CMIE data shows that gross fixed assets for the non-financial corporate sector increased by a sedate 8.7% in 2003-04, when the economy was just coming out of the downturn after the bursting of the technology bubble. The chart shows that the annual increase in capital expenditure steadily gained momentum, reaching a peak of 19.2% in 2008-09. The surprise is that 2008-09 was the year of the Lehman collapse and of the stock market meltdown worldwide. The Indian corporate sector, it seems, merrily went on increasing capex at a record pace that year, despite the pall of gloom that hung over the globe. Is it any wonder then that capex growth in the corporate sector has slowed down since then? Could it not be that the slowdown in adding capex is the result of the business cycle asserting itself?
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Or take the rate of growth in non-food credit. During the last downturn after the tech wreck, non-food credit increased by 14.1% in 2000-01 and a mere 9.4% in 2001-02. In contrast, the growth in non-food credit hardly decelerated during the recent downturn. It grew by 17.8% in 2008-09 and this growth slowed to 17.1% in 2009-10. Once again the question that we face are: Is the business cycle dead? Why didn’t credit growth slow during the recent downturn?
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Interest rates now during the recent downturn were much higher than during the last one. CMIE data, for example, say that the maximum interest on deposits in 2003-04, when the economy was just coming out of the downturn, was a mere 5.5%. In contrast, the maximum rate of deposits fell from 9% in 2007-08 to 8.8% in 2008-09 and further to 7.5% in 2009-10 before rising to 9.5% last fiscal. The same trend holds true for the yields on bonds—during the last downturn, yields on government bonds were much lower. In short, the interest rate structure during the current downturn is well above that during the last downturn.
Look at yet another indicator—the credit-deposit ratio of banks. The credit-deposit ratio of banks in December 2008, soon after the Lehman collapse and in the depths of the downturn, was an astounding 74%. Now consider what this ratio was in December 2001, during the worst part of the global downturn after the pricking of the technology bubble and a few months after 9/11. At that time, banks’ credit-deposit ratio was a mere 51.7%. No wonder then that bank deposit and lending rates were much higher during the recent downturn than in 2001-03.
The next thing to consider would be inflation. Inflation remained remarkably low during the boom years right up to 2007. This time, however, the recovery has been accompanied by a very high rate of inflation. The reasons for this have been much debated, with many discerning a structural change in inflation as a result of the social security programmes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme which has put purchasing power in the hands of the poor.
Finally, we come to gross domestic product growth. Growth in the economy had slipped to a low of 3.8% in 2002-03, while the low during the recent downturn was 6.7% in 2008-09. Is this the result of much higher savings and investment rates, or were there other factors at work?
One clue is provided by the rate of increase in government final consumption expenditure. During 2001-02, for example, during the lows of the previous cyclical downturn, government final consumption expenditure increased by all of 2.3%, according to the Central Statistical Organisation data. In 2002-03, it was actually less than the previous year’s figure. Now contrast what happened during the recent downturn. In 2008-09, government final consumption expenditure increased by 10.7%; in 2009-10 it went up by 16.4%.
To cut a long story short, could it be that the slowdown we are seeing now is actually the result of postponing the downturn by a mix of easy money and fiscal stimulus? Recall that in 2007, the Indian economy was at the peak of the cycle. Inflation was breaking out, the stock markets were inventing all kinds of excuses to justify their valuations and the economy was bumping up against a shortage of skilled labour. The Reserve Bank of India had started to raise its policy rates in order to cool the economy. But then the financial crisis happened, panic struck the markets and banks and regulators desperately did all they could to shore up the economy and infuse confidence. Monetary and fiscal stimulus was applied with a vengeance, not only in India but across the world.
The upshot has been high inflation, not just in India but also in countries such as China, which too boosted their economies through government support. In short, it’s very plausible that what we’re seeing now is the end of the long boom, which had been artificially kept alive by massive monetary and fiscal intervention. It is for this reason that inflation, interest rates and real estate prices have been so high. A period of slower growth is therefore necessary to allow the business cycle to do its work.
Graphic by Paras Jain/ Mint
Manas Chakravarty looks at trends and issues in the financial markets. Comment at email@example.com