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11
Indian Economic Reforms: A More Difficult Phase
FOURTH ANNUAL CONFERNCE
LAHORE SCHOOL OF ECONOMICS 25 APRIL 2008
Rajiv Kumar
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PLAN OF THE PAPER
• INDIAN ECONOMIC PERFORMANCE: A BRIEF RECAP
• CAN THE GROWTH BE SUSTAINED?
• NECESSARY REFORMS FOR INCLUSIVE GROWTH
• REVISITING THE ROLE OF THE STATE
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GDP Growth in Current Decade
Decadal Growth Rates
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4
Global Integration(Current Account & Capital Account as a % GDP)
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Global Context
Narrowing of the real interest rate differential reversed since January 2007
Real Interest Rate Differential with Developed Countries (1999-07)
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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
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Globalisation:The Difference 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.
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Sectoral Composition of GDP
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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
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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
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Industrial Growth: Controlled Vs Overall Industry
11
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
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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).
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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)
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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)
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WPI Inflation (Week to Week)
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WPI Inflation ( Monthly Average)
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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
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1818
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)
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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
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Total Expenditure on Subsidies, Infra & Agriculture ( % to GDP)
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Interest rate(Base Year = 2005)
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Real Effective Exchange Rate (REER)(Base Year = 1993-94)
22
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 12%) happened in 2007-08
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2323
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%
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2424
Raising Potential Output Growth
• Reforms
• Infrastructure
• Education
• Business climate
• Public expenditure efficiency
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GLOBALIZATION: THE DIFFERENCE
• CHINA: The Communist Party- playing the perfect coordinating role and overseeing the delivery of public goods and services.
• INDIA: WILL ACHIEVE DESPITE THE GOVERNMENT!!
• IS THIS SUSTAINABLE
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THE ADDED COMPLICATIONS
• INCLUSION
• REGIONAL DIVERGENCES
• PLURALISTIC HETEROGENOUS SOCIETY
• ENVIRONMENT
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ROLE OF THE STATE
• DOES NOT IMPLY REVERSAL TO THE LICENCE-CONTROL RAJ
• DOES NOT ALSO IMPLY A PAUSE ON NEEDED STRUCTURAL REFORMS
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ROLE OF THE STATE
• DELIVERY OF PUBLIC GOODS AND SERVICES– EDUCATION– HEALTH– LAW AND ORDER AND SECURITY – URBAN PLANNING– INFRASTRUCTURE– R&D– SCIENCE AND TECHNOLOGY
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ROLE OF THE STATE
• EXTERNAL RELATIONS AND ACCESS TO FOREIGN MARKETS
• ACCESS TO INTERNATIONAL AND REGIONAL PUBLIC GOODS AND SERVICES
– CLIMATE CHANGE- INTERNATIONAL MIGRATION– EXTREMISM– TRAFFICKING
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THE WAY FORWARD
• FOCUS ON GOVERNANCE REFORMS
ENFORCING ACCOUNTABILITY
REAL OUTCOME BASED BDUGETING
EMPOWERING THE BENEFICIARIES
MOBILISING THE CIVIL SOCIETY
MUCH GREATER USE OF THE RIGHT TO INFORMATION
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THE WAY FORWARD
• NECESSARY EDUCATION SECTOR REFORMS
• IMPROVING PRIMARY & SECONDARY PUBLIC EDUCATION SYSTEMS
• REHABILITATE PRIMARY HEALTH SERVICES
• INCREASING PUBLIC EXPENDITURE ON PHYSCIAL INFRASTRUCTURE
• ENSURE EQUALITY OF OPPORTUNITY
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32
Thank You.