Recent macroeconomic trends in emerging economies and implications - - PowerPoint PPT Presentation

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 134th 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 12th 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
• bjectives (infrastructure sector alone require US$ 1

trillions) while relying less on foreign capital, aid as well as PPP models

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

Issues for medium to long term growth and development in India

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

Food subsidy bill as % of GDP is high.. ..while oil subsidy bill ever‐raising and shows large unpaid component

Utilisation ratios (in %) in NREGA

Duplicity of social development schemes

Schemes in departments

• No. of

existing schemes After proposed 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
• bjectives

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??