Reasons for India’s slowdown..

Nth paper on the topic. This one is by IMF econs Rahul Anand ; Volodymyr Tulin.

They say the slowdown is mainly because of policy uncertainty. The latter is measured by an index developed by Scott Baker and others:

 

The recent investment slowdown has sparked an intense debate in India about the role of interest rates and the role of policy uncertainty and business confidence in slowing  investments. Economists typically argue that real interest rates have been low, even though nominal rates have gradually risen after the substantial easing of 2008/09. On the other hand, some representatives of the business community maintain that high nominal lending interest
rates have played a key role in the current investment slump. Not surprisingly, the two groups have argued for different monetary policy actions to respond to this situation. The objective of this paper is to ascertain the determinants of the current investment slowdown. In this paper, we try to answer the following questions:

– Which interest rate matters for investment – real or nominal?
– How much of the investment slowdown could be attributed to higher interest rates?
– To what extent could the investment slowdown be due to policy and regulatory uncertainty?

This paper makes three contributions.

First, the paper exploits a newly created economic policy uncertainty index by Baker and others (2013) to study the impact of economic policy and regulatory uncertainty on the recent investment slowdown in India. To the best of our knowledge, this is the first such attempt to quantify the impact of uncertainty on the investment slowdown in India.

Second, we find that real interest rates explain investment activity better than nominal interest rates. Our results suggest that real interest rates account  for only one quarter of the explained investment downturn.

However, we find that standard macro-financial variables (interest rates, external demand, relative prices, global financial market volatility and others) do not fully explain the recent investment slump. Finally, using the new measure of economic policy uncertainty, the results suggest that heightened uncertainty and deteriorating business confidence have played a key role in the recent investment slowdown.

25% is still a significant number if at all..No variable can really explain the equation fully. The paper is slightly heavy on econometrics…so one has to be careful to interpret the results…

But even keeping econometrics aside, this is how it should have been. We have had a crazy last 4-5 years in India’s politics and policy uncertainty. It clearly has dampened the economic situation like none else. As things did not improve, likes of RBI were caught in the fold and tight policies were blamed right from businesses to politicians in power.

And whatever people may say, things have been pretty impressive despite such poor quality of politics. Even now citizens are in frenzy over the upcoming political situation, investors are having a ball. Sometimes one does not know, why do the investor community complain?

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.


%d bloggers like this: