india and decoupling

Slide 1: 

“ 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” Choudhary Nathu Ram

INDIA AND THE DECOUPLING HYPOTHESIS: 

INDIA AND THE DECOUPLING HYPOTHESIS

INTRODUCTION: 

INTRODUCTION GREATER INTEGRATION WITH THE WORLD FINANCIAL INTEGRATION IS VISIBLE TRADE AND SERVICES HAVE AMALGAMATED

INTRODUCTION: 

INTRODUCTION INTEGRATION WITH BUSINESS CYCLE SYNCHRONISATION ? HIGH ECONOMIC GROWTH - DECOUPLED ARE WE FOOTLOSE AND ON OUR OWN ?

INTRODUCTION: 

INTRODUCTION INCREASING TRADE INTENSITY-BUSINESS CYCLE SYNCHRONISATION EVERYONE SEEMS TO BE TALKING ABOUT DECOUPLING NO THEORY OR CONSENSUS ON DEVELOPING NATIONS DECOUPLING – THE GREAT DEBATE DIVERGENT PERFORMANCE OF ECONOMIES IN 2008 ECONOMIC CRISIS

INTRODUCTION: 

INTRODUCTION EARLIER STUDIES – INCREASED SYNCHRONISATION SOME FIND INCREASED CORRELATION RECENT STUDIES REVEAL A MIXED TREND OTHERS FAVOUR DECOUPLING

INTRODUCTION: 

INTRODUCTION ANECDOTAL EVIDENCE FOR INDIA WE WILL LOOK AT BOTH SIDES OF THE COIN : WHICH SIDE IS THE TOAST BUTTERED SYSTEMATIC EVIDENCE IS LIMITED GRAPHICAL ,STATISTICAL ,ECONOMETRIC DATA TO PROVE/DISPROVE THE HYPOTHESIS

Slide 9: 

CONTENTS THE DECOUPLING HYPOTHESIS WHAT IS A BUSINESS CYCLE REASONS TO SAY YES BUSINESS CYCLE SYNCHRONISATION WHAT DOES IT IMPLY REASONS TO SAY NO TESTING THE HYPOTHESIS CONCLUSION

THE HYPOTHESIS: 

THE HYPOTHESIS

DECOUPLING 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: 

HYPOTHESIS ECONOMIES OF WORLD ARE INDEPENDENT OF EACH OTHER INDIA’s GROWTH RATE OF 9-10% REFLECTS THRIVING DOMESTIC ECONOMY TROUBLES IN WEST MIGHT PROVE TO BE ADVANTAGEOUS FOR INDIA OUTSOURCING OF SERVICES ONLY 22% OF INDIA’s ECONOMY IS EXPORT RELATED EMERGING MIDDLE CLASS

HYPOTHESIS: 

HYPOTHESIS THE BUBBLE WAS FORMING SKYROCKETING PRICES OF REAL ESTATE STOCK MARKETS ROSE RAPIDLY INCREASED PARTICIPATION OF MIDDLE CLASS IN STOCK MARKETS MUTUAL FUND INDUSTRY BOOMED FROM $5 BILLION TO $40 BILLION

HYPOTHESIS: 

HYPOTHESIS STOCK MARKET BUBBLES TEND TO BE SELF CONTAINED DECOUPLING THEORY MIGHT HAVE HELD UP IN CASE OF JUST STOCK MARKET BUBBLE CREDIT BUBBLES LEAD TO A ‘DOMINO EFFECT’

HYPOTHESIS: 

HYPOTHESIS INDIAN STOCK MARKET ON A STEADY DECLINE FOREIGN BANKS STARTED PRESERVING THEIR OWN CAPITAL FLIGHT OF FOREIGN CAPITAL GETTING LOANS FROM OUTSIDE HAVE BECOME DIFFICULT INDIAN ECONOMY HAS SLOWED DOWN

“When liquidity dries up, it doesn’t matter where you are” Jamshid Pandole : 

“When liquidity dries up, it doesn’t matter where you are” Jamshid Pandole

REASONS TO SUPPORT OR REJECT THE HYPOTHESIS: 

REASONS TO SUPPORT OR REJECT THE HYPOTHESIS

REASONS FOR SAYING “YES”: 

REASONS FOR SAYING “YES” EMERGING ECONOMIES COULD BE ‘DE-LINKING’ FROM THE DOMINANT ECONOMIES PICKING UP OF ECONOMIC GROWTH IN INDIA INCREASED IMMUNITY FROM IMPACT OF AN ECONOMIC DOWN - TURN STRONG COMPLIMENTARITY BETWEEN EXPORTERS OF MANUFACTURING GOODS AND PRIMARY GOODS

REASONS FOR SAYING “YES”: 

REASONS FOR SAYING “YES” INDIAN RURAL ECONOMY STRONG ENOUGH SMALLER EXPORT SECTOR RELATIVELY LESS RELIANT STRENGTH OF RURAL ECONOMY- PRIMARY CAUSE OF DECOUPLING INDIA TOWARDS MIGRATION Cont…

ROBUST INDIAN FINANCIAL SYSTEM: 

ROBUST INDIAN FINANCIAL SYSTEM SAVINGS RATE WILLINGNESS TO TAKE FISCAL CONSOLIDATION LOW HOUSEHOLD DEBT LOW FUNDING COST FOR HUGE INVESTMENT AVAILABILITY OF EQUITY AND DEBT FUNDING STRONG CONSUMPTION OVER THE NEXT DECADE

REASONS FOR SAYING “NO”: 

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 INCREASED BUSINESS CYCLE SYNCHRONISATION OF INDIAN ECONOMY WITH THE DEVELOPED WORLD EVERY 1% DECLINE IN WORLD GDP GROWTH LEADS TO AROUND 3.71% DECLINE IN INDIAN EXPORTS EVERY 1% DECLINE IN WORLD GDP RESULTED IN 4% DECLINE IN INDIAN SOFTWARE EXPORTS

REASONS FOR SAYING “NO” cont…: 

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) IN 2008-09, EXPORTS PLUS IMPORTS OF GOODS & SERVICES FORMED AT LEAST HALF OF THE GDP THE SERVICES EXPORT TO GDP RATIO ROSE FROM 3.2%(1990-91) TO 15.1% (2008-09) SHARE OF FDI IN INVESTMENT INCREASED FROM 7% IN 2007 TO 8% IN 2008

BUSINESS CYCLE AND ITS SYNCHRONISATION: 

BUSINESS CYCLE AND ITS SYNCHRONISATION

BUSINESS CYCLE: 

BUSINESS CYCLE

BUSINESS CYCLE THEORIES: 

BUSINESS CYCLE THEORIES KEYNESIAN THEORY REAL BUSINESS CYCLE THEORY POLITICAL BUSINESS CYCLE THEORY

BUSINESS CYCLE: 

BUSINESS CYCLE

BUSINESS CYCLE SYNCHRONISATION: 

BUSINESS CYCLE SYNCHRONISATION DEMAND CHANNEL- DEMAND SHOCKS IN ONE ECONOMY LEAD TO INCOME SHOCKS IN ITSTRADING PARTNERS MONETARY POLICY IS A CHANNEL FOR COMOVEMENT BETWEEN COUNTRIES BUSINESS CYCLE CONVERGENCE FINANCIAL MARKETS LINKAGES AND CONTAGION INCREASED FINANCIAL INTEGRATION SYNCHRONIZES CAPITAL FLOW

GRAPHICAL AND STATISTICAL TESTING OF HYPOTHESIS: 

GRAPHICAL AND STATISTICAL TESTING OF HYPOTHESIS

EXPLAINATION OF TERMS: 

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: 

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: 

ECONOMETRIC EVIDENCE SERIES OF REGRESSION USING THREE VARIABLES INTERCEPT (ALPHA), TWO COEFFICIENTS (BETA) & (GAMMA) EMERGING MARKET OUTPUT GAP, ADVANCED MARKET OUTPUT GAP & DUMMY VARIABLE NEGATIVE GAMMA CONFIRMS DECOUPLING HYPOTHESIS

Slide 35: 

2000 2001 2002 2003 2004 2005 2006 2007 USA β 0,35 (0,07) 0,32 (0,009) 0,25 (0,018) 0,27 (0,017) 0,32 (0,09) 0,36 (0,06) 0,41 (0,04) 0,29 (0,017) structural break γ -0,91 (0,005) 2,98 (0,02) 1,30 (0,08) 0,85 (0,021) 1,99 (0,003) -1,26 (0,043) -0,77 (0,023) 0,28 (0,005) E.U. β 0,35 (0,07) 0,30 (0,012) 0,27 (0,014) 0,34 (0,06) 0,36 (0,05) 0,35 (0,06) 0,35 (0,06) 0,32 (0,09) structural break γ -0,02 (0,009) 0,69 (0,003) 1,50 (0,07) 1,70 (0,09) 4,71 (0,02) 0,61 (0,055) 0,72 (0,005) 1,47 (0,003) World’s advanced Economies β 0,38 (0,05) 0,34 (0,08) 0,30 (0,01) 0,36 (0,05) 0,39 (0,041) 0,38 (0,046) 0,38 (0,047) 0,35 (0,06) structural break γ 0,06 (0,09) 0,67 (0,037) 1,39 (0,07) 3,38 (0,01) 1,28 (0,021) 1,59 (0,05) 2,47 (0,005) 1,23 (0,003) G-7 β 0,35 (0,07) 0,31 (0,01) 0,27 (0,014) 0,33 (0,07) 0,37 (0,05) 0,36 (0,06) 0,36 (0,06) 0,32 (0,09) structural break γ 0,16 (0,009) 0,76 (0,034) 1,41 (0,07) 4,24 (0,11) -0,420 (0,19) 0,31 (0,02) 0,31 (0,005) 1,36 (0,03) ECONOMETRIC METHOD OF TESTING

TESTING RESULTS: 

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: 

THE VERDICT

GROUPS MANDATE: 

GROUPS MANDATE PROVE OR DISPROVE THE HYPOTHESIS CHECK THE DIVERGENCE OF OUR GROWTH PATH STUDY THE BUSINESS CYCLE SYNCHRONISATION

CONCLUSION: 

CONCLUSION DECOUPLING HYPOTHESIS –A MYTH DECOUPLED -WORLD BANKING SYSTEM TO A GREAT EXTENT PRUDENCE OF OUR POLICY MAKERS AND CENTRAL BANKER THIS SELECTIVE RISK AVERSION SAVED US

TRIPARTITE BLOW: 

TRIPARTITE BLOW HIGH INTERST RATES MANAGEMENT OF FOREX INFLATION

GROWTH SNUBBED: 

GROWTH SNUBBED IIP FIGURES AT 5.6% ARE AT THEIR LOWEST IN 9 MONTHS

RECOMMENDATIONS: 

RECOMMENDATIONS TREAD CAREFULLY ON INTEREST RATE HIKES REMOVE SUPPLY SIDE BOTTLENECKS MONETARY POLICY ALONE WILL NOT CONTROL INFLATION IMPROVE INFRASTRUCTURE BY 200%

RECOMMENDATIONS: 

RECOMMENDATIONS REDUCE DEPENDENCE ON IMPORTED OIL STEM OUT CORRUPTION-BLACK MONEY DILLEMA IMPROVE FARM PRODUCTIVITY-WEAN SUBSIDIES GRADUALLY

Slide 49: 

“ 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” Choudhary Nathu Ram

: 

50

STOCK MARKET RETURNS OF INDIA Vs EMERGING ECONOMIES: 

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: 

BUSINESS CYCLE PERIODS OF EXPANSION AND CONTRACTION TROUGH RELATES TO ECONOMIC DECLINE PEAK REFERS TO ECONOMIC EXPANSION

Slide 60: 

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: 

THE TEST FOR DECOUPLING – THE GLOBAL CRISIS 2008 EVIDENT FINANCIAL & COMMERCIAL INTERDEPENDANCY BETWEEN INDIA & US TIGHTENING OF LIQUIDITY IN DOMESTIC MARKETS & CONSTRAINTS IN ACCESS TO EXTERNAL FINANCING INDIRECT EFFECT OF SUB PRIME CRISIS IN FORM OF LARGE CAPITAL OUTFLOWS DROP IN US DEMAND LED TO AN END TO EXPORT DRIVEN GROWTH & DISRUPTION OF INTRA ASIAN TRADE