>RESILIENCE OF INDIAN ECONOMY

India: Faring its way in a challenging environment
The increasing economic and political influence of the BRIC countries has attracted considerable attention over the past five years. India is no exception. Key reforms implemented in the 1990s have pushed the economy on an exceptional growth path and enabled important progress in the social area. The dynamic IT sector which has lifted India amongst the world’s leaders in this sector has also put the country in the spotlight. As regards to future prospects, they remain positive. With the second world’s largest population and a rapid economic growth, India is expected to overtake the Japanese economy in PPP terms by 2025 to become the world’s third largest economy. Its attractiveness in terms of market potential is also huge due to a rising middle class. However many obstacles lie ahead and further reforms will be crucial to overcome them. On top of the list comes the need for a wider coverage of social safety nets, an improvement in government practices, a reduction in income inequality and poverty and infrastructure improvements. Moreover, the public finance burden must be reduced in order to provide an enhanced leeway to implement vital structural reforms. In the short term, India’s economy is proving resilient in the face of the global economic crisis and will perform rather well compared to other Asian countries. These good growth prospects will be further boosted by the strong mandate of the Congress-led coalition which has injected some optimism in the economy. Nonetheless it is worth noting that the country will still head towards a marked slow down after having enjoyed five years of high economic growth.

Resilience of the Indian economy in FY 2009/10
Asian countries are caught again in the global economic turmoil a decade after the Asian financial crisis. Highly exposed to trade, these economies have experienced a sharp economic slowdown. Although 2nd quarter data seems to indicate a timid rebound, many Asian countries are expected to post negative GDP growth in 2009. On the contrary, the Indian economy is likely to rank amongst the best performing economies in the region in 2009. Moreover, the overwhelming victory of the Congress- led coalition party in the recent elections will likely give a boost to growth. We are expecting a 6% GDP growth in FY 2009/2010 and 7% in FY 2010/2011. However, these good growth prospects mark a slowdown in FY 2009/10 compared to an average growth of 8.5 % over the past 5 years.

Some sectors nevertheless affected…
Strong demand plus stimulus measures have not been enough to compensate downward pressures brought by the global crisis and past restrictive policy measures.

In fact, since 2004, the Indian economy was booming as a result of buoyant investment in the industrial sector. In addition to that, the growing bubble in the real estate has made access to property unaffordable and was thus becoming unsustainable (see chart). In reaction to this situation, the Reserve Bank of India (RBI) adopted a restrictive monetary policy since the beginning of 2008 to cool down economic activity.

To read the full report: RESILIENCE OF INDIAN ECONOMY

>Emerging countries: A recovery that remains to be confirmed (ECLAIRAGES)

■ Emerging market countries: After the shock:
The global crisis has affected all emerging market countries, to different degrees, through the real channel (with lower demand from developed countries and lower commodity prices) and the financial channel (with a freeze or even reversal in capital flows). Economic activity, and industrial production in particular, contracted sharply in late 2008 and Q1 2009. Q2 saw a sometimes sharp rebound, which should continue with support from the reprieve in the developed countries, and from the same technical factors, i.e., inventories and a base effect. In the medium-term, however, despite fundamentals that are sound on the whole, the pace of growth in the emerging market countries will continue to depend on growth in the developed countries, which could remain soft. "They died not all, but all were sick"

■ Asia: On the road to recovery
Asian countries have been able to resist well during the global turmoil. However a complete recovery can only take place in Asia when the US economy fully exits the crisis and job markets return to normal. Beyond that, Indonesia, Philippines and Vietnam will be able to pick up more rapidly due to specific features that will bring further support to the economy. The reaction to the crisis has been the same throughout Asia. Without exception, all countries rapidly shifted towards a pro growth policy. Central Banks made drastic interest rate cuts. And helped by large fiscal leeway, policy makers implemented massive stimulus plans. Supportive measures are bearing fruits. The Chinese economy is recovering and is now expected to reach its growth target of 8% in 2009. In turn, this has led to a revival of Asian countries to a certain extent. The massive stimulus plan in China resulted in increased needs for commodities and intermediate goods which then led to a rise in Asian exports towards China. GDP growth in Asia also stood better than expected in Q2. Business sentiment improved following various signs of an upturn in USA and Europe. Even in Korea, confidence has gradually been restored since March. The won is now strengthening rapidly against the USD (30% appreciation since March 09 after a depreciation of 26% in 2008). These signs of recovery are increasingly fuelling hopes that the worst is over.

To see the full report: EMERGING COUNTRIES

>EXIT STRATEGIES : A PRACTICAL GUIDE (ECLAIRAGES)

MAIN CONTENTS OF THE REPORT

• Tools for an exit strategy
• The credibility to do it
• Saying and doing

EXIT STRATEGIES : A PRACTICAL GUIDE

Since the financial crisis broke in the summer of 2007, central banks have been extremely active. On the liquidity front, all the central banks without exception acted as lenders of last resort with operations that were exceptional in terms of their size, their maturity, and the range of assets accepted as collateral. This was combined with aggressive rate cuts, starting with preemptive cuts by the Fed in late 2007, followed by the other central banks from October 2008, in response to the sharp, sudden deterioration in the economic situation.1 This phase of post-Lehman-bankruptcy financial distress plunged the economy and finance into an adverse feedback loop in which the traditional mechanisms for monetary policy transmission became ineffective, forcing the central banks to greater innovation in order to continue to act on economic activity and credit. They adopted less-orthodox methods frequently referred to as Quantitative Easing (QE), with the deployment of unprecedented measures involving active management of the size and composition of their balance sheet.

As the economic and financial environment stabilizes, thought turns to unwinding the web of unconventional measures and a return to more conventional forms of intervention. In our opinion, the central banks have numerous tools at their disposal for withdrawing, at the appropriate time, the monetary stimulus they injected into the economy. The process will take many forms, with differences across countries. The key difficulty in these exit strategies will be determining when to begin tightening monetary and financial conditions, and at what pace. This issue of Eclairages is reviewing the three dimensions of the debate: when, how, and how fast (see article “Tools for an exit strategy“, page 2). There are many possibles, as will be seen, but the central banks can depend on two assets for accomplishing this difficult task. They have very high credibility (see article “The credibility to do it“, page 6), supported by effective communication policy (article “Saying and doing“, page 10). They will be able to say what they do, be believed in what they say, and finally do what they say, with maximum efficiency.

Tools for an exit strategy
D iscussions about an exit strategy from unconventional monetary policy began shortly after the initial measures to counter the crisis, in late 2007-early 2008. The debate was sparked by the unprecedented, aggressive approaches put in place. The question was initially "how," but more recently, with signs of an improvement in the real and financial spheres, the question "when" has been added. Today, the issue thus encompasses both dimensions ("how" and "when"), and everything that will reverse current ultra-accommodative monetary policy. In other words, the exit strategy is not just a matter of what central banks do to reduce the size of their balance sheet, nor the date of the first rate hikes; they will use both of these approaches to tighten monetary and financial conditions when it becomes necessary. The reversal will also be a multifaceted process, just as the easing was, and it will unfold differently, depending on prospects for growth, inflation, and the financial system in each country.

• How to exit
• Why to exit
• When to exit from current policies

To see full report: EXIT STRATEGIES