Macroeconomic Overview of India: Recent Trends and Developments Recent Trends and Developments Mathew Joseph Senior Consultant, ICRIER India-Taiwan Relations ICRIER-CIER Joint Feasibility Study New Delhi 1 7 January 2011 1
Structure 1. An overview 2. India’s recovery from global crisis 3. India back to pre-crisis growth trajectory? 4. Twin risks in the economy – Inflation – Balance of payments 5. The next reform agenda 2
Indian economy: An Overview 12 th in terms of GDP at market exchange rates ($1.3 trillion) and 4 th in • terms of GDP at purchasing power parity exchange rates ($3.8 trillion) in 2009 2.3% of global GDP at market exchange rates and 5.2% of global GDP at • purchasing power parity exchange rates • Relatively a closed economy till 1991 and opened up after the external payments crisis of 1991 Average growth rate about 4% before 1991and moved up to 6.5% post • reforms Growth rate rose to nearly 9% in the pre-crisis 5-years, 2003-08 • Per capita GDP rose 3 times from $374 in 1990 to $1134 in 2009 • 3
Recovery from Global Crisis • Growth fell to 6.7% in 2008-09 from 9.2% in 2007-08 • Smart recovery to 7.4 % in 2009-10 and 8.9% in H1 2010-11 (average growth rate, 2003-08 : 8.9%) • India returning to 9%+ sustained growth trajectory? 4
Potential Growth Rate of Indian Economy • Potential growth rate : the maximum sustainable rate at which an economy can grow without raising the rate of inflation • India’s potential growth rate rose from about 5.5% in late1990s to above 8.5% in mid-2000s • Growth potential has fallen after crisis to about 7.5% and below • Current growth rate above potential and has triggered inflationary pressures 5
Post-crisis Saving and Investment: India-China Contrast Savings as % of GDP Investment as % of GDP 60 60 50 50 40 40 30 30 20 20 20 20 10 10 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 China India China India Source: WDI Database, World Bank 2010. • Both savings and investment rates declined in India following the crisis; in China both rose • In India consumption ratio rose following crisis, both for households and government; China the opposite 6
Inflation • CPI inflation above 5% right back from April 2006 • Though falling , rate remain at 7.5-8.5% 7
Month-on-Month Inflation Annualised Month-on-Month Seasonally Adjusted Rate of WPI and CPI (IW) Inflation Month-on-month inflation indicates persistence of inflationary pressures at annualized 8-10% 8
Inflation and Agriculture WPI Inflation CPI-IW Inflation WPI Food Inflation 2000-06 5.1 4.0 2.9 2006-10 5.7 8.6 10.2 2006-07 6.5 6.8 9.6 2007-08 4.8 6.2 7.0 2008-09 8.0 9.1 9.1 2009-10 3.6 12.4 15.3 2010-11 (Apr-Nov) 2010-11 (Apr-Nov) 9.4 9.4 11.2 11.2 16.8 16.8 Source: Office of the Economic Adviser, Ministry of Commerce & Industry; Labour Bureau, Ministry of Labour and Employment. • Rising inflation from 2006-07 • Inflation linked with food inflation and in turn, the state of agricultural output vis-à- vis consumer demand 9
Declining Agricultural Potential Growth Rate • Inflationary surge in 2008-09 and 2008-10 due to agricultural supply shocks, but gradually rising inflation from 2006 due to falling agricultural potential growth rate • Potential growth rate in agriculture declined from 3.5% in 2006-07 to 2.5% in 2009-10 10
Index of Per Capita Availability of Major Agricultural Food Products Source: Computed based on data from Department of Agriculture and Co-operation; CSO. • Per capita income rising by 5.5% per annum but per capita food availability either stagnant or falling 11
Investment in Agriculture (Average Annual Growth in Per cent) Total Agriculture 1970-80 5.0 7.3 1980-90 5.4 -2.6 1990-00 7.9 9.3 2000-05 9.0 3.2 2005-09 2005-09 11.2 11.2 16.1 16.1 Source: CSO. • Huge underinvestment in agriculture in 1980s and early 2000s • Government support to agriculture through input subsidies (water, electricity, urea fertilizers, etc) • Government investment in irrigation has declined sharply • Agriculture subject to huge restrictions with regard to pricing, movement and sale of products • “Subsidy-control regime” not congenial to a breakthrough in production 12
Rising Current Account Deficits (% of GDP) 10 8 6 4 2 0 -2 -4 -6 -8 -8 -10 -12 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Trade balance Invisibles balance Current account balance • Progressive deterioration in trade balance since 2003-04, from 2.3% to 9.0% in 2009-10 • Invisibles surplus declining since 2008-09 13
Structural Break in India’s Merchandise Imports The Trend in the Quantum Indices of Merchandise Exports and Imports, Q4 1998-99 to Q3 2009-10 (Base: 1978-79=100) 3000 2500 2000 1500 1000 500 0 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Exports trend Q4 2003-04 – Q3 2009-10 Imports trend Q4 2003-04 – Q3 2009-10 Exports trend Q4 1998-99 – Q3 2003-04 Imports trend Q4 1998-99 – Q3 2003-04 While high domestic growth sucks in huge imports, India lags behind in export competitiveness 14
Index of Real Effective Exchange Rate (REER) for the Rupee (36-Currency Export Weighted, Base: 2004-05=100) 130 125 120 115 110 105 100 95 90 85 80 Mar-99 Sep-99 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 RECX REWX Source: Constructed based on data from IFS, IMF, Labour Bureau (Ministry of Labour and Employment), and Office of the Economic Adviser (Ministry of Commerce and Industry) • Substantial real appreciation of the rupee from both nominal appreciation and high inflation (more in terms of consumer price index than wholesale price index) • Huge inflow of portfolio capital putting upward pressure on rupee despite rising current account deficits 15
Risks to Growth • Inflation and rising current account deficits – Structural and not cyclical • Central bank raised policy rates six times since February 2010 and likely to raise again 2010 and likely to raise again • Rising global commodity prices and rising interest rates to hurt corporate profits • Structural reforms necessary to raise the potential growth rate beyond 7-8 per cent 16
“The Second Generation Reforms” To policy and procedural reforms to pave the way for speedy • infrastructure building Agricultural reforms to liberate the farmer for enhanced food • production and its better distribution Educational reform at school, vocational and college levels to • raise the labour productivity and remove skill shortages Regulatory reforms for vastly improving the ease of doing • business Raising government efficiency in the delivery of public services • 17
Thank You. Thank You. 18
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