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11
OUTLOOK FOR THE INDIAN ECONOMY PRESENTATION
at
SANEI SEMINAR ISLAMABAD
Rajiv Kumar April 23, 2008
2
Global Integration(Current Account & Capital Account as a % GDP)
3
Global Context
3
While Indian growth is higher than world growth, the two are clearly correlated
GDP Growth: India & World(3-Year Moving Average)
44
Global Context
No link-up with world economy pre-1980
Relationship between Growth of GDP World and India (1951-1979)
55
Global Context
Post-1980 integration with the world economy
Relationship between Growth of GDP World and India (1980-2006)
66
Global Context
Narrowing of the real interest rate differential reversed since January 2007
Real Interest Rate Differential with Developed Countries (1999-07)
77
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
88
Expenditure composition of India GDP
Fall in the share of consumption in 2000s but still higher than in China
Chart 2.7a: Share of Consumption, Investment and Net Exports in GDP: India
-10.00
0.0010.00
20.0030.00
40.00
50.0060.00
70.0080.00
90.00
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
% o
f GD
P
Domestic final consumption expenditure Gross domestic capital formation
Net exports of goods and services
99
Growth Driven by Soaring Investment: China
Falling consumption share more dramatic in China
Chart 2.7b: Share of Consumption, Investment and Net Exports in GDP:China
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
% o
f G
DP
Domestic final consumption expenditure Gross domestic capital formation
Net exports of goods and services
1010
Decomposition of GDP Growth: 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.
Global Context
Chart 2.6: Post-Reform Growth Rates: China Vs India(t=1978 for China and 1991-92 for India)
0
2
4
6
8
10
12
14
16
%
China India Linear (India) Linear (China )
Indian growth rate to finally converge to Chinese by 2013-14?
Sectoral Composition of GDP
1313
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
14
Sectoral Growth (Quarterly Growth Rate)
Manufacturing growth rate higher than services growth in 15 out of 31 quarters from 2000-01
15
Monsoon and Agriculture Growth
15
•Agriculture growth closely follows monsoon
•Better monsoon this year means a better agricultural turnout
16
Industrial Growth: Controlled Vs Overall Industry
16
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
17
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
1818
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).
19
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)
20
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)
21
India’s Balance of Payments Trends
•Mounting gap represents lost opportunities to raise investment levelsMounting gap represents lost opportunities to raise investment levels•Further reforms necessary to raise the absorptive capacityFurther reforms necessary to raise the absorptive capacity
Chart 5.1: India's Current and Capital Account Balances as % of GDP
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08(P)
% o
f GD
P
Current account Capital account
Direction of Trade
22
Exports Share (%) Imports Share (%)
2000-01 2006-07 2000-01 2006-07
1 U S A 21.8 14.9 CHINA P RP 3.0 9.4
2 U A E 6.1 9.5 SAUDI ARAB 1.3 7.2
3 CHINA P RP 1.9 6.6 U S A 6.1 6.3
4 SINGAPORE 2.1 4.8 SWITZERLAND 6.4 4.9
5 U K 5.4 4.4 U A E 1.3 4.7
6 HONG KONG 6.2 3.7 IRAN 0.4 4.1
7 GERMANY 4.5 3.1 GERMANY 3.5 4.1
8 ITALY 3.1 2.8 NIGERIA 0.1 3.8
9 BELGIUM 3.4 2.7 AUSTRALIA 2.1 3.8
10 JAPAN 4.2 2.3 KUWAIT 0.2 3.2
Pakistan 0.6 1.5 Pakistan 0,15 0.4
Total (1 to 10) 58.7 55.0 24.4 51.4
Major shift towards China in India’s trade; China replaces US as the biggest trade partner in 2007-08
23
WPI Inflation (Week to Week)
24
WPI Inflation ( Monthly Average)
25
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
2626
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)
27
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)
Deepening Democracy
….
30
Interest rate(Base Year = 2005)
Real Effective Exchange Rate (REER)(Base Year = 1993-94)
31
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 9%) happened in 2007-08
Index of Real Effective Exchange Rate
32
Current phase of appreciation of REER of about 11% since Aug 06 to Nov 07 preceded a REER depreciation of 8-9% during Jul 05 to Aug 06
3333
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%
3434
Raising Potential Output Growth
• Reforms
• Infrastructure
• Education
• Business climate
• Public expenditure efficiency
35
Thank You.
36
CPI Inflation ( Monthly Average)
CPI inflation also has come down but remains at about 6%
37
Growth Forecasts 2007-08
38
Index of Leading Economic Indicators (LEI)
• LEI consists of:– Production of machinery & equipment– Sales of heavy commercial vehicles– Non-food credit– Railway freight traffic– Cement sales– Corporate performance (sales)– Fuel & metal prices– Real interest rate
• Principal component index approach
39
Index of Leading Economic Indicators (Quarterly)
LEI forecasts a growth rate at 9.2 per cent for 2007-08&
7.9 % for 2008-09 (Apr-Dec)
40
GDP Growth Forecasts for 2007-08
2006-07
2007-08 (CSO)
2007-08 (ICRIER)
Forecast
Agriculture, forestry & fishing
3.8 2.6 3.5
Industry 11.0 8.9 10.0
Manufacturing 12.0 9.0 11.0
Services 11.1 10.6 10.7
Total 9.6 8.7 9.2
41
Revenue-Expenditure Growth Trends
•High growth in direct taxes and indirect tax growth broadly on track
•Huge growth in capital expenditure arising from purchase of RBI stake in SBI
2004-05 2005-06 2006-07 (RE) 2007-08 (BE)2007-08
(Apr-Dec)*
Gross Revenue (Tax+ Non-Tax) 15.9 13.5 21.8 14.9 26.6
Net Tax Revenue (net of State Share)20.2 20.2 28.0 16.7 27.0
Direct Taxes 25.8 26.6 23.5 16.6 39.0
Corporate Tax 30.1 22.5 44.6 15.0 37.1
Taxes on Income Other than Corporate Income19.0 23.3 28.7 19.7 42.7
Indirect Taxes 16.9 17.4 19.3 17.7 16.9
Customs 18.5 12.9 25.7 20.7 17.0
Union Excise duties 9.2 12.2 5.4 11.0 5.1
Other Taxes 62.7 100.3 53.7 29.8 44.4
Non-Tax Revenue 5.6 -4.9 0.2 6.7 22.4
Total Expenditure 11.9 25.7 14.9 10.9 14.3
Revenue Expenditure 5.5 14.8 15.2 10.1 13.6
Capital Expenditure 709.4 239.7 12.8 14.0 21.8
* Growth over the corresponding period of 2006-07
4242
Fiscal Scene
•Central and state debt positions have been improving since 2004-05, but the levels remain high by international/ past Indian standards
•Mounting off-budget liabilities: oil bonds, securities to FCI, arrears of fertilizer subsidies and losses of state utilities, all about 2% of GDP
Chart 6.2: Outstanding Liabilites of the Centre and States
0
10
20
30
40
50
60
70
80
90A
s %
of
GD
P
Centre 55.3 51 55.4 59.9 63.6 62.9 63.9 63.4 61.5 59.2
States 22.5 21.1 28.6 30.7 32 33 32.9 32.7 30.8 29.8
Combined 64.9 61.3 70.8 76.4 80.2 81.1 81.9 80.7 77.5 74.8
1990-91 1995-96 2000-01 2001-02 2002-03 2003-04 2004-05 2005-062006-07(RE)
2007-08(BE)
43
Fiscal Forecast for 2007-08
@ Includes revenue receipts and non-debt capital receipts; # Calculated excluding transactions relating to SBI transfer; Numbers are in Rs. Crore.
2007-08 (BE)Actuals up to
Dec 07Forecast for
2007-08
Revenue Receipts 486422 355646 555017
Tax Revenue 403872 295994 460007
Non Tax Revenue 82550 59652 95010
Total Receipts@ 494042# 361144 539658#
Total Expenditure 644990# 438722 666148#
Revenue Expenditure 557900 394856 598161
Of which: Interest payments 158995 111764 177978
Capital Expenditure 87090# 43866 67987#
Fiscal Deficit 150948 77578 126490
Revenue Deficit 71478 39210 43145
•Receipts much above budget estimates, revenue expenditure higher
•Fiscal and revenue deficits lower than budget estimates
• Table: Central Government Budget 2008-09 (Rs. Crore) 2006-07 (Actuals)
• 2007-08 (RE) 2008-09 (BE) %Change 3 over 2% Change4 over 3
• Revenue Receipts (3+4)43438752509860293520.914.82. • Gross Tax Revenue47151258541068771524.217.5 • Corporation tax14430618612522636129.021.6 • Income tax8556111832013831438.316.9 Customs8632710076611893016.718.0
Excise duties1176121279471378748.87.8 Service tax37597506036446034.627.43. Net Tax Revenue (Net of States' Share)35118243177350715022.917.54. Non-Tax revenue83205933259578512.22.65. Recoveries of Loans589344974497-23.70.06. Other Receipts*5345941016511.21611.37. Total Expenditure*58338767384275088415.511.48. Revenue Expenditure51460958858665811914.411.8 Of which: Interest payments15027217197119080714.411.09. Capital Expenditure*68778852569276524.08.810. Revenue Deficit (8-1)80222 (1.9)63488 (1.4)55184 (1.0)-20.9-13.111. Fiscal Deficit [7- (1+5+6)]142573 (3.5)143653 (3.1)133287 (2.5)0.8-7.2*Excludes transactions related RBI
45
Fiscal Forecast for 2007-08
2007-08 (RE)
ACTUALS FOR 2007-08
Revenue Receipts 10.6 11.9
Tax Revenue 8.8 9.9
Non Tax Revenue 1.8 2.0
Total Receipts@ 10.8# 11.6#
Total Expenditure 14.1# 14.3#
Revenue Expenditure 12.2 12.8
Of which: Interest payments
3.53.8
Capital Expenditure 1.9# 1.5#
Fiscal Deficit 3.3 2.7
Revenue Deficit 1.5 0.9
@ Includes revenue receipts and non-debt capital receipts; # Calculated excluding transactions relating to SBI transfer.
Both fiscal and revenue deficits lower than budget estimates
46
Tax-GDP Ratio: Centre (Gross)
02468
101214
199
0-91
199
1-92
199
2-93
199
3-94
199
4-95
199
5-96
199
6-97
199
7-98
199
8-99
199
9-20
00
200
0-01
200
1-02
200
2-03
200
3-04
200
4-05
200
5-06
2006
-07(
RE)
2007
-08(
BE)
perc
ent
Direct Indirect Total
Direct taxes overtaking indirect taxes in the current year
47
Employment