Macroeconomic Policy in India Since the Global Financial Crisis: Trends, Policies and Challenges in Economic Revival Post-Covid (India Studies in Business and Economics)

This book discusses the Indian economic crisis and brings out what went wrong and the correction necessary for getting the economy back to high growth trajectory, leading to economic transformation. To do so, the book covers trends in performance of Indian economy since the Global Financial Crisis to the COVID-19 effect, bringing out factors that have determined the same. The book questions the approach to macroeconomic policy of both the RBI and the government and brings out what it takes for macroeconomic policy to be supportive of high growth. It contains revealing contrasts with East Asia and China, although India has the same potential to grow with an expansion of manufacturing. Overall, it argues that macroeconomic policies (as much as structural, industrial, and trade policies) have been deficient and even good initiatives on the industrial policy and trade flounder for the lack of a strategic approach to macroeconomics. The book highlights the special opportunities present in an emerging economy with vast under and utilised labour and the macroeconomic policy initiatives that can take advantage of this key feature. It covers the macroeconomic data on growth using multiple indicators, then the external shocks and the internal policy measures/responses; besides, GVA/GDP, credit, exports, external transactions, interest and policy rates, yields, exchange rates, money, capital flows, indices of industrial sector, price indices and inflation, government expenditures, tax rates, fiscal deficits, market uncertainty measures to present a holistic picture of the economy and the shocks and policy actions that have followed. The book uses an innovative method of presentation and the consistency of the trends/stances of both monetary and fiscal policy using these large number of variables. It discusses the debate on overestimation of GDP/GVA growth estimates over the years from 2011-12 to about 2016-17 comprehensively. There is special coverage of GST with a comparison with China. Coverage also includes performance since the COVID-19 crisis again using a large number of indicators and an explanation for the same in terms of the limitations of the government’s initiatives to counteract. The book is a quick and ready reference of what has happened in macroeconomic terms to those interested in the relevant facts. It is of interest to international economists, policy analysts, and investors whose need to understand that the Indian economy in macroeconomic terms and in terms of the stances and penchant of the government and the RBI is of value. Preface Acknowledgments Contents Abbreviations List of Figures 1 Introduction 1.1 The Great Liberalization 1.2 Global Financial Crisis 1.3 The “Tiger” Period 1.4 “Reforms” and Macroeconomic Policy 1.5 Macroeconomic Policy Could Hurt Reforms 1.6 Equilibrium Not “General” 1.7 Incorporating Financial Sector (Monetary Side) Stocks 1.8 The Problem of Global Capital Flows 1.9 Exchange Rate Management 1.10 Trends and Their Determinants 1.11 After the Global Financial Crisis 1.12 Movement to Inflation Targeting 1.13 Should the CPI be “Targeted”? 1.14 Supply-Side Inflation 1.15 Food Inflation is Special 1.16 Fiscal Conservatism 1.17 Reforms During Modi-I 1.18 The COVID Crisis 1.19 Employment Decline 1.20 RBI’s Dynamic Response 1.21 Manufacturing Kickoff? 1.22 GST and Its Effects 1.23 The Coverage Annex: Indian Growth Experience References 2 Trends in Growth Since the GFC 2.1 Official 2011–12 National Income Series 2.2 Possible Overestimation in GVA11-12? 2.3 Index of Industrial Production 2.4 IIP Sectors Since 2018 2.5 GDP04-05 Series and GVA11-12 Series 2.6 GVA11-12 Series Since 2015–16 2.7 Exports, Imports, and Electricity 2.8 Trends in GCF References 3 Credit, Employment, and the Current Account 3.1 Growth and Credit 3.2 Employment from CMIE’s Surveys 3.3 Exports, Imports, and the Current Account References 4 Capital Formation and Foreign Investment 4.1 Gross Capital Formation 4.2 Private Investment 4.3 Private Sector Investments 4.4 Portfolio Flows 4.5 FDI 4.6 Cumulative FII Flows 5 Inflation and Monetary Developments 5.1 Inflation Trends 5.1.1 Fractured Agriculture Markets and CPI 5.1.2 Challenge of Monetary Policy with Open Capital Account 5.2 Trends in M, H and NFA 5.2.1 The “Tiger” Period 5.2.2 Impact of GFC 5.2.3 “Taper Tantrum” 5.2.4 Policy Rates and Bond Yields 5.3 Uncertainty in the Financial Markets References 6 Policy and Analyses 6.1 High Growth Continues After GFC 6.2 Estimates of the Stimulus 6.3 Policy Paralysis 6.4 PMEAC’s Analysis 6.5 Monetary Tightening 6.6 Market Rises and Fall 6.7 Positive Vibes But Underspending 6.8 Unconditional Pursuit of Fiscal Deficit Targets 6.9 Scaling Down MGNREGS 6.10 Demonetization and Delayed Effects 6.11 Authorities Enhancing Risks and Uncertainty 6.12 Not External Factors 6.13 Real Estate Construction and Growth 6.14 Infrastructure and NPAs of Banks in the Slowdown 6.15 The GST Effect 6.16 Tax “Terrorism” 6.17 Taxes in the Growth Experience 6.18 Government Expenditure 6.19 The Fiscal Deficit References 7 Reflexive, Not Reflective Monetary Policy 7.1 Introduction 7.2 Reflexive Approach to Inflation 7.3 Inflation Targeting Experiences 7.4 Supply-Side Inflation 7.5 Special Case of Food Inflation in Transition Economies 7.6 Chinese High Food Inflation Episode 7.7 Nature of Inflation in India 7.8 Addressing Demand-Side Inflation 7.9 RBI’s Inflation “Forecasts” 7.10 Expectations Survey 7.11 Inflation Pass Through 7.12 Wrong Weights for Food? 7.13 Specificities Need Recognition 7.14 A Broken Compass (or Is the CPI Useless)? 7.15 Pay Commission Implementation and Distortions in the Core Inflation 7.16 Adjusting for Rents 7.17 Transmission Issues References 8 The COVID Crisis and Response 8.1 Before the Crisis 8.1.1 Growth Had Slowed Down 8.1.2 Inflation Was Low 8.1.3 On the Monetary Side: 8.1.4 Stimulus Withdrawal and Monetary Tightening 8.1.5 Conservative Government Spending 8.1.6 GST Raised Effective Tax Rates 8.1.7 Ineffective Corporate Tax Cut 8.1.8 Rise in Uncertainties 8.2 The COVID Crisis and the Response 8.2.1 Contagion Was Limited 8.2.2 Prime Minister’s Initiative 8.2.3 Dysfunctional Lockdowns 8.2.4 Fractured Markets 8.2.5 Middle-Class Delight 8.2.6 Migrant Labor 8.2.7 Territoriality of Restrictions 8.2.8 Knee-Jerk and Emergent Response 8.2.9 Employment Scheme for Workers? 8.2.10 Simultaneous Demand and Supply Shock 8.2.11 Summer Harvest Escapes 8.2.12 Infection Patterns 8.3 Anticipating the Effect Through a Model 8.4 The Stimulus Package 8.5 Impact 8.6 RBI’s Response Annex Table 1. References 9 The Recovery 9.1 Stock Market Performance 9.1.1 Discount Rates 9.1.2 Model to Explain Stock Valuation 9.1.3 Cost and Return Structure of Corporates 9.2 GDP and GVA Over the Crisis and Recovery 9.3 IIP Over the Months of the Crisis and Recovery 9.4 Sectoral Patterns 9.5 Industry Wise Recovery 9.6 Unemployment 9.6.1 Labor Force Participation 9.6.2 Reservation Wages 9.6.3 Employment 9.6.4 Sectoral Patterns 9.6.5 Type of Work 9.7 Export and Imports 9.8 Monetary Developments 9.9 Lending Rates 9.10 Yields and Credit Flows 9.11 Government Expenditure 9.12 Inflation 9.13 FDI, FII, and the “Fisher-Open” Annex References 10 The Challenge of Manufacturing 10.1 Manufacturing and Demand 10.2 Sectoral Differences 10.3 Growth Trends 10.4 Competitiveness in the Eighties 10.5 Large Tax Distortions 10.6 Auto Sector in the Eighties 10.7 Relative Profitability of Exports 10.8 Pre-plan Competitiveness 10.9 Declining Tariffs and Currency “Overvaluation” 10.10 Auto Industry 10.11 Electronics Manufacture 10.12 The PC Revolution 10.13 Policies Designed to Lose 10.14 Relative Revealed Comparative Advantage 10.15 Electronics Manufacture in ELG Economies 10.16 Fab Before Assembly 10.17 Low Bound Tariffs 10.18 DIPP and “Thru Put Support” 10.19 WTO and the Solar Panels Fiasco 10.20 Debilities Faced by the Electronics Industry 10.21 ITA and Decline of Electronics Manufacturing 10.22 Tariffs and Domestic Prices 10.23 EPR’s not Easy to Estimate 10.24 IS in India 10.25 Role of Exchange Rates 10.26 Pure Trade Theory Model is Limiting 10.27 ELG is Mis-Understood in India 10.28 India Moved Towards Laissez Faire not ELG 10.29 The Fisher Open and the Nature of FDI 10.30 Equilibrium Stances and Dutch Disease 10.31 Would “Make in India” Finally Takeoff? References 11 GST and the Discrimination Against Production Oriented States 11.1 Antecedents 11.2 Issues in a Destination-Based Tax 11.3 Need for State-Level Estimates of Revenue Neutrality (RNR) 11.4 Current Estimates of RNR at the State Level 11.5 The Consumption-Based Approach 11.6 Adjusting NSSO Estimates with NAS PFCE 11.7 RNRS (A) 11.8 RNRS (AA) 11.9 Further Estimates Including Service Taxes 11.10 Including Government Purchase 11.11 Institutional Mechanism 11.12 Conclusions References 12 Conclusions 12.1 Managing the GFC 12.2 The Fall from High Growth 12.3 Monetary Tightening 12.4 Inflation Targeting 12.5 Fiscal Conservatism 12.6 Programs Without Design 12.7 Public Sector Banks 12.8 External Environment 12.9 Reforms and Macroeconomic Policy 12.10 The COVD19 Crisis 12.10.1 Stimulus 12.10.2 Lockdowns 12.10.3 RBI to the Rescue 12.10.4 Employment Fall 12.10.5 Insipid Recovery 12.11 Working Through Reforms 12.12 Make in India Today 12.13 Debilities on Manufacturing 12.14 Not ELG as Yet 12.15 Finally 12.16 Revised Estimates’ Indications 12.16.1 Growth and Recovery 12.16.2 Inflation 12.16.3 Chinese Disruptions 12.17 “Logistics” Inflation 12.17.1 Fight the Inflation? Uncited References