Transcript ECONOMIC GROWTH IN INDIA

Arvind Virmani
(views are personal)
INTRODUCTION
 Trends vs. Cycles: Tendencies
 Short Term Cyclical fluctuations (Project) => Trend
 Classify every uptrend as cyclical (‘overheating’)
 Long Term Trends
 Medium Term Performance: 2003-04 to 2007-08
 Short Term: Inflation – Global cost push
 Role of Policy reform:
 Sustaining growth
 Raising productivity/ offsetting cost increases
02 August 2008
General: AV
2
Economic Growth Perspective
 Phase I: 1950-1 to 1979-80
 Two sub-phases (50to 65; 66 to 79)
 Phase II: 1980-81 to 1993-4
 Start: Policy regime change
 End (a) Crises year(1990-91). (b) Reform initiation 19912 (c) Adjustment/recovery (1992-3 to 1993-4)
 Phase III: 1994-5 to ?
 1994-95: Statistical significant growth break
 Rising trend growth
02 August 2008
General: AV
3
Figure 1: Three Phases of Growth
(Phase III Result of radical reform)
9%
7%
5%
3%
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
1957
1955
1953
-1%
1951
1%
-3%
GdpmpGr
GdpGrTrend
GdpTndHpf
-5%
02 August 2008
General: AV
4
Recent Developments:
Past five years ( 2003-4 to 2007-8)
 Growth Acceleration
 GDP
 Average Income / Per capita GDPmp (PcGdp)
 Avg. Private Consumption (PvtCons)
 Aggregate Growth drivers
 Supply side
 Demand Side
 Sector drivers of growth
02 August 2008
General: AV
5
Growth acceleration:
( 2003-4 to 2007-8)
 In the next three figures: Cyclical movement around Rising trend
 HP filtered trend
 GDPmp: Avg. growth of 8.9%
 Per Capita gdp growth has doubled
 To 7.3% (from 3.7% in 1980-1991)
 Average income will double in ten years
 Avg. Private Consumption Gr rt: Almost doubled
02 August 2008
General: AV
6
Fig 2:Growth Acceleration-Gdp
10%
GdpmpGr
GdpGrTrend
GdpTndHpf
9%
8%
7%
6%
5%
4%
3%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
02 August 2008
General: AV
7
Fig 3: Per Capita Income
Per Capita Income (PcGdpmp)
9%
8%
PcGdp
G
r
o
w
t
h
r
a
t
e
PcGma5y
7%
6%
5%
4%
(
)
%
3%
02 August 2008
General: AV
2007-8
2006-7
2005-6
2004-5
2003-4
2002-3
2001-2
2000-1
1999-00
1998-9
1997-8
1996-7
1995-6
1994-5
1993-4
1992-3
2%
8
Fig 4: Per Capita Consumption
Per Capita Consumption
7%
PcPfce
Linear (PcPfce)
6%
G
r
o 5%
w
t
h 4%
r
3%
a
t
e 2%
(
%
)
1%
02 August 2008
General: AV
2007-8
2006-7
2005-6
2004-5
2003-4
2002-3
2001-2
2000-1
1999-00
1998-9
1997-8
1996-7
1995-6
1994-5
1993-4
1992-3
0%
9
Aggregate Demand Growth Dynamics:
Investment Led growth
 Growth of Demand
 Investment growth rate doubled
 Pvt consumption & imports accelerated
 Govt. Consumption-slowed
 Role of private Consumption important but declined
below that of Investment for first time
 External : Short period of positive contribution (low oil
prices) over
 Govt Consumption: Lower contribution
02 August 2008
General: AV
10
Fig 6: Investment Led
40%
Gdcf - GDP ratio & moving avg (%)
Gdcf/Gdp
MaGdcf/gdp
35%
30%
25%
20%
15%
02 August 2008
General: AV
11
Fig 5: Investment Led Growth
Gdpmp
20%
GDCF
PFCEdm
GFCE
18.0%
18%
16%
14%
12%
9.5%
10%
9.2%
8.9%
8%
7.0%
6.2%
6.1%
6%
5.0%
5.3%
5.6%
4.7%
4.5%
4%
2%
0%
91-2to97-8
02 August 2008
General: AV
98-9 to 02-3
03-4to07-8
12
CONTRIBUTION TO DEMAND
70%
60%
60.1%
57.7%
55.0%
47.8%
50%
40%
34.0%
26.9%
30%
20%
12.0%13.6%
11.6%
10%
5.4%
0%
92-3to97-8
-10%
-20%
02 August 2008
97-8 to 02-3
02-3to07-8
-7.6%
PFCEdm
General: AV
GDCF
GFCE
Net exports
-14.7%
13
Supply Side: Investment & Savings
 Investment growth led by
 Fixed investment i.e. not inventory build up
 Private Investment i.e. Profitable
 Increase in productive capacity of the economy
 Savings rate also rose: Private & Public sectors
 Saving rises with income/investment
 Lag during sharp acceleration
02 August 2008
General: AV
14
Investment: Total, Fixed & Private (ratio to GDP)
40%
GCF/GDP
GFCF/GDP
IKpvt/Gdp
Investment- Ratios (% of GDP)
35%
30%
25%
20%
02 August 2008
General: AV
2007-8
2006-7*
2005-6@
2004-5
2003-4
2002-3
2001-2
15%
15
Supply Side: Savings
 Savings rate also rose by 9.8% (2003-4 to 2007-8)
 Avg. 33.3% of GDP from 23.6% in previous 5 yrs
 Private and Public
 Increment (4 yrs) 5.1% & 3.4% respectively
 Contributed(60:40)
 Saving Rate: 36.1% of GDP in 2007-8
 Maintenance of Investment and Saving Rate at 2007-8
levels enough to give average growth 0f around 9%
 Possible with deceleration in gr of profits, saving &
investment to 9%.
02 August 2008
General: AV
16
FDI : Inward and outward
35
30
F
D
I
FDI Inbound
FDI Outbound
25
(
U
S
20
$
b 15
i
l
l
i 10
o
n
)
5
0
02 August 2008
General: AV
17
02 August 2008
General: AV
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
Kstock/Lhp
1997
1996
1995
1994
1993
1992
NDP/Lhp
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
Sources of Growth
7.0%
TFPGhp
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
18
Sector Drivers
 Manufacturing
 GDP/Value Added
 Investment: GCF, GFCF
 Communication
 Competition and efficiency
 Trade, Agriculture, Construction
 Labor intensive
02 August 2008
General: AV
19
Drivers of Growth
Contribution to Growth (2002-3 to 2007-8)
transport by other
means
6%
Rest
10%
manufacturing
16%
other services
7%
trade
14%
banking & insurance
8%
communication
11%
real
estate,ownership of
dwellings & business
services
8%
02 August 2008
General: AV
construction
10%
agriculture(crop)
10%
20
Sector Drivers of Growth
 Acceleration in Value Added: Increase in growth rate
 Highest for Manufacturing and construction
 Followed by storage & agriculture.
 Investment Growth: Manufacturing 30.5% per year
 Capital stock (end 2007-8 over end 2002-3).
 Construction(1.92 times)
 Manufacturing (1.75 times),
 rade, Hotels & Restaurants (1.62 times).
02 August 2008
General: AV
21
Efficiency of Investment
.
ICOR
Manufacturing
1992-3 to
2003-4
2004-5
2005-6
2006-7
2003-4 to
Change
2002-3
(act)
(act)
(rev)
(est)
2007-8
11.1
8.6
9.5
10.5
8.3
9.2
-1.9
1.5
1.3
1.0
1.0
1.4
1.2
-0.4
2.2
0.5
0.6
0.6
0.4
0.5
-1.7
Construction
Telecommunication
02 August 2008
General: AV
22
Summary: Medium term gr trend
 Growth has accelerated in last five years
 While Consumption growth remained robust, the





acceleration was Investment led
External sector was a drag on demand because of oil
(and other) price increases
Private investment particularly corporate is leading
investment and growth
Domestic Saving rate has increased inline with I
Telecom, Construction, Manufacturing were the
leading sectors
11th Plan target of 9% average growth will be met
02 August 2008
General: AV
23
INFLATION: Global effects
 Kemal Dervis Exim lecture(18/3/08): Global Cost push
 Global Commodity Price Shock
 All commodity index
 Food price Index


Edible oil (Palm): Net Importer
Effect on India: Primary food & edible oils
 Iron Ore: Net exporter
 Mineral Oil: Net Importer
 Impact on Indian Inflation
 Comparison: India(Wpi), USA(Pppi), UK(Ppi Manf)
02 August 2008
General: AV
24
Global Cost Push?
70%
All
Food
60%
50%
40%
30%
20%
10%
0%
-10%
02 August 2008
General: AV
25
02 August 2008
General: AV
2008M6
2008M5
2008M4
2008M3
2008M2
2008M1
2007M12
2007M11
2007M10
2007M9
2007M8
2007M7
2007M6
2007M5
2007M4
2007M3
2007M2
2007M1
2006M12
2006M11
2006M10
2006M9
2006M8
2006M7
2006M6
2006M5
2006M4
2006M3
2006M2
2006M1
2005M12
2005M11
2005M10
2005M9
2005M8
2005M7
2005M6
2005M5
2005M4
Global Supply: Edible Oil(Palm)
1,150
World Price of Palm Oil ($/MT)
1,050
950
850
750
Palm oil
650
550
450
350
26
02 August 2008
General: AV
2008M6
2008M5
2008M4
2008M3
2008M2
2008M1
2007M12
2007M11
2007M10
2007M9
2007M8
2007M7
2007M6
2007M5
2007M4
2007M3
2007M2
2007M1
2006M12
2006M11
2006M10
2006M9
2006M8
2006M7
2006M6
2006M5
2006M4
2006M3
2006M2
2006M1
2005M12
2005M11
2005M10
2005M9
2005M8
2005M7
2005M6
2005M5
2005M4
Global Supply Shock: Iron Ore
150
World Price of Iron Ore(cents/MT)
140
130
120
110
100
90
PironOre
80
70
60
27
02 August 2008
General: AV
2008M6
2008M5
2008M4
2008M3
2008M2
2008M1
2007M12
2007M11
2007M10
2007M9
2007M8
2007M7
2007M6
2007M5
2007M4
2007M3
2007M2
2007M1
2006M12
2006M11
2006M10
2006M9
2006M8
2006M7
2006M6
2006M5
2006M4
2006M3
2006M2
2006M1
2005M12
2005M11
2005M10
2005M9
2005M8
2005M7
2005M6
Global Supply Shock: Oil Price
260
240
Global Oil Price Index (IMF)
220
200
Poil
180
160
140
120
100
28
Rate of Growth: Iron Ore & Oil
100%
PironOre
Poil
80%
60%
40%
20%
0%
-20%
02 August 2008
General: AV
29
-1
03.04
03.06
03.08
03.10
03.12
04.02
04.04
04.06
04.08
04.10
04.12
05.02
05.04
05.06
05.08
05.10
05.12
06.02
06.04
06.06
06.08
06.10
06.12
07.02
07.04
07.06
07.08
07.10
07.12
08.02
08.04
08.06
Contribution to change in WPI
13
11
Pman
02 August 2008
General: AV
Pfl
Pprf
Pprnf
Pmnrl
9
7
5
3
1
30
Acceleration in Inflation during 2008 H1 over 2007 H1:
Contribution of different commodities
 WPI Inflation during H1 2007 (i.e. from December
2006 end to June 2007 end) was 2.7%.
 Inflation during H1 2008 (i.e. from December 2007
end to June 2008 end) was 9.9%(est).
 Of the 7.2% increase in inflation this year, 2/3rd was
due to 3 sets of commodities:
 Edible oils (including) oils seeds and oil cakes)
 Iron and Steel (including iron ore)
 Mineral Oils and refinery products
02 August 2008
General: AV
31
-2%
02 August 2008
General: AV
2008.06
2008.05
2008.04
2008.03
2008.02
2008.01
2007.12
IndiaWpi
2007.11
2007.10
2007.09
2007.08
2007.07
2007.06
2007.05
2007.04
2007.03
2007.02
2007.01
Inflation in India (WPI) and USA(PPI)
16%
UsaPpi
14%
12%
10%
8%
6%
4%
2%
0%
32
Inflation: India-WPI Manf, UK-PPI
Manf, USA PPI Ind
16%
UsPpiInd
UkPpiMnf
IndWpiMf
14%
12%
10%
8%
6%
4%
2%
02 August 2008
General: AV
2008.06
2008.05
2008.04
2008.03
2008.02
2008.01
2007.12
2007.11
2007.10
2007.09
2007.08
2007.07
2007.06
2007.05
2007.04
2007.03
2007.02
-2%
2007.01
0%
33
Inflation Convergence: US & India
13
I
n
f
l
a
t
i
o
n
India Ppfce
US Pcons
Diff:India-US
Poly. (Diff:India-US)
11
9
7
5
(
3
)
%
1
-1
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
-3
19th Junel 2008
Mumbai Isec: AV
34
97q1
97q2
97q3
97q4
98q1
98q2
98q3
98q4
99q1
99q2
99q3
99q4
00q1
00q2
00q3
00q4
01q1
01q2
01q3
01q4
02q1
02q2
02q3
02q4
03q1
03q2
03q3
03q4
04q1
04q2
04q3
04q4
05q1
05q2
05q3
05q4
06q1
06q2
06q3
06q4
07q1
07q2
07q3
07q4
08q1
CPI(unme) & Gdp Pvt Cons deflator
13%
CPI unml
19th Junel 2008
Mumbai Isec: AV
Pfce def
11%
9%
7%
5%
3%
1%
35
Monetary Policy and Inflation
 Cost Push and Monetary accommodation!
 Monetary Policy includes exchange rate policy
 Important only for its effect on objectives
 Monetary Policy Objectives
 Production/Growth & Inflation – emphasis varies
 Socio-Political Tolerance level of Inflation
 Primary Focus Today- Inflation & Expectations
 Capital flows main driver of RM gr. (prt. Q4 2007-8)
 M3 gr. exceeded peaks of 92.10 (98.10) in 07.10
 M3ma gr. exceeded peaks of 95.04 and 98.04 in 07.01
02 August 2008
General: AV
36
(
(
)
)
94.05
94.10
95.03
95.08
96.01
96.06
96.11
97.04
97.09
98.02
98.07
98.12
99.05
99.10
2000.03
2000.08
2001.01
2001.06
2001.11
2002.04
2002.09
2003.02
2003.07
2003.12
2004.05
2004.10
2005.03
2005.08
2006.01
2006.06
2006.11
2007.04
2007.09
2008.02
2008.07
Monetary Accommodation?
23%
G
r
o
w
t
h
M3
02 August 2008
General: AV
M3rlc
20%
M
o
n 21%
e
y
18%
16%
14%
19%
12%
M
3
17%
10%
15%
6%
13%
4%
2%
11%
M
o
n
e
y
r
e
a
l
8%
g
r
o
w
t
h
0%
37
Real Interest Rate Convergence: US-India
8
US1yr
I
n
t
e
r
e
s
t
6
r
a
t
e
2
India364d
Dif:Ind-Us
Poly. (Dif:Ind-Us)
4
(
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1992
)
0
1993
%
-2
-4
19th Junel 2008
Mumbai Isec: AV
38
Inflation & Interest rates
 Inflation Trajectory
 Medium Term: Down to normal level in a year
 Short Term: Depends on Oil prices
 Real Interest rates
 Short term: Decline
 Medium Term: U shaped pattern to normal in a year
 Aggregate Inflation: Who is hurt
 Poor- unskilled wage lag.
 Every one cannot be hurt unless GDP declines!
02 August 2008
General: AV
39
Growth/Production objective:
Policy and Institutional Reform
 March 2008 Forecast: 8% to 9% (8.5 -/+ 0.5)
 Oil shock and Production(IIP) data:
 Revised forecast: 7.75% to 8.75% (8.25% -/+ 0.5)
 Productivity enhancing reforms can help moderate
cyclical downturn and inflation upturn.
 Motivation for revisiting/reviving pending reforms
 Energy Sector: Oil shock
 Investment Environment
02 August 2008
General: AV
40
Medium-Long term implications
 Natural Resources
 Non-renewable (Oil, selected minerals): Rising relative
price => Need for User efficiency, Technical change
 Renewable : Land-intensive agriculture crops (cereals)



Extensive margin (e.g. forest clearing) constrained by climate
and environment concerns.
Race between productivity and global demand.
Relative prices could stabalise at higher levels
02 August 2008
General: AV
41
Balance of Payments
 Capital Flows
 Trends and Volatility (FDI, FII, ECB)
 Current year: Below trend- FII (Global risk/liquidity
preference vs. liquidity).
 Medium Term: Surplus capital flows/reserve accum.
 Current Account
 Invisibles: Non-factor services (software) & prviate
remittances low volatility around rising trend
 Exports (G&S) to Oil/natural resource exporters will
increase, perhaps with a lag.
 CAD : U-shape
02 August 2008
General: AV
42
Excess Capital Flows-over CAD (% of GDP)
7%
C
a
p
i
t
a
l
F
l
o
w
s
Excess Capital flow
Portfolio (FII)
Linear (Excess Capital flow)
Linear ( Portfolio (FII))
6%
5%
4%
3%
(
%
G
D
P
2%
)
1%
0%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
-1%
02 August 2008
General: AV
43
Current Act and Goods & Services Deficit
4%
P
a
y
m
e
n
t
s
B
a
l
a
n
c
e
3%
2%
1%
0%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
(
%
G
D
P
-1%
)
-2%
Goods &Services Def
Curnt Act Def
Poly. (Goods &Services Def)
Poly. (Curnt Act Def)
-3%
02 August 2008
General: AV
44
Long Term: Sustaining Growth
 Reforms essential for sustaining 9% for two decades.
 Policy Reform
 Structural change: Labor market flexibility
 Competition: Decontrol, free entry

Industry(sugar, fertilizer), mining(coal), infrastructure
(electricity - open access), financial services.
 Education and Skills: Regulated (transparency, rating)
entry (freer), controls (minimal)
 Urban Land policy (land use, supply, development,
utilities)
02 August 2008
General: AV
45
Sustaining Growth: Institutional reform
 Public and Quasi-Public goods & services
 National Networks: Drinking Water, Waste (solid and
liquid)
 Universal Primary education-outcome (not enrolment)
 Civic/Urban services
 Social service delivery: Empowerment
 Debit/credit (smart card): PC WP 2002
 Multi-application smart card (UID): 2005, 2006, 2007
02 August 2008
General: AV
46
References
 Precursor:
 India’s Economic Growth: From Socialist Rate of Growth to Bharatiya Rate of
Growth, Working Paper No. 122, ICRIER, February 2004.
 Two Phases (4 sub-phases), Third phase statistically insignificant.
 Heuristic Theory and Empirics!
 Policy Regimes, Growth and Poverty in India: Lessons of Government Failure and




Entrepreneurial Success!, Working Paper No. 170, ICRIER, October 2005.
The Dynamics of Competition: Phasing of Domestic and External Liberalisation in
India,” Working Paper No. 4/2006-PC, Planning Commission, April 2006.
Propelling India from Socialist Stagnation to Global Power: Growth Process, Vol. I
(Policy Reform, Vol. II), Academic Foundation, New Delhi, 2006.
“Maco-economic Management of Indian Economy: Capital Flows, Interest Rates and
Inflation, Working paper No. 2/2007-DEA, Ministry of Finance, November 2007.
Economic Survey, 2007-8, February 2008
02 August 2008
General: AV
47