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Macroeconomic Overview of India: Recent Trends and Developments - - PowerPoint PPT Presentation

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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

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Macroeconomic Overview of India: Recent Trends and Developments

1

Recent Trends and Developments

Mathew Joseph

Senior Consultant, ICRIER

India-Taiwan Relations ICRIER-CIER Joint Feasibility Study New Delhi 17 January 2011

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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

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Indian economy: An Overview

  • 12th in terms of GDP at market exchange rates ($1.3 trillion) and 4th 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

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Recovery from Global Crisis

4

  • 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?
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Potential Growth Rate of Indian Economy

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  • 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
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20 30 40 50 60

Savings as % of GDP

20 30 40 50 60

Investment as % of GDP

Post-crisis Saving and Investment: India-China Contrast

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10 20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 China India 10 20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 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
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Inflation

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  • CPI inflation above 5% right back from April 2006
  • Though falling , rate remain at 7.5-8.5%
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Month-on-Month Inflation

Annualised Month-on-Month Seasonally Adjusted Rate of WPI and CPI (IW) Inflation

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Month-on-month inflation indicates persistence of inflationary pressures at annualized 8-10%

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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) 9.4 11.2 16.8

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2010-11 (Apr-Nov) 9.4 11.2 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

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Declining Agricultural Potential Growth Rate

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  • 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

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Index of Per Capita Availability of Major Agricultural Food Products

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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

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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 11.2 16.1

Investment in Agriculture

(Average Annual Growth in Per cent)

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2005-09 11.2 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
  • f products
  • “Subsidy-control regime” not congenial to a breakthrough in production
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Rising Current Account Deficits

(% of GDP)

  • 8
  • 6
  • 4
  • 2

2 4 6 8 10

13

  • 12
  • 10
  • 8

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
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1000 1500 2000 2500 3000

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)

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500 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

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Index of Real Effective Exchange Rate (REER) for the Rupee (36-Currency Export Weighted, Base: 2004-05=100)

85 90 95 100 105 110 115 120 125 130

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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

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

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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

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“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

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Thank You.

18

Thank You.