Signs of green shoots in economic recovery
By Hardev Kaur(www.nst.com.my)
Hardev Kaur
MALAYSIA is listed among the top 10 countries seen as best able to weather the current global economic crisis. This is the view of more than 7,500 businessmen in 24 countries polled for the International Business Confidence Survey. The survey, by Servcorp, was conducted over a two-week period in April aimed at understanding the current mood, business morale, impact of the economic downturn and which countries in their view were navigating through the crisis most effectively.
Australia was ranked the best able to weather the crisis, followed by China in second spot and India third.
The Malaysian economy, which registered a negative growth of 6.2 per cent in the first quarter of this year, is showing signs of improvement with positive growth forecast in the fourth quarter of this year and in 2010.
The signs of improved economic performance are emerging even in the major economies which are also major markets for Malaysian
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products. The stock markets have gained and the KLCI is above 1,000 points. The stock market, Tan Sri Nor Mohamed Yakcop, minister in the Prime Minister’s Department, pointed out, is not only about the prices and the value created in the market but it is also indicative of the level of confidence in the economy.
The number of retrenchments has stabilised, unemployment has not really gone up and has not become a major problem, Nor Mohamed stressed. Inflation rate of 2.4 per cent in May is at a 16-month low and has been easing since hitting highs of 8.5 per cent in July and August last year. The construction sector, which has a high multiplier effect, is showing considerable improvement.
According to Jon Oh, an analyst with CLSA, the sector could have outperformed the broader market index by as much as 30 per cent over the last three months.
Prime Minister Datuk Seri Najib Razak told Parliament on Monday that “the people-friendly housing project” had been implemented on an urgent basis. Costing RM200 million to build 2,664 units of homes, the project has had a positive impact on the construction sector activity for the first quarter of this year, which posted a growth of 0.6 per cent. The housing project also provided employment and income for small contractors, especially in the rural areas.
The two stimulus packages totalling RM67 billion announced by the government last November and this March will begin to have greater impact in the second half of this year.
Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said the two packages would add between one and 1.5 per cent of gross domestic product (GDP) growth. Even as Malaysia’s own domestic pre-emptive measures continue to be implemented, there are positive signs from the major developed nations. China’s stimulus package, too, is having positive impact on economy, which is a welcome sign for countries in the region.
The Finance Ministers of the Group of Eight (G8) meeting in Italy over the weekend also “began looking ahead to economic recovery”. They acknowledged that there are “signs of stabilisation” in their economies as improving economic data fuelled a rally on world stock markers. The Paris-based Organisation for Economic Cooperation and Development (OECD) said most of the world’s big economies were close to emerging from a recession and its data pointed to a possible recovery by the end of the year.
The OECD says a “possible trough” had been reached in April in the major economies that account for almost three quarters of global GDP. The composite index for 30 economies rose 0.5 points in April, the second consecutive monthly rise, after falling for the previous 21 months. The OECD added that its overall measure of advanced member countries pointed to “recovery” instead of the “strong slowdown” they had been suffering since last August.
Despite the encouraging signs, “it is still too early to assess whether it is a temporary or a more durable turning point”. And the G8 ministers were reminded not to be too eager to unwind the various stimulus packages they have put in place. While there may be some “green shoots” of economic recovery, the full impact of the financial and economic turmoil was yet to be felt in “some corners of the world”.
There are mixed signals from the Bretton Woods institutions, too. The World Bank forecast earlier last week an even worse period ahead. It said the global economy would shrink by three per cent this year, far worse than a previous estimate of a 1.75 per cent contraction.
World Bank president Bob Zoellick is more positive and is quoted by Reuters as saying that the International Monetary Fund had raised its 2010 global growth estimate to 2.4 per cent from 1.9 per cent, and confirmed its 2009 forecast for a 1.3 per cent contraction made in April.
The G8 ministers in their communique said the “situation remains uncertain and significant risks remain to economic and financial stability”. They also stressed their commitment to provide any more stimulus the economy might need. They asked the IMF to assist with the process of outlining exit strategies from monetary and fiscal stimulus measures, like tax cuts and lower interest rates, and said such plans were “essential to promote a sustainable recovery over the long term”.
Despite all due respect to ministers and other managers of economic policies of our great country, it is disappointing to read statements where it is repeatedly stated that the next year may be economically tougher, GDP growth rate may further decline, fiscal deficit may increase over the revised budget estimates and Indian economy may not turn around unless the global economy recovers. However, once the global economy shows the signs of recovery, India’s turn around will be sharper and swifter; backed by our strong fundamentals and the untapped growth potential.
we should learn from india some tricks
Challenges might be viewed as opportunities:
We do believe that our fiscal and monetary authorities are sincerely doing the jobs at their best. Since no one can be perfect, chances of error and omissions might be there in assessment and visualization; and just possible that something might be missing in evaluation and analysis of data and plans. Thus it is desirable that instead of mentally preparing common Indians to face hard times ahead, they should better find and remove the regulatory hurdles for growth, announce alternative measures after reviewing the strategic plans and impacts of adopted measures. Of course, Indian economy, like many other economies around the world is facing hard time due to global recession, but it could also be an opportunity for India to pick up higher growth rate again. If India succeeds in doing it, many other nations may like to follow her. Thus, India may have an opportunity here to become a global economic leader.
Overweighing GDCF ratio to GDP:
It is rather unfortunate that the strategy for financing 11th five year plan is not accordance with the fundamental principles of economics of development and planning. How can we resolve a plan with continuous fall in the ratio of consumption expenditure to GDP? Somewhere we have overemphasized Gross Domestic Capital Formation (GDCP) to boost GDP growth. The balance between consumption expenditure and investment should be well maintained in our plans. No economy can achieve sustainable higher economic growth if consumption expenditure ratio to GDP is allowed to fall below 70 percent. Since 11th five year plan was finalized, economic environment in India as well as around the world has changed drastically. It might be reasonable to think of a possible review of the plan to find the odds. The proposal to finance the plan was based on higher saving and investment growth rates which was going right to the plan till inflow of capital from international market was increasing, but after reversal of capital account status, the falling consumption expenditure ratio to GDP accompanied by fall in international demand revealed the truth that an economy cannot grow at higher rate if its consumption expenditure ratio to GDP keep on reducing and the GDCF ratio to GDP keep on increasing.
Continuous falling TCE ratio to GDP should be arrested:
After liberalization of capital account, our GDP growth rates in India have been more than impressive, but proportionate share of Total Consumption Expenditure (TCE) to GDP has declined from 73.2% in 2003-04 to 67.8% in 2007-08. Even with higher GDP growth, our consumption power has weakened during these years. The GDCF ratio to GDP has increased from 27.7% in 2003-04 to 31.9% in 2007-08. There is a limit to stretch the GDCF ratio to GDP. At present India need to focus more on boost consumption expenditure compared to investments expenditures. To boost demand, funds need to flow more towards unorganized sector where workers have higher Marginal Propensity to Consume (MPC) as compared to workers in organized sector. But after analyzing the scope of increase in consumption expenditure with increased liquidity through monetary and fiscal measures, it may be found that funds are not really reaching to bottom level and financial adjustments are more composite in these measures.
Uneven distribution of financial resources:
The fall in consumption expenditure and increase in saving and investment does not indicate inclusive growth because data may prove that after liberalization of capital account, capital inflow through stock market or in terms of External Commercial Borrowings (ECBs) has relatively benefited the corporate sector and the financial enterprises more than other sectors ; but the domestic unorganized sector enterprises have been somehow remained neglected and suffered due to lack of sufficient financial support required for growth. The uneven distribution of financial resources within the economy may have put the corporate sector on higher growth trajectory at the cost of unorganized sector. As a result the rich became richer and poor became poorer.
Corporate Sector might be exploiting financial regulations:
At this stage, one may advance the hypothesis that the corporate sector has exploited the financial regulations framed with regard to fuller convertibility of capital account. Corporate sector have seen investing locally raised equities into Mutual Funds, while enjoying ECBs to expand their businesses because ECBs have been cheaper than domestic credit sources. It has pulled the equity funds to corporate sector and the unorganized sector enterprises were under mercy of local banks with high interest rate which were enough to discourage the entrepreneurship.
Flow of Funds for inclusive growth:
Study might reveal that the financial sector enjoyed liberalization of capital account and thus the financial sector growth rate surpasses GDP growth and rates of growth for many primary and secondary sector industries and trades. The data on growth rate for unorganized and organized sector during last five years and fund flow ratio to these sectors would reveal the script of high growth trajectory for India. It would help us assess the role of financial sector enterprises to help the economic enterprises grow. We have to assure that funds are guided to flow according to sustainable and real inclusive growth plan.
Appropriate flow of equity funds may reduce fiscal deficit:
As an emerging economy, India has high potential for investment expenditures, but when GDCF ratio to GDP crosses 25%, this potential was bound to become somewhat moderate. The continuous fall in consumption expenditure ratio to GDP for last ten years could not hold the high economic growth and it became faster when global recession further weakened the external demand. Since October 2008 after feeling financial pressure, Indian authorities provided excess liquidity worth around 10% of GDP through monetary and fiscal measures in domestic market; but even 2% increase in domestic consumption expenditure has not been achieved. It is critical to review whether the measures are appropriate enough to divert the liquidity to the group with higher Marginal Propensity to Consume (MPC). It is inappropriate to increase the fiscal deficit any more to increase the consumption expenditure when central and state government combined debt is more than 70% of GDP. Domestic consumption expenditure may be increased at even higher rate with entrepreneurship development as well if equity funds are extended to the unorganized sector where workers have higher MPC instead of corporate sector where workers have higher Marginal Propensity to Save (MPS). If we appropriately priorities the flow of equity funds there it may work more effectively to boost demand compared to increasing public expenditures and making fiscal deficit beyond revised budget estimates.
Workers with higher MPC do not get Equity Funds:
A study may reveal that we need to track the fund flow guided through monetary and fiscal measures to boost domestic consumption. Around 95% Poor and vulnerable workers engaged in the unorganized sector enterprises with higher MPC still find difficult to access equity funds while corporate sector with higher MPS enjoys all equity funds. There is no doubt that equity funds encourage entrepreneurial expenses whereas high risk mitigating capacity is needed to afford debt based credits. Since poor entrepreneurs in unorganized sector have low risk mitigating capacity, they deserve more of equity funds as compared to corporate sector. The nature of work at enterprises engaged in unorganized sector does not allow stock market to provide equity funds so they are deprived of equity funds.
Banks should be allowed to deal in small equity funds:
India need to invent small banks dealing in small equity deposits and credits at local level so that small enterprises working in the unorganized sector could be monitored through banks that are otherwise out of reach of stock markets. It might be appropriate to allow local banks deal in equity funds with limit of Rs. 3,00,00,000 which is entry limit for an enterprise to register in stock market. Considering the composite structure of huge unorganized sector, banks may be allowed to extend equity funds with limit of Rs. 3,00,00,00 from their equity fund stocks. Small equity fund may be maintained by banks which could be easily monitored at local levels.
Huge domestic consumerism is main strength of Indian economy:
Such initiatives may increase flow of equity funds to the unorganized sector enterprises whose factor cost would certainly boost expenditure capacity of workers. Since such workers are around 95% of total Indian work force, it may increase the consumption expenditure to considerable level because their MPC is much higher compared to workers in the organized sector. It would also boost the demand forces pushing India out of recession. The investment through equity funds at unorganized sector enterprises will help them grow and raise output whose consumers are local. Increased output of unorganized sector enterprises is supposed to be immediately consumed by huge domestic consumerism where MPC is much higher.
Equity Funds to unorganized sector is the key:
If we succeed to provide equity funds to 95% unorganized sector workers who have higher MPC, India may be on higher growth trajectory again with much inclusive and sustainable growth in nature because it would not depend on international demand or supply, but on domestic demand and supply which is much strong at present as indicative through the difference in wholesale and retail price indices. Equity funds to the unorganized sector will help 95% Indian workers make more expenditure on consumption and investment allowing India grow faster than ever before with really inclusive in nature as well.
Let’s guide the global economy:
Once Indian economy comes out from recession, it will certainly guide other nations to follow this pattern. India will lead the international economic growth strategy. So, it is better that India should stop waiting for recovery of global recession, and set guideline for faster and inclusive economic growth strategy for all nations.
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