Archive for July 20th, 2007

EAC’s Indian economy outlook 2007-08

July 20, 2007

Finally after a long wait we have Economic Advisory Council’s outlook for 2007-08. The report is here. [What a messy website. There is a need to revamp the website completely. The websites of most government (or sponsored) entities really need to be redone (I don’t understand this fascination for putting flashing photos on the homepage). Look at Planning Commission, SEBI…  all rich in content but the presentation, less said the better.]

Let me say at the onset, this report is disappointing. Agreed their mandate is to give an outlook on Indian economy and not explain what should be done to ensure the growth follows, still this eminent panel could have done much more. 

Especially, in these times when we have no communication from policymakers on any of the important issues bothering the Indian economy as of now- surplus liquidity, capital inflows, currency appreciation etc. (Off course, we have India’s Finance Minister talking about monetary policy!)  I would have expected some good empirical analysis on what is needed rather than pureplay of words and economic theory. 

Some quick findings from the report:

1. The report projects GDP growth at 9% higher than projections given by others. Report says RBI has given around 8.5%, IMF – 8.4%, NCAER- 8.5%, Private international banks till a month ago mostly had forecasts of around 8.5%, although some major banks have recently revised it to 9.0% and over.

However, there are problems with the estimates itself. RBI, CSO includes Construction sector in Services and EAC includes former in Industrial sector. So which is correct?

2. I would skip the rest of the projections, as they are simply numbers. The report raises its concerns over agriculture and power. In agriculture, the issues are well known and widely discussed. In Power, the report tells me :

The capacity build-up that we have planned has thus been in respect of an attenuated demand, and then even that capacity has failed to materialise in time. It is instructive to note that during the Tenth (2002–2007) Plan period, we had planned to add 41,110 MW and succeeded in implementing some 18,000 MW. In sharp contrast, it is understood that China implemented 101,170 MW of power generating capacity (mostly thermal) in calendar year 2006 alone.

The gap is of many orders of magnitude and holds serious implications of the consequences of not doing enough. The initial thinking in formulating the Eleventh Plan (2007–2012) was that additional power generating capacity during the plan period would be about 50,000 MW; this was revised upwards to 60,000 MW in the Approach Paper for the XIth Plan (December 2006). More recently this number has been further raised to 68,869 MW, with a “best effort” commitment to bring another 11,545 MW forward, i.e., a total of 80,414 MW. Some may argue that given the record of slippages in implementation, we should be guided by the past and accordingly we ought to lower our sights, and adopt a “realistic” target, which is not in excess of 40,000–50,000 MW.

EAC says it is high time we start thinking big in power sector and 11th plan should be looking at augmenting power generation capacity by 100,000 MW and above.

3. In last report EAC had said India’s growth has largely been consumption driven ( I have summarised it here) and there is a need to shift it to more investment driven. This time they say it is happening (I had also suggested the same here).

4. The previous report had no analysis on emplyment and this report covers the latest 61st round survey by NSSO. I had covered the findings of the survey previously and found that story is pretty grim and most of the increase has happened in low income/low productive jobs.

The EAC outlook acknowledges it but that is all in very few words. It should have focused on lack of value-added employment; instead, it says employment scenario has undergone a fundamental change! Why can’t they refer to/provide references to what has already been done on the subject. It makes a huge difference as one gets a complete view of what is actually happening. For instance, had I not read the paper on employment I covered here, I would have thought, well employment is not a problem as of now.

5. The last chapter is perhaps the most important and something which most analysts had been waiting for. It is aptly titled ‘Monetary, Exchange Rate and Inflation Management’. This has also been the most talked about in the media as well.

It says the usual stuff- Central Bank should mange the inflation, things have to be balanced etc. For instance it says, capital inflows have been much larger than current account deficit and this puts a pressure in the currency to appreciate. As currency appreciates, the current account deficit widens and we have capital flows equivalent to the current account deficit. So all balances. But then we need to look at the magnitude. At present cap flows are 5 times so for a current account to widen by that much would means huge adjustments as currency appreciation would reduce exports massively….and so on…

So, to control appreciation, RBI should intervene and it should be directed towards “orderly conditions” as has been the RBI Policy for long…..What is it supposed to mean?

The media has been talking about 3 measures suggested by EAC to control capital inflows:

1. Let currency appreciate
2. Absorb capital flows and sterilise the excess
3. Liberalise outflows and discourage inflows by putting restrictions

At best you would expect that EAC to analyse which ones should be used when but you get this disappointing line, which is also the end of the report:

Instead of arguing for the exclusive use of any one of the instruments, there must be a judicious mix of all of the three instruments. There are limits to which each instrument can be used by itself.

This is something most people know about as media and number of economists have commented about them. What is new? They could have done some empirical work doing costs and benefits of each policy measure or provided references to the same. In today’s ET, one of the EAC member comments:

So should we seek an unchanging exchange rate? Not unless we wish to emulate the boy on the burning deck. Should we then hold our heads in our hands and let the exchange rate go where it wills, much like the nineteenth century stereotype of the fatalistic Oriental? No, for we don’t fit that stereotype. Which brings us back to the opening issue of the dimension of time and the PM’s Economic Advisory Council’s (EAC) advice of a “judicious” mix of three instruments to deal with the current situation, a term that the editorial of this paper a couple of days ago found rather elusive to pin down, suspecting perhaps of it being more illusory than real!

To me, after reading the article it is still illusory.

They have added some annexures on select issues like agri, power, cement industry, banking sector etc.

Another dampener is this report is 87 pages long which is longer than the previous outlook for 2006-07 which was 52 pages.

Update: Surjit Bhalla (of Oxus Research) also criticises the report in his usual (witty, full of sarcasm) manner.  His point of view is that EAC has overestimated export growth as rupee continues to appreciate.

Assorted Links

July 20, 2007

1. Ajay Shah has a nice posting on India’s currency market. In shirt, it is highly inefficient with a rampant illegal market.

2. One of my favorite economists Hal Varian has joined Google as a Chief Economist. WSJ Blog points out to a super interview of Varian.

3. WSJ Blog points out to a paper by Raghu Rajan et al which says Aid does not cause growth. The paper was written few months ago and is recently being covered in media and blogs (see for instance blog posts from Dani Rodrik, Greg Mankiw; all seem to be discussing this). I am expecting a few fireworks from aid supporters especially Jeff Sachs.

4. TCA Srinivasa in his Friday column in BS points out to a new paper on corporate pay system in India.

5. BS has  an excellent interview of Bimal Jalan, former RBI Governor. He says Financial Crisis are different because of couple of reasons:

In a financial system the real crisis occurs within a very short period — before you know it, you are gone. You don’t realise it and do not get enough time to prepare. All other crises take time to pan out. The key thing that I want to emphasise about a financial system crisis as was witnessed in east Asia is the short time duration in which it happens.

The second point, which is also important, is the contagion effect.

The third thing, unfortunately for policymakers, is that the crisis may already be there before they know it!

6. Ravimohan has written a decent article in BS on current market developments.

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