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India and the World Economy(Section E)

Instructor

Sudip ChaudhuriRoom B-207; Ext 185

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India and the World Economy Economics I and II:

Microeconomics Macroeconomics

Economics III:

Course objective: analyze economic problemsof India in the context of the ongoing processof globalization

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Some Current Major Economic Issues

Slowing down of GDP

BOP difficulties

Inflation

Foreign exchange rate Fiscal deficit

Foreign investment Sensex

Lack of inclusive growth3

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Fundamentally important

Sustained economic growth (GDP growth)

Create jobs, reduce poverty

Avoid crises:

Recession/depression Inflation:

Foreign exchange crisis

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Year United States China India1000 400 466 450

1500 400 600 5501600 400 600 5501700 527 600 5501820 1,257 600 5331850 1,806 600 5331870 2,445 530 5331890 3,392 540 5841900 4,091 545 5991913 5,301 552 673

1930 6,213 568 7261950 9,561 448 6191980 18,577 1,061 9381990 23,201 1,871 1,309

2008 31,178 6,725 2,975

Per capita GDP

(International $ 1990)

http://www.ggdc.n

et/maddis

on/

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6

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1000 1600 1820 1870 1900 1930 1980 2008

1990international

$

Per capita GDP

United States China India

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Economic Policy Inherent tension

Impact different for different people

Consciously (or not) policies favour

particular groups against others Example: fiscal deficit

Reducing subsidies for poor

Reducing government expenditure

Increasing taxes from rich

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Lecture Topics

1. Introduction: Context and policy background

2. An analytical framework to understand growth and crisis

3. Growth and crises in Indian economy before 1991

4. Economic performance after reforms

5. RBI, monetary policy and demand management

6. Fiscal reforms and fiscal deficit

7. Trade and Industrial reforms and manufacturing performance

8. Unemployment, poverty and inequality

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Readings

All uploaded in Course web(Also: Collect Hardcopy)

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Topic 1 Ahluwalia and NayyarTopic 2 Financing economic development

Topic 4 Nagaraj; Rangarajan-Mishra; Ghose

Topic 5 SubbaraoTopic 6 Bhaduri

Topic 7 Chaudhuri

Attempt has been made to give you a flavour of writings ofEconomists of different persuasion

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Examination

Closed book One hour End-term examination: Lecture PPTs

Class discussions Readings recommended

Opinions must have factual and logical basis:

Different readings may have different approaches Separate question papers Sections (A & B),

Sections (C & D), Section E and Section F.

Grades to be normalized

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Grade normalization target A plus: 10% of the students

A only: 15%

A minus: 15%

B plus: 25% B only: 15%

B minus: 10% C plus/F: 10%

Note: Actual distribution may vary across sections11

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Lectures PPTs in course web

Discussions in class room: PPTs uploaded are not substitutes for class

lectures

Apart from class rooms, students may askquestions through email (sudip@iimcal.ac.in)

Discussion sessions 2nd week onwards?

Clarifications: Most welcome to meet me in my office room

on Wednesdays and Fridays

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43,480

28,231

14,461

13,676

10,152

7,945

3,285

0 10,000 20,000 30,000 40,000 50,000

USA

South Korea

Russia

Malaysia

Brazil

China

India

GNI per capita, 2012, $ PPP

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Indias Distinctiveness

Low per capita income

But: Huge size (10th largest, 3rd largest in PPP in

2012)

Relatively high growth rate (but lowagriculture growth rate)

High investment/savings rate

Diversified industrial structure

Imbalance: employment, income and capitalstock

Foreign exchange reserves

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Diversified industrial structure IT and IT enabled services

Pharmaceuticals

Auto-components

Electrical equipment Etc

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Imbalance More of 50% of employment in Agriculture

More than 50% of domestic product fromServices

More than 50% of fixed capital stock inIndustry

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0

50

100

150

200

250

300

350

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-2000

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

$

billion

Foreign Exchange Reserves

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India: Major Issues of Concern More than 50% of population depend on agriculture but

low growth rate

Jobs in organized sector have not increased despiteindustrial and service sector growth

Inter-state disparity

Poverty has declined but at modest rate Malnutrition has decreased but magnitude still very high

Poor health, education, clean drinking water, sanitation very low HDI

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Some useful sources of data UNDP: http://hdr.undp.org/en/statistics/data/ www.worldbank.org www.imf.org RBI, Handbook of Statistics on Indian Economy

(www.rbi.org.in) Min of Finance, Economic Survey:

http://indiabudget.nic.in/ http://www.planningcommission.nic.in/ CSO: http://mospi.gov.in/mospi_cso_rept_pubn.htm

IIMC Library: e-resources: CMIE Business Beacon, EIS, India Trades, Prowess etc World Bank, World Development Indicators www.epw.org.in

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Economic Strategy

What Policies do developing countriesadopt for economic development?

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Choices

Government regulation/market forces Domestic production/Imports

Production for home market/exports

Public sector/private sector

Indigenous enterprise/MNC

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Regime Changes After the Second world war till 1970s

Emphasis on role for government (wronglyreferred to as socialism)

Since 1980s, particularly 1990s

Economic Reforms (critics: neo-liberalism;market fundamentalism)

Recently Again some re-thinking

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But ?

Per Capital GDP Growth rate, 1960-1980

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Background Policies

Most Developingcountries:

Poor economic record Crises in 1980s

Emergence of theWashington Consensus:

De-regulation Import liberalization Private sector

Market forces

Since 1980s

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Bretton Woods Institutions International Monetary Fund (IMF)

World Bank General Agreement on Tariffs and Trade

(GATT)

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IMF and World Bank

All members: BOPdifficulties

Quotasubscriptions(partly in hardcurrencies/goldand mainly owncurrencies)

IBRD (onlydeveloping countries:for projects/

programmes) IDA: very poor

countries - interest

free loans IBRD: marketborrowings by bondsissue (AAA rating)

IDA gets its fundsmainly from donorcountry grants

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World Trade Organization

Established in 1995 as a result of theUruguay Round multilateral tradenegotiations (1986-94)

GATT as an organization replaced byWTO and GATT became one of the

agreements of WTO with a larger scope

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Washington Consensus(Coined in 1989 initially for Latin America)

1. Fiscal discipline

2. Reorientation of public expenditures3. Tax reform4. Financial liberalization5. Unified and competitive exchange rate6. Trade liberalization7. Openness to foreign direct investment8. Privatization

9. Deregulation10.Secure property rights

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Augmented Washington Consensus

Corporate governance

Flexible labour markets Social safety nets

WTO agreements Etc

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1951 to mid 1960s(Nehru)

Planning strategy

Mid-1960s to mid-1980s

(Indira Gandhi)

External and internal shocks

Initiation of Liberalization ofimport and industrial licensing:

substantial expansion

limits of units regularizing excess capacity

But also: FERA/MRTP

Banks, insurance, oil andcoal nationalized Distribution and pricecontrols

Planning and Reforms in India

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Mid-1980s to 1991

(Rajiv Gandhi)

Liberalization broad-

banding etc

MRTP limit

1991 onwards(Manmohan Singh?)

New economic strategy reforms not ad hoc

Planning and Reforms in India

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Economic Reforms in India Financial sector reforms:

Reforms in the Banking Sector Reforms in the Foreign Exchange Market

Reforms in the Government Securities Market

Reforms in the Monetary Policy Framework External sector reforms

Fiscal reforms

Trade and Industrial reforms

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Banking Sector Reforms Prudential Measures

capital adequacy requirement, accounting,income recognition, provisioning andexposure etc.

Competition Enhancing Measures Reduction of public ownership in public sector

banks

Entry of private banks

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Banking Sector Reforms Measures Enhancing Role of Market

Forces Sharp reduction in reserve requirements

(CRR and SLR),

Market determined pricing for governmentsecurities,

Disbanding of administered interest rates witha few exceptions

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