11

Indian Economic Reforms: A More Difficult Phase

FOURTH ANNUAL CONFERNCE

LAHORE SCHOOL OF ECONOMICS 25 APRIL 2008

Rajiv Kumar

PLAN OF THE PAPER

• INDIAN ECONOMIC PERFORMANCE: A BRIEF RECAP

• CAN THE GROWTH BE SUSTAINED?

• NECESSARY REFORMS FOR INCLUSIVE GROWTH

• REVISITING THE ROLE OF THE STATE

GDP Growth in Current Decade

Decadal Growth Rates

4

Global Integration(Current Account & Capital Account as a % GDP)

55

Global Context

Narrowing of the real interest rate differential reversed since January 2007

Real Interest Rate Differential with Developed Countries (1999-07)

66

Global Context

Inverse relationship with world oil price

World Oil price and India’s GDP growth (1974-2006)

Real $ / barrel

Futures Price   Average

Mar-08 95.14Apr-08 94.63May-08 94.47Jun-08 94.30Jul-08 94.09Aug-08 93.86

Source: www.nymex.com

77

Globalisation:The Difference China Vs India

High growth driven by domestic investment, consumption and net exports in China, while the contribution by net exports negative in India

Table 2.1: Contribution to GDP Growth by Consumption, Investment and Net Exports: China Vs India

  China India

  1994-00 2000-05 1994-01 2001-07

Final consumption expenditure 63.2 37.6 75.2 67.2

Gross capital formation 29.9 54.4 26.3 36.4

Net exports 6.9 7.9 -1.5 -3.6

Total 100.0 100.0 100.0 100.0

Source: Computed from WDI and CSO data.

Sectoral Composition of GDP

99

Increasing Role of Services in Indian Growth

In 2000s, services contributing nearly two thirds of GDP growth

Chart 3.2: Sectoral Contribution to GDP Growth, 1951-07

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Services Industry Agriculture

% o

f G

DP

1951-60 1980-90 1990-00 2000-07

10

IIP Manufacturing

(Apr-Feb)

2001 2.6 2.8

2002 5.8 6.0

2003 6.9 7.4

2004 8.2 9.0

2005 8.1 9.1

2006 11.2 12.2

2007 8.7 9.1

Growth of IIP

Overall industry and manufacturing growth slowdown in 2007 first time since 2001

11

Industrial Growth: Controlled Vs Overall Industry

11

IIP Manu Core Electricity Coal

Crude Petroleum

Petroleum Refinery Sugar

Nitrogenous

fertilizer (N)

Phosphatic fertilizer (P2O5)

2001-02 2.7 2.9 3.5 3.1 4.2 -1.2 3.9 -3.9 -2.5 3.1

2002-03 5.7 6.0 5.0 3.2 4.8 3.6 5.0 2.2 -1.7 0.6

2003-04 7.0 7.4 6.1 5.1 5.0 0.8 8.4 -13.8 0.7 -8.1

2004-05 8.4 9.2 5.8 5.3 6.2 1.9 4.6 -18.5 6.7 11.7

2005-06 8.2 9.1 6.1 5.2 6.5 -5.2 2.2 39.3 0.5 4.4

2006-07 11.6 12.5 8.4 7.3 5.9 5.7 12.4 30.8 1.8 9.22007-08 (Apr – Feb) 8.7 9.1 5.6 6.6 5.6 0.4 7.2

Growth of industries subject to government price control lower than those where prices are market determined

1212

Employment

•Overwhelming proportion of workforce in the fast shrinking agriculture

•Limited labour absorption by the booming service sector

•Continued strong growth in manufacturing required for employment growth

Table 7.1: Share in GDP and Employment of Selected Sectors, 1993-94 to 2004-05

 

Share in GDP (%) Share in Employment (%)

1993-94 1999-00 2004-05 1993-941999-

002004-05

1. Agriculture, forestry and fishing 28.9 25.0 18.8 64.8 59.8 58.4

2. Industry 25.9 25.3 27.5 15.6 17.4 18.2

Of which: Manufacturing 15.8 14.8 15.9 11.3 12.1 11.7

3. Services 45.2 49.7 53.7 19.7 22.7 23.4

Of which: Trade 11.9 13.0 14.9 7.8 8.2 8.4

Of which: Retail n.a n.a n.a n.a 7.4 7.3

Wholesale n.a n.a n.a n.a 0.8 1.1

Total 100.0 100.0 100.0 100.0 100.0 100.0

n.a: Not available. Source: Computed based on data from CSO, NSSO and EAC Report (2007).

13

Growth of Employment ( 1993-94 to 2004-05)

Annual Employment Growth by Sector (%)

  1994-00 2000-05

Agriculture, forestry and fishing -0.34 2.41

Industry 2.91 3.77

Manufacturing 2.05 2.19

Services 3.42 3.47

Total 0.98 2.89

•Strong growth in employment during 2000-05 in all sectors

• “Jobless growth” of 1990s replaced by high-employment generating growth in this decade (61 million new jobs during 2000-05)

14

Balance of Payments

•Widening trade deficits compensated by rising invisibles surplus

•Huge capital inflows continuing, and to cross 9% of GDP this year!

5.1: India's Balance of Payments: Selected Indicators (US$ Mn)

  2003-04 2004-05 2005-06 2006-07 2007-08(P)

Exports 66285 85206 105152 128083 153700

Imports 80003 118908 157056 191254 239068

Trade balance -13718 -33702 -51904 -63171 -85368

% of GDP -2.3 -4.8 -6.4 -6.9 -7.3

Invisible receipts 53508 69533 89687 115074 138089

Invisible payments 25707 38301 47685 61669 70919

Invisibles, net 27801 31232 42002 53405 67169

% of GDP 4.6 4.5 5.2 5.8 5.7

Current account 14083 -2470 -9902 -9766 -18198

% of GDP 2.3 -0.4 -1.2 -1.1 -1.6

Capital account (net) 17338 28629 24954 46372 107000

% of GDP 2.9 4.1 3.1 5.1 9.1

Change in Reserves -26159 -26159 -15052 -36606 -88802

(-increase, +decline)          

15

WPI Inflation (Week to Week)

16

WPI Inflation ( Monthly Average)

17

Global Commodity Prices(Base Year = 2005)

 Index % Change

Commodities 2007 Q2 March 2008

Mar 07 to

Mar 08Wheat 134.9 288.5 120.9Maize 160.4 237.6 37.9Rice 112.2 201.5 77.8Barley 176.4 240.5 45.6Soybean oil 151.5 266.5 94.4Palm oil 193.5 311.9 102.5Sunflower oil 58.8 113.9 93.6Groundnuts 134.7 221.0 70.0Iron Ore 130.3 216.3 66.0Energy 122.8 189.0 66.0Spot crude 123.9 190.9 68.1Natural Gas 115.1 148.9 29.2Coal 120.1 256.7 120.8

1818

Fiscal Scene

Centre and state finances have improved steadily since 2001-02

Chart 6.1: Fiscal Indicators of the Combined Centre and States

0

2

4

6

8

10

12A

s %

of G

DP

Fiscal Deficit 9.4 6.5 9.5 9.9 9.5 8.4 7.5 6.7 6.4 5.5

Revenue Deficit 4.2 3.2 6.6 7.0 6.7 5.8 3.8 2.8 2.1 1.3

Interest payments 4.4 4.9 5.9 6.2 6.4 6.4 6.1 5.7 5.5 5.3

1990-91 1995-96 2000-01 2001-02 2002-03 2003-04 2004-05 2005-062006-07(RE)

2007-08(BE)

19

Tax-GDP Ratio: Centre and States Combined

02468

101214161820

1990-9

1

1991-9

2

1992-9

3

1993-9

4

1994-9

5

1995-9

6

1996-9

7

1997-9

8

1998-9

9

1999-2

000

2000-0

1

2001-0

2

2002-0

3

2003-0

4

2004-0

5

2005-0

6

2006-0

7(R

E)

2007-0

8(B

E)

perc

en

t

Direct Indirect Total

Direct taxes (mostly corporate and individual income taxes) rising from 2% of GDP in 2000-01 to about 7% of GDP 2007-08

Total Expenditure on Subsidies, Infra & Agriculture ( % to GDP)

21

Interest rate(Base Year = 2005)

Real Effective Exchange Rate (REER)(Base Year = 1993-94)

22

Export-weighted (36-Country)

Trade-weighted (36-Country)

1993-94 100.0 100.01994-95 104.9 104.31995-96 100.1 98.2

1996-97 99.0 96.81997-98 103.1 100.81998-99 94.3 93.0

1999-00 95.3 96.02000-01 98.7 100.12001-02 98.6 100.9

2002-03 96.0 98.22003-04 99.1 99.6

2004-05 98.3 100.12005-06 100.5 102.4

2006-07 97.4 98.52006-07( Apr-Nov) 96.5 97.62007-08 (Apr-Nov) 105.3 106.4

Since 1993-94, largest annual appreciation of the rupee (over 12%) happened in 2007-08

2323

Potential Growth of the Indian Economy

• OECD (2007) has computed the growth rate of potential output for India at 8.5% for 2006

• IMF Working Paper (Sept. 2007) estimated it between 7.4 to 8.1% for 2006-07 and 8 per cent for the medium term

• Economy growing over 9% last two years

• Estimates for 2008-09 are around 8%

2424

Raising Potential Output Growth

• Reforms

• Infrastructure

• Education

• Business climate

• Public expenditure efficiency

GLOBALIZATION: THE DIFFERENCE

• CHINA: The Communist Party- playing the perfect coordinating role and overseeing the delivery of public goods and services.

• INDIA: WILL ACHIEVE DESPITE THE GOVERNMENT!!

• IS THIS SUSTAINABLE

THE ADDED COMPLICATIONS

• INCLUSION

• REGIONAL DIVERGENCES

• PLURALISTIC HETEROGENOUS SOCIETY

• ENVIRONMENT

ROLE OF THE STATE

• DOES NOT IMPLY REVERSAL TO THE LICENCE-CONTROL RAJ

• DOES NOT ALSO IMPLY A PAUSE ON NEEDED STRUCTURAL REFORMS

ROLE OF THE STATE

• DELIVERY OF PUBLIC GOODS AND SERVICES– EDUCATION– HEALTH– LAW AND ORDER AND SECURITY – URBAN PLANNING– INFRASTRUCTURE– R&D– SCIENCE AND TECHNOLOGY

ROLE OF THE STATE

• EXTERNAL RELATIONS AND ACCESS TO FOREIGN MARKETS

• ACCESS TO INTERNATIONAL AND REGIONAL PUBLIC GOODS AND SERVICES

– CLIMATE CHANGE- INTERNATIONAL MIGRATION– EXTREMISM– TRAFFICKING

THE WAY FORWARD

• FOCUS ON GOVERNANCE REFORMS

ENFORCING ACCOUNTABILITY

REAL OUTCOME BASED BDUGETING

EMPOWERING THE BENEFICIARIES

MOBILISING THE CIVIL SOCIETY

MUCH GREATER USE OF THE RIGHT TO INFORMATION

THE WAY FORWARD

• NECESSARY EDUCATION SECTOR REFORMS

• IMPROVING PRIMARY & SECONDARY PUBLIC EDUCATION SYSTEMS

• REHABILITATE PRIMARY HEALTH SERVICES

• INCREASING PUBLIC EXPENDITURE ON PHYSCIAL INFRASTRUCTURE

• ENSURE EQUALITY OF OPPORTUNITY

32

Thank You.