Recent macroeconomic trends in emerging economies and implications for development: A Case of India N R Bhanumurthy NIPFP, New Delhi, India
Scheme of presentation 1.Recent trends in some major macro indicators 2.Major issues that could hinder the medium to long term growth in India 3.Way forward
Recent trends in some major macro variables • India currently experiencing disturbance in most of the macroeconomic as well as financial variables • GDP growth decelerated to about 5%, much lower even compared to during the crisis period • The slowdown was across the sectors, and particularly sharp in industrial sector (negative growth in some months) • Exports growth was negative for a long time • Mining sector growth negative for the last two years • Inflation continue to be persistently high and more so in the food articles prices • Problem of high twin deficits persist ‐ warnings from the credit rating agencies • While the trends from social indicators are better
ANNUAL GROWTH RATE OF GDP (%)
Deceleration in savings ‐ investments • Both savings and investments (as% of GDP) have declined • But the decline in savings is more than investments, resulting in sharp rise in the current account deficit
Risks to growth ICOR Output Gap • Structural bottlenecks pose risk to growth recovery Doing Business Survey ranks India at 134 th out of 189 countries – • deteriorated compared to last year
Inflation stays at elevated levels • Headline inflation stay at higher levels for a long time with retail inflation at double ‐ digits • In the context of declining growth (particularly in industrial sector) this high inflation poses monetary policy challenges in reducing interest rates • High inflation driven by prices of food articles and also policy ‐ induced through hike in MSP, Fuel prices, and large rural development schemes
Core sector growth slows down
BOP ‐ CURRENT ACCOUNT INDICATORS Worsening external account threatens the growth recovery
Monetary tightening is back • The linkage between policy rates and investments are debated • This also brings the issue of whether growth is savings ‐ led or investment ‐ led
Poverty decline sharply Year Rural Urban total 1993 ‐ 94 50.1 31.8 45.3 2004 ‐ 05 41.8 25.7 37.2 2011 ‐ 12 25.7 13.7 21.9 • Based on the Tendulkar poverty line, there has been sharp deceleration in the poverty ratio both in rural and urban areas • The decline is sharper in the lastest decade compared to previous decade • Can be attribiuted to both high growth as well as introduction of major social development programs in since 2004
Deterioration in Fiscal condition • Fiscal deficit, well above the prescribed levels, poses major macroeconomic instability • Higher revenue deficit crowding ‐ out private investments • Fiscal dominance of monetary policy weakening interest rate channel of monetary policy transmission
Issues for medium to long term growth and development in India Achieving 12 th Five Year Plan objective of “Faster, Sustainable and More Inclusive Growth” needs following: • Improving the growth ‐ distribution ‐ poverty nexus • Address the issue of regional divergences • Mobilise large domestic resources to finance plan objectives (infrastructure sector alone require US$ 1 trillions) while relying less on foreign capital, aid as well as PPP models
Issues for medium to long term growth and development in India Four issues • Improving financial access and financial inclusion through sectoral reforms • Maintaining fiscal discipline and subsidy management • Improving efficiency of public expenditure management • Balancing growth and inclusion objectives
Financial Resource Gap (in %) in India: Segments & Economy Agriculture Industry Services Total Unorganised Sectoral GDP Share 0.38 0.15 0.47 1.00 Financial Resource Gap 51.61 76.3 91.16 67.53 Organised Sectoral GDP Share 0.03 0.30 0.67 1.00 Financial Resource Gap 0.00 0.00 0.00 0.00 Economy Sectoral GDP Share 0.19 0.21 0.60 1.00 Financial Resource Gap 49.00 22.00 41.00 38.53 • Financial sector reforms helped the sector to develop • However, there are large gaps in terms of providing sufficient resources for productive purposes
Fiscal discipline and subsidy management ..while oil subsidy bill ever ‐ raising and Food subsidy bill as % of GDP is high.. shows large unpaid component
Utilisation ratios (in %) in NREGA
Duplicity of social development schemes No. of After existing proposed Schemes in departments schemes merger Agriculture & Co ‐ operation 13 6 Animal husbandry, diary and fisheries 15 3 Environment & Forest 8 4 Health and Family Welfare 11 5 Home affairs 4 1 School education and literacy 17 6 Labour and employment 13 2 Minority affairs 4 1 Rural development 6 4 Social justice and empowerement 13 5 Others 43 23 Total 147 60
Balancing growth and inclusion • In the early stages of reforms, growth was given high priority • That resulted in ‘job ‐ less growth’ and increased divergences • As part of inclusiveness, more social development schemes unveiled, largely piggy ‐ backing on the rewards from growth policies • However, growth policies are neglected with no new policy reform towards that direction… • ….the outcome is low growth and high fiscal deficit • Balancing growth, inclusion at the same time achieving fiscal consolidation is a challenge • One way to solve is to compromise on all the three objectives
Domestic Constraints for growth recovery – High CAD and exchange rate depreciation needs some response – Inflation and its expectations and identifying its drivers – Clarity on interest rate policy and investments relation – Removal of ambiguity in the power (coal) sector policies – Formalising high informal sector – Issue of Fiscal consolidation and fiscal/debt sustainability – Achieving high growth, fiscal consolidation and at the same time running higher revenue expenditures –not consistent – Large structural issues that could effect productivity
Domestic Constraints for growth recovery • Role of domestic savings and the need for more financial sector reforms to enhance financial access through reduction in transaction costs and risks • Role of technology and improving revenue buoyancy • Expenditure switching policies and rationalisation of public expenditures • Fiscal ‐ monetary tensions in the context of fiscal dominance • Fiscal ‐ financial linkage a larger risk going forward (banking sector) • Role of institutions for balancing growth and development – CCI and AADHAAR • Green growth??
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