Economic Survey Series-1: Decoupling of Indian growth from world economy

 

Decoupling

Decoupling refers to the reversal of usual relationship between two parameters. In economics, different parameters have well defined relationships, however, under certain condition, such defined relationship is reversed. This reversal of relationship is termed “Decoupling”

The present decoupling

In the present case decoupling refers to the reversal of relationship between the growth statistics of India and the rest of the world. Until early 2016, India’s growth had been accelerating when growth in other countries was decelerating. But then converse happened. The world economy embarked or a synchronous recovery but India’s GDP growth and other related indicators like IIP data, credit and investment decelerated.

Causes of Decoupling

  1. Decoupled Monetary Policy

During this period, India’s monetary conditions decoupled from the rest of the world.

Until mid 2016, Indian real interest rate followed the downward trend of global interest rate. Since then, world’s real interest rate witnessed downward trend while Indian average real interest rate zoomed, for the same period. This was mainly due to tight Monetary Policy adopted by RBI while the world adopted liberal monetary policy to infuse investment and increase demand in the economy.

This tight money policy of RBI resulted in

  1. Depressed consumption and investment as compared to other countries, mainly due high interest rate.
  2. It attracted capital inflow, consequently strengthened Indian rupee which in turn
  • Dampened the net service export, making it costly due to rupee appreciation.
  • Widened manufacturing trade balance as their exporting cost increased due to rupee appreciation and hence export value declined, on the other hand, traders import increased due rupee appreciation.
  1. Demonetization

It temporarily reduced demand and hampered production, especially in the informal sector, which transacts mainly in cash.

  1. GST

It badly affected supply chain, disrupting economic system. Through cash- GDP ratio stabilized by mid-2017, but GST affected the retail chain which in turn had adverse impact on llP data as well as on consumer demand.

  1. Export- import witnessed reverse trend

Since March, 2017 export growth decelerated while import accelerated sharply, a pattern not observed in other Asian emerging economics or the world.

This was mainly due to 1st three causes as mentioned above

  1. Twin Balance sheet syndrome

It has been a drag on both investment and consumption. The accumulated losses of companies increased NPAs of banks. The profits of PSBs declined or even entered negative territory as their provisioning for bad loans increased.  They were left with less money for investment. All these dampened both investment and consumption.

  1. Zooming oil prices

It is estimated that a $ 10 per barrel increase in oil price, reduces growth by 0.2 to 0.3% points. In this period oil prices have increased by over 20% and so it has

  • Increased WPI
  • Increased cost of production
  • Lowered domestic demand
  • Decreased export.

 

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