Economic Decline finally hits India too. Govt. in denial?

[Sei]

I've been trying to understand the economic conditions of the various countries that have still not come out of the throes of the 2009 recession; Spain, Italy and Greece to name a few. ( Here's an excellent interview of Alexis Tsipras (frontrunner for the PM's post in Greece in the elections in June) taken by TIME magazine. Be sure to read it.. Very, very interesting - Crisis in the Euro Zone: Alexis Tsipras Is the Greek Who Makes Europe Tremble - TIME )

However, today I read an article in TOI which said that India has shown the biggest decline in growth in the last 9 years. It is seriously shocking when our FM was all blabbering how India is immune from all this and wouldn't really be affected. Couldn't find the same article, but here's a similar one -

Rupee decline, wobbly markets and 'lowest' GDP growth highlight inept handling of economy by UPA-II government - The Economic Times

Does the Indian economy have a 1991 crisis feel? - The Economic Times

I am really trying to understand all this but since I am from an I.T. background, it's really a hit and miss in most cases. For e.g. what role does the RBI exactly have in controlling the downward spiral of the Rupee's value? What steps could the FM have taken to stem the decline? I know that there should have been more investment to increase manufacturing, but how exactly does it affect the entire scenario?

Would love some more article links or even other educational links

 

[viva1986]

i think u are right global recession finally hits india. The markets of india dont have money liquidity due to which there is decline in manufacturing. i can say that because i am a small scale manufacturer and i am feeling this condition from last year and the starting of this financial year i.e. 2012-2013 becomes worse. there is no money in the markets and the demand it is also on bad side. Government is in denial mode because it affects the foreign investors.

These are my views based on the condition of market.

 

[Sei]

@viva1986 Thanks for replying. Can you elaborate on the money liquidity part? I read this in one of the articles -

"Forex reserves are also much higher so we have a cushion." In '91, reserves covered only two weeks of imports. They can cover imports for six months now. ​

How does this play in the whole scenario?

Also can someone explain this ?

India's current account deficit in 1991 was 3% of GDP, today it is hovering at 4%. The ​

fiscal deficit

in 1991 was almost 8% of ​

GDP

and that was just for the central government. The deficit right now is a tad lower than 6%, better than 1991 but hardly comfortable. ​

 

[sharktale1212]

I'm also from IT, lets see if this clears your doubts:

RBI's role: There is a view on economics that a central bank can control the inflation/deflation, growth/decline of a country by controlling the money flow. The controlling is mainly done through interest rates. The cheaper it is to borrow money, the more money in the system. The more money in the system, more people spend and the economy is rejuvenated.
But even with RBI increasing interest rates last year, spending dint go low. Inflation has been sky high. So RBI tried to play another trick. Re-issuing the coins with lower metal content ie devalued INR (they wanted rupee to appreciate against the dollar). What they dint expect is how this will come back to bite their ass.
High inflation + devalued currency = worst performing currency of Asia
RBI did it best to prop up the rupee in January. But no one has ever won against the market. (You can read about Soros and how he broke the Bank of England to took home $1.1 billion in one single day)

FM's role: This part is quite debatable. With the world economy in tatters what can one really do?

Government's role: This is the highlight of whats happening now. You cant really expect things to be all good when your government is so weak that: announce a policy and then roll it back the very next day. It looks like we are living in a banana republic.

Check out the risk association of different countries.
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/05-2/20120530_EM2.png

World Economy: With europe not doing so good. Things are really bleak out there.

I havent covered all the points (why GDP/manufacturing etc are bad). I'll have to write a long article to explain all that

 

[Sei]

I'm also from IT, lets see if this clears your doubts:

RBI's role: There is a view on economics that a central bank can control the inflation/deflation, growth/decline of a country by controlling the money flow. The controlling is mainly done through interest rates. The cheaper it is to borrow money, the more money in the system. The more money in the system, more people spend and the economy is rejuvenated.
But even with RBI increasing interest rates last year, spending dint go low. Inflation has been sky high. So RBI tried to play another trick. Re-issuing the coins with lower metal content ie devalued INR (they wanted rupee to appreciate against the dollar). What they dint expect is how this will come back to bite their ass.
High inflation + devalued currency = worst performing currency of Asia
RBI did it best to prop up the rupee in January. But no one has ever won against the market. (You can read about Soros and how he broke the Bank of England to took home $1.1 billion in one single day)

FM's role: This part is quite debatable. With the world economy in tatters what can one really do?

Government's role: This is the highlight of whats happening now. You cant really expect things to be all good when your government is so weak that: announce a policy and then roll it back the very next day. It looks like we are living in a banana republic.

Check out the risk association of different countries.
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/05-2/20120530_EM2.png

World Economy: With europe not doing so good. Things are really bleak out there.

I havent covered all the points (why GDP/manufacturing etc are bad). I'll have to write a long article to explain all that

@sharktale1212 I really appreciate the reply. Especially the jab about you also being from I.T. But please bear with me!

RBI increased interest rates last year, spending dint go low. Inflation has been sky high. So RBI tried to play another trick. Re-issuing the coins with lower metal content ie devalued INR (they wanted rupee to appreciate against the dollar). What they dint expect is how this will come back to bite their ass.

Why would the RBI want people to spend less? The more the people spend, the greater the boost to the economy right?

Also, I didn't understand the purpose of devalued INR. How does that help in the rupee appreciating against the dollar?

And if you have the time, please do throw some light on the GDP/manufacturing part. Links would do fine too, but a reply like the one above makes everything easier to understand!

 

[sharktale1212]

sharktale1212 I really appreciate the reply. Especially the jab about you also being from I.T. But please bear with me!

By saying I am also from IT I was actually highlighting there might be holes in my theories too

Why would the RBI want people to spend less? The more the people spend, the greater the boost to the economy right?

with economies growing too fast comes high inflation. the economy might overheat and go bust. (just like a overheating computer )

Also, I didn't understand the purpose of devalued INR. How does that help in the rupee appreciating against the dollar?

Say today Re 1 = 10gms of metal = 1/56 of dollar. On decreasing the metal content Re 1 = 8gms of metal = 1/56 of dollar?
Check wiki
http://en.wikipedia.org/wiki/Currency_devaluation

And if you have the time, please do throw some light on the GDP/manufacturing part. Links would do fine too, but a reply like the one above makes everything easier to understand!

It will be a long winding tirade on government policies which is quite boring and debatable.

Central bank game: http://www.frbsf.org/education/activities/chairman/index.html --> This one is for FED, similar theory can be expected to work on RBI

 

[mjumrani]

The decline hit India long time ago. Our Quarterly and Annual GDP has steadily been declining. Its at its lowest in a decade or more.

 

[singenaadam]

The actual numbers may be even worse than what is being shown on TV. Our statistics collection systems are way to behind the times. By the time time they get to analyze the data, it is already too old.

We are not like China with trillion $ reserves and if the will is present you can spend your way out of the recession.

But it is a good time to buy equity/shares. With the market down and I see no light for at least a couple of years, it is a good period to accumulate stocks you like. Start SIPs now!

 

[viva1986]

viva1986 Thanks for replying. Can you elaborate on the money liquidity part? I read this in one of the articles - How does this play in the whole scenario?

"Money Liquidity means actual money in hand which can be used in purchasing raw material for manufacturing or in purchasing anything."

In actually money is only in books or on papers and this type of money cant be used in trading for example-:

Suppose you are a trader or manufacturer and sells goods on credit policy of one month i.e. the buyer gives you money after 30+ days for the goods which he purchased from you. Now u dont have actual money in hand but you have to recover it from the market or from your buyers, and you have to purchase something for your family member lets say necklace for your wife then you cant buy it just by telling the shop owner that you have money in papers and you can transfer these papers to him. Because of this situation you are unable to purchase just because u dont have money but actually u have money but it is all stuck in the markets.
All these also apply in case of purchasing raw material due to which your work is getting down and your sales are also going down.

 

[sharktale1212]

"Forex reserves are also much higher so we have a cushion." In '91, reserves covered only two weeks of imports. They can cover imports for six months now. ?

India's current account deficit in 1991 was 3% of GDP, today it is hovering at 4%. The ​

fiscal deficit

in 1991 was almost 8% of ​

GDP

and that was just for the central government. The deficit right now is a tad lower than 6%, better than 1991 but hardly comfortable.
​

1. Forex reserves: All the purchases made from foreign countries viz. oil etc needs to be paid in dollars. These dollars are coming out of the government coffers. Say the oil prices increases, it really hits the reserves government has. In case government run out dollars, it needs to buy at the current rate.
2. Fiscal deficit: amount by which some measure of government revenues falls short of some measure of government spending. (from wiki) say government is providing free color tvs to people but doesn't have enough tax revenues to make it up, they need to borrow that amount. So they need to plan better policies to spend the money they dont have.
3. Current account: A country has something called balance of payments - made of two major parts: current account & capital account. Current account is basically a measure on foreign income. Gold charges were increased recently due to their effect on BoP
Business Line : Industry & Economy News : Huge gold imports strain balance of payment: Pranab

 

[Sei]

The decline hit India long time ago. Our Quarterly and Annual GDP has steadily been declining. Its at its lowest in a decade or more.

You are true with regards to that information. Here's a snippet from the article I linked above -

The actual numbers may be even worse than what is being shown on TV. Our statistics collection systems are way to behind the times. By the time time they get to analyze the data, it is already too old.

We are not like China with trillion $ reserves and if the will is present you can spend your way out of the recession.

But it is a good time to buy equity/shares. With the market down and I see no light for at least a couple of years, it is a good period to accumulate stocks you like. Start SIPs now!

Yeah, I guess it is. But considering the manner in which the global economy is going, it might a be a much longer time than a couple of years before you can derive some benefits from the stocks. But, they are best treated as a long-term investment so yeah this might be a good time to do so.

"Money Liquidity means actual money in hand which can be used in purchasing raw material for manufacturing or in purchasing anything."

In actually money is only in books or on papers and this type of money cant be used in trading for example-:

Suppose you are a trader or manufacturer and sells goods on credit policy of one month i.e. the buyer gives you money after 30+ days for the goods which he purchased from you. Now u dont have actual money in hand but you have to recover it from the market or from your buyers, and you have to purchase something for your family member lets say necklace for your wife then you cant buy it just by telling the shop owner that you have money in papers and you can transfer these papers to him. Because of this situation you are unable to purchase just because u dont have money but actually u have money but it is all stuck in the markets.
All these also apply in case of purchasing raw material due to which your work is getting down and your sales are also going down.

That is a very nice explanation. Makes things a bit more clear for me. So, basically, this means that if this balance gets upset, no more money will be actually present with the people. And the people can't really pump money back in the market.

1. Forex reserves: All the purchases made from foreign countries viz. oil etc needs to be paid in dollars. These dollars are coming out of the government coffers. Say the oil prices increases, it really hits the reserves government has. In case government run out dollars, it needs to buy at the current rate.
2. Fiscal deficit: amount by which some measure of government revenues falls short of some measure of government spending. (from wiki) say government is providing free color tvs to people but doesn't have enough tax revenues to make it up, they need to borrow that amount. So they need to plan better policies to spend the money they dont have.
3. Current account: A country has something called balance of payments - made of two major parts: current account & capital account. Current account is basically a measure on foreign income. Gold charges were increased recently due to their effect on BoP
Business Line : Industry & Economy News : Huge gold imports strain balance of payment: Pranab

You have an amazing grasp on things. Good you saw this thread. I've learnt so much in this evening alone.

Alright, this might be a stupid question but where are these coffers present? IIRC, I read somewhere that the money is actually stored offshore in Britain. I'm not sure of this information though. Or is this present in form of Gold Reserves or is that something completely different?

 

[manu1991]

I read somewhere that the money is actually stored offshore in Britain.

Nope, that's the Gold reserves,

 

[sharktale1212]

You have an amazing grasp on things. Good you saw this thread. I've learnt so much in this evening alone.

Alright, this might be a stupid question but where are these coffers present? IIRC, I read somewhere that the money is actually stored offshore in Britain. I'm not sure of this information though. Or is this present in form of Gold Reserves or is that something completely different?

I am also not sure where the fx reserves are held.
Gold reserves are different from fx reserves, gold being thought to be a good hedge against risk (recession and BoP) are bought for safety purposes. India bought a huge chunk of IMF reserves back in 2009/10 at record prices:
Full circle: India buys 200 tons gold from IMF - The Times of India
India is supposed to transact directly with Iran to buy oil ie no dollar payments. In came Hillary Clinton to dissuade government from doing that, cause supposedly US was enforcing "tougher" sanctions on Iran (oil politics working to a hilt):
India, Iran to settle some oil trade in rupees-source | Reuters
(you should watch a movie called Syriana - George Clooney. It gives a glimpse of how energy lobbying works)
One point I forgot to make during the reducing metal content in coins. Reducing metal content not only devalues currency, it also causes inflation. So you could say current coalition government and rbi governor (Duvvuri Subbarao) are a pair causing all these problems.

 

[pratikb]

I ain't any economy guy but as I see it ,
We are in vicious cycle.

We are behaving as usa poodle and loosing out on Iranian oil. While china continues to buy it as much as possible.

Forex--- is going down with our rs. It's all part of foreign institutional guys game plan. They are single handedly manipulating our markets. I feel ruppee can easily hit 60 plus if our government does not come out of policy paralysis.

Two key area'a which are screwed up are reforms.

Without cutting down on subsidy and increasing prices of commodities, situation of fiscal deficits won't improve and in this scenario, FII Will continue to pull out funds.

Second is FDI Decisions.
In budget it was decided that we shall deregulate retail and aviation FDI. Both are in limbo and I am not sure whether it will be done this year.

Talking of politics, it's stupid most event that some foreign secretary can come here and directly meet state prime ministers.

2014 won't be great and I predict hung assembly and that further reducing trust on Indian economy. We are fully capable to sustain ourself if political will is their.

Honestly speaking , due to lacks of crores of corruption, and lot of subsidy , our fiscal deficit will keep increasing and
Great Indian congress will keep it same for next two yrs with majority of populist decisions as they have to win election in 2014.

I don't remember where I read this statistic but our fiscal deficit has increased by some 315% in last decade.

 

[pratikb]

I will give you one sector example. Sugar industry.
We have quite high production of sugar and sugar products. But due to government inaction, exports are not allowed and that screws us double.

We loose on forex and in turn Indian market price of sugar remains low and in turn farmer gets screwed

I don't know why can't government decide that this many tons of sugar is required for domestic needs and remaining can get exported.

Dirty politics and even dirty regulatory stuff

 

[pratikb]

And euro zone shall break off. Germany has lost backing of France after Hollande came in power .
Greece is almost leaving euro zone and rest of PIIGS shall also do same.

Then economic scene might improve. And anothe slowdown on America is also coming. Like Lehman brother's now it's turn of Goldman and most probably it will unfold next yr after new us president comes in oval office.

Bad days ahead.

 

[NinByChoice]

The decline hit India long time ago. Our Quarterly and Annual GDP has steadily been declining. Its at its lowest in a decade or more.

Not true. GDP has been growing for the last decade. The rate of growth for the last Q has been the lowest in the last decade.

One point I forgot to make during the reducing metal content in coins. Reducing metal content not only devalues currency, it also causes inflation. So you could say current coalition government and rbi governor (Duvvuri Subbarao) are a pair causing all these problems.

Very funny. Reducing paper size of currency notes also causes devaluation?

 

[sharktale1212]

Very funny. Reducing paper size of currency notes also causes devaluation?

Woah dint know they did reduce the paper size.
As I said I am also into IT so my theories could wrong.
That said, whats your opinion on these things?

 

[JuGGa]

I will give you one sector example. Sugar industry.
We have quite high production of sugar and sugar products. But due to government inaction, exports are not allowed and that screws us double.

We loose on forex and in turn Indian market price of sugar remains low and in turn farmer gets screwed

I don't know why can't government decide that this many tons of sugar is required for domestic needs and remaining can get exported.

Dirty politics and even dirty regulatory stuff

If they do so, it will be another reason to increase sugar prices for black marketers and stockists. Its pure business man. No one thinks about others.

 

[pratikb]

If they do so, it will be another reason to increase sugar prices for black marketers and stockists. Its pure business man. No one thinks about others.

Production is far higher than domestic requirement and more. Than that how much black market can hold. It's screwing market.

It was decided to export excess but again classic flip flop of policy maker and again cancelled.