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ECONOMIC SURVEY 2017-2018
Released By Government of India Ministry of Finance Department of Economic Affairs Economic Division January 29, 2018 Presented By Roman Saini
Therefore, the lower the threshold, the greater the risk of capturing episodes of temporary volatility rather than more enduring slowdowns Complete cross-country list of investment and saving slowdowns are shown in figure 2. It reveals that slowdowns are quite frequent, appearing even in 'success stories', such as China (1988), Singapore (1985, 1999), and Mauritius (1981, 1995, 2012) There is only one economy in the sample since the early 1980s that has not suffered from any slowdown: Bangladesh. Most slowdowns in Latin America and Africa occurred during the 1980s, a period that became known as the 'lost decade' in those continents. Meanwhile, Asian countries faced the largest number of slowdown episodes (10) following 1997.
During that period, there were large investment slowdowns in Malaysia, Thailand, Indonesia and Korea, which of course is why this period is known as the East Asian crisis Curiously, this relationship between the two types of slowdown turns out to be unusual from 1975 to 2007 Saving are perhaps less prone to cycles because of being influenced by long term trends viz. Demographics.
How does India fit into this broader picture? Until recently, India had not experienced either type of slowdown : not during the 'lost decade', not during the East Asian crisis, not even after India's own balance-of- payments crisis in 1991 As a result, the current slowdown - in which both investment and saving have slumped is the first in India's history The investment slowdown started in 2012 (when it surpassed the 2 percent threshold), subsequently intensified (surpassing the 3 percent and then the 4 percent thresholds in 2013 and 2014 respectively), and was apparently still continuing as of the latest date, that for 2016. With the slowdown now having lasted at least five years, it has already surpassed the typical duration of slowdown episodes; if it continued through 20127
Savings vs Investment:Growth Consequences Shouldpolicies in India that hoost investment (viz suhstantial infrastructure push. reforms to facilitate the ease of doing husiness or the 'Make in India'program) he given greater priority over those that hoost saving2 The issue is about relative importance and urgency. Both set of policies are crucial in the long run but which one needs to be prioritized at present? The standard solution that is often prescribed is that both problems need to be tackled simultaneously. However, the experience has varied across time. During the first two periods (the oil shock 1975-1983 and the great moderation 1984-1997) the share of public and private in aggregate investment declines are almost similar. Over the 1998-2014 period investment slowdowns are overwhelmingly led by private investment contractions.
Recovery from 'India Type' Investment Slowdowns India's investment slowdown is unusual in that it is so far relatively moderate in magnitude long in duration, and started from a relatively high peak rate of 36 percent of GDP. Furthermore, it has a specific nature in that it is a balance sheet-related slowdown. In other words, many companies have had to curtail their investments because their finances are stressed, as the investments they undertook during the boom have not generated enough revenues to allow them to service the debts that they have incurred
What happens after balance-sheet slowdowns? Or What tends to happen to investment rates in the aftermath of 'halance sheet' episodes? Since India is now 11 years past its investment peak, investment rates are measured as deviations from peak levels.There are two take-aways: 1. Investment declines flowing from balance sheet problems are much more difficult to reverse 2. India's investment decline so far (8.5 percentage points) has been unusually large when compared to other balance sheet cases What happens after similar investment falls2 A full' recovery is defined as attainment of an investment rate that completely reverses the fall, while no recovery implies the inability to reverse the fall at all or worse
The median country reverses only about 25 percent of the decline 14 years after the peak, and about 40 percent of the decline 17 years after the peak. If India conforms to this pattern, the investment-GDP ratio would improve by 2.5 percentage points in the short run. Given the large fall in investment that India has registered, it has paid moderate costs in terms of growth. Between 2007 and 2016, rate of real per-capita GDP growth has fallen by about 2.3 percentage point. That is lower than the above 3 percent decline in growth noticed, on average, in episodes in other countries that have registered investment declines of similar magnitudes and from roughly a similar peak.(about 36 percent)
Policy Lessons For India First, it is clear that investment slowdowns are more detrimental to growth than saving slowdowns. So, policy priorities over the short-run must focus on reviving investment. Mobilizing saving, for example via attempts to unearth black money and encouraging the conversion of gold into financial saving or even courting foreign saving are important but perhaps not as urgent as reviving investment. Second India's investment slowdown is not yet over although it has unfolded much more gradually than in other countries, keeping the cumulative magnitude of the loss and the impact on growth - at moderate levels so far