTS
    REASONS TO SAY NO
    WHAT IS A BUSINESS CYCLE
    BUSINESS CYCLE SYNCHRONISATION
    TESTING THE HYPOTHESIS
    CONCLUSION
  • THE HYPOTHESIS
  • DECOUPLING HYPOTHESIS
    The decoupling hypothesis is the idea that business cycles in emerging market economies have become more independent from business cycles in advanced economies in recent years. Decoupling essentially amounts to a structural break in the degree of business cycle interdependence between the two groups of economies
  • HYPOTHESIS
    ECONOMIES OF WORLD ARE INDEPENDENT OF EACH OTHER
    TROUBLES IN WEST MIGHT PROVE TO BE ADVANTAGEOUS FOR INDIA
    OUTSOURCING OF SERVICES
    ONLY 22% OF INDIA’s ECONOMY IS EXPORT RELATED
    INDIA’s GROWTH RATE OF 9-10% REFLECTS THRIVING DOMESTIC ECONOMY
    EMERGING MIDDLE CLASS
  • HYPOTHESIS
    THE BUBBLE WAS FORMING
    STOCK MARKETS ROSE RAPIDLY
    INCREASED PARTICIPATION OF MIDDLE CLASS IN STOCK MARKETS
    MUTUAL FUND INDUSTRY BOOMED FROM $5 BILLION TO $40 BILLION
    SKYROCKETING PRICES OF REAL ESTATE
  • HYPOTHESIS
    STOCK MARKET BUBBLES TEND TO BE SELF CONTAINED
    CREDIT BUBBLES LEAD TO A ‘DOMINO EFFECT’
    DECOUPLING THEORY MIGHT HAVE HELD UP IN CASE OF JUST
    STOCK MARKET BUBBLE
  • HYPOTHESIS
    INDIAN STOCK MARKET ON A STEADY DECLINE
    FLIGHT OF FOREIGN CAPITAL
    FOREIGN BANKS STARTED PRESERVING THEIR OWN CAPITAL
    GETTING LOANS FROM OUTSIDE HAVE BECOME DIFFICULT
    INDIAN ECONOMY HAS SLOWED DOWN
  • “When liquidity dries up, it doesn’t matter where you are” JamshidPandole
  • REASONS TO SUPPORT OR REJECT THE HYPOTHESIS
  • REASONS FOR SAYING “YES”
    EMERGING ECONOMIES COULD BE ‘DE-LINKING’ FROM THE
    DOMINANT ECONOMIES
    INCREASED IMMUNITY FROM IMPACT OF AN ECONOMIC DOWN - TURN
    PICKING UP OF ECONOMIC GROWTH IN INDIA
    STRONG COMPLIMENTARITY BETWEEN EXPORTERS OF MANUFACTURING
    GOODS AND PRIMARY GOODS
  • REASONS FOR SAYING “YES”
    Cont…
    INDIAN RURAL ECONOMY STRONG ENOUGH
    STRENGTH OF RURAL ECONOMY- PRIMARY CAUSE OF
    DECOUPLING
    SMALLER EXPORT SECTOR RELATIVELY LESS RELIANT
    INDIA TOWARDS MIGRATION
  • ROBUST INDIAN FINANCIAL SYSTEM
    SAVINGS RATE
    LOW HOUSEHOLD DEBT
    WILLINGNESS TO TAKE FISCAL CONSOLIDATION
    LOW FUNDING COST FOR HUGE INVESTMENT
    AVAILABILITY OF EQUITY AND DEBT FUNDING
    STRONG CONSUMPTION OVER THE NEXT DECADE
  • REASONS FOR SAYING “NO”
    IN 1990’s PRIVATE CONSUMPTION 67% OF GDP,SHARE OF EXPORTS 9% AS
    COMPARED TO 59% & 24.5% OF GDP IN 2008-09
    EVERY 1% DECLINE IN WORLD GDP GROWTH LEADS TO AROUND 3.71%
    DECLINE IN INDIAN EXPORTS
    INCREASED BUSINESS CYCLE SYNCHRONISATION OF INDIAN ECONOMY
    WITH THE DEVELOPED WORLD
    EVERY 1% DECLINE IN WORLD GDP RESULTED IN 4% DECLINE IN INDIAN
    SOFTWARE EXPORTS
  • REASONS FOR SAYING “NO” cont…
    SHARE OF MANUFACTURED EXPORTS ROSE FROM 27.1%(1990-91)
    TO 52.2%(2000-01) & FURTHER TO 72.3% (2008-09)
    THE SERVICES EXPORT TO GDP RATIO ROSE FROM 3.2%(1990-91) TO
    15.1% (2008-09)
    IN 2008-09, EXPORTS PLUS IMPORTS OF GOODS & SERVICES FORMED
    AT LEAST HALF OF THE GDP
    SHARE OF FDI IN INVESTMENT INCREASED FROM 7% IN 2007 TO 8% IN 2008
  • BUSINESS CYCLE AND ITS SYNCHRONISATION
  • BUSINESS CYCLE
  • BUSINESS CYCLE THEORIES
    KEYNESIAN THEORY
    REAL BUSINESS CYCLE THEORY
    POLITICAL BUSINESS CYCLE THEORY
  • BUSINESS CYCLE
  • BUSINESS CYCLE SYNCHRONISATION
    DEMAND CHANNEL- DEMAND SHOCKS IN ONE ECONOMY LEAD TO INCOME
    SHOCKS IN ITSTRADING PARTNERS
    BUSINESS CYCLE CONVERGENCE
    FINANCIAL MARKETS LINKAGES AND CONTAGION
    INCREASED FINANCIAL INTEGRATION SYNCHRONIZES CAPITAL FLOW
    MONETARY POLICY IS A CHANNEL FOR COMOVEMENT BETWEEN COUNTRIES
  • GRAPHICAL AND STATISTICAL TESTING OF HYPOTHESIS
  • EXPLAINATION OF TERMS
    TREND-trend of the GDP
    output gap of each country- output gaps represent business cycles for a country. The output gap = (nominal GDP-trend GDP)/trend GDP
    Euclidean distance : Euclidean distance equals to the absolute value of the difference between the output gap of the emerging-market economy (either individually or as a group) and the output gap of a group of advanced-market economies
  • GRAPHICAL METHOD
    Hence Euclidean distance takes into account the difference in amplitude and thus offers an innovative way of measuring synchronization. When Euclidean distance equals to zero, the business cycles are perfectly synchronized. Any other value (positive due to absolute sign) means imperfect synchronization and therefore the larger the distance, the larger the business cycle interdependence.
  • ECONOMETRIC EVIDENCE
    SERIES OF REGRESSION USING THREE VARIABLES
    EMERGING MARKET OUTPUT GAP, ADVANCED MARKET
    OUTPUT GAP & DUMMY VARIABLE
    INTERCEPT (ALPHA), TWO COEFFICIENTS (BETA) & (GAMMA)
    NEGATIVE GAMMA CONFIRMS DECOUPLING HYPOTHESIS
  • ECONOMETRIC METHOD OF TESTING
  • TESTING RESULTS
    BOTH GRAPHICAL AND ECONOMETRIC TESTING POINT TO A GREAT EXTENT OF COUPLING WITH THE WORLD ECONOMY
    SOME PARAMETERS SHOWED A SLIGHT DECOUPLING FROM THE US ECONOMY
  • THE VERDICT
  • GROUPS MANDATE
    PROVE OR DISPROVE THE HYPOTHESIS
    STUDY THE BUSINESS CYCLE SYNCHRONISATION
    CHECK THE DIVERGENCE OF OUR GROWTH PATH
  • CONCLUSION
    DECOUPLING HYPOTHESIS –A MYTH
    PRUDENCE OF OUR POLICY MAKERS AND CENTRAL BANKER
    DECOUPLED -WORLD BANKING SYSTEM TO A GREAT EXTENT
    THIS SELECTIVE RISK AVERSION SAVED US
  • TRIPARTITE BLOW
    HIGH INTERST RATES
    INFLATION
    MANAGEMENT OF FOREX
  • GROWTH SNUBBED
    IIP FIGURES AT
    5.6% ARE AT THEIR LOWEST IN 9 MONTHS
  • RECOMMENDATIONS
    TREAD CAREFULLY ON INTEREST RATE HIKES
    MONETARY POLICY ALONE WILL NOT CONTROL INFLATION
    REMOVE SUPPLY SIDE BOTTLENECKS
    IMPROVE INFRASTRUCTURE BY 200%
  • RECOMMENDATIONS
    REDUCE DEPENDENCE ON IMPORTED OIL
    STEM OUT CORRUPTION-BLACK MONEY DILLEMA
    IMPROVE FARM PRODUCTIVITY-WEAN SUBSIDIES GRADUALLY
  • “ India is a great economy now, we are posed to lead the world into the next century and regain our golden bird status. We will walk alone and show the world that …... We are the best”
    ChoudharyNathu Ram
  • 50
  • STOCK MARKET RETURNS OF INDIA Vs EMERGING ECONOMIES
    Emerging Markets are shown by the green line, the USA by the blue line, and non-US developed stock markets by the orange line
  • BUSINESS CYCLE
    PERIODS OF EXPANSION AND CONTRACTION
    PEAK REFERS TO ECONOMIC EXPANSION
    TROUGH RELATES TO ECONOMIC DECLINE
  • The growth of the Indian economy has become more tightly correlated to world growth in the last decade. While the correlation was 0.43 in the1980s and 0.59 in the 1990s, the slow and steady opening up of the economy led to an increase in this correlation to 0.92 during the period 2001-08
  • THE TEST FOR DECOUPLING – THE GLOBAL CRISIS 2008
    EVIDENT FINANCIAL & COMMERCIAL INTERDEPENDANCY BETWEEN
    INDIA & US
    INDIRECT EFFECT OF SUB PRIME CRISIS IN FORM OF LARGE
    CAPITAL OUTFLOWS
    TIGHTENING OF LIQUIDITY IN DOMESTIC MARKETS & CONSTRAINTS IN
    ACCESS TO EXTERNAL FINANCING
    DROP IN US DEMAND LED TO AN END TO EXPORT DRIVEN GROWTH &
    DISRUPTION OF INTRA ASIAN TRADE