2. 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
3. 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
1991-2 (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
4. Figure 1: Three Phases of Growth
(Phase III Result of radical reform)
-5%
-3%
-1%
1%
3%
5%
7%
9%
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
GdpmpGr GdpGrTrend GdpTndHpf
02 August 2008 General: AV 4
5. 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
6. 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
8. Fig 3: Per Capita Income
2%
3%
4%
5%
6%
7%
8%
9%
1992-3
1993-4
1994-5
1995-6
1996-7
1997-8
1998-9
1999-00
2000-1
2001-2
2002-3
2003-4
2004-5
2005-6
2006-7
2007-8
G
r
o
w
t
h
r
a
t
e
(
%
) PerCapita Income (PcGdpmp)
PcGdp
PcGma5y
02 August 2008 General: AV 8
9. Fig 4: Per Capita Consumption
0%
1%
2%
3%
4%
5%
6%
7%
1992-3
1993-4
1994-5
1995-6
1996-7
1997-8
1998-9
1999-00
2000-1
2001-2
2002-3
2003-4
2004-5
2005-6
2006-7
2007-8
G
r
o
w
t
h
r
a
t
e
(
%
)
Per Capita Consumption
PcPfce Linear (PcPfce)
02 August 2008 General: AV 9
10. 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
11. Fig 6: Investment Led
15%
20%
25%
30%
35%
40%
Gdcf
-
GDP
ratio
&
moving
avg
(%)
Gdcf/Gdp MaGdcf/gdp
02 August 2008 General: AV 11
14. 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
15. Investment: Total, Fixed & Private (ratio to GDP)
15%
20%
25%
30%
35%
40%
2001-2
2002-3
2003-4
2004-5
2005-6@
2006-7*
2007-8
Investment-
Ratios
(%
of
GDP)
GCF/GDP GFCF/GDP IKpvt/Gdp
02 August 2008 General: AV 15
16. 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
17. FDI : Inward and outward
0
5
10
15
20
25
30
35
F
D
I
(
U
S
$
b
i
l
l
i
o
n
)
FDI Inbound FDI Outbound
02 August 2008 General: AV 17
21. 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
22. Efficiency of Investment
• .
02 August 2008 General: AV 22
1992-3 to 2003-4 2004-5 2005-6 2006-7 2003-4 to Change
ICOR 2002-3 (act) (act) (rev) (est) 2007-8
Manufacturing 11.1 8.6 9.5 10.5 8.3 9.2 -1.9
Construction
1.5 1.3 1.0 1.0 1.4 1.2 -0.4
Telecommunication
2.2 0.5 0.6 0.6 0.4 0.5 -1.7
23. 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
02 August 2008 General: AV 23
24. 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
02 August 2008 General: AV 24
31. 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)
02 August 2008 General: AV 31
32. Inflation in India (WPI) and
USA(PPI)
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2007.01
2007.02
2007.03
2007.04
2007.05
2007.06
2007.07
2007.08
2007.09
2007.10
2007.11
2007.12
2008.01
2008.02
2008.03
2008.04
2008.05
2008.06
IndiaWpi UsaPpi
02 August 2008 General: AV 32
33. Inflation: India-WPI Manf, UK-PPI
Manf, USA PPI Ind
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2007.01
2007.02
2007.03
2007.04
2007.05
2007.06
2007.07
2007.08
2007.09
2007.10
2007.11
2007.12
2008.01
2008.02
2008.03
2008.04
2008.05
2008.06
UsPpiInd UkPpiMnf IndWpiMf
02 August 2008 General: AV 33
34. Inflation Convergence: US & India
-3
-1
1
3
5
7
9
11
13
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
I
n
f
l
a
t
i
o
n
(
%
)
India Ppfce US Pcons
Diff:India-US Poly. (Diff:India-US)
19th Junel 2008 Mumbai Isec: AV 34
36. 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)
02 August 2008 General: AV 36
38. Real Interest Rate Convergence: US-India
-4
-2
0
2
4
6
8 1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
I
n
t
e
r
e
s
t
r
a
t
e
(
%
)
US1yr India364d Dif:Ind-Us Poly. (Dif:Ind-Us)
19th Junel 2008 Mumbai Isec: AV 38
39. 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.
02 August 2008 General: AV 39
40. 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
02 August 2008 General: AV 40
41. 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
42. 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
02 August 2008 General: AV 42
43. Excess Capital Flows-over CAD (% of GDP)
-1%
0%
1%
2%
3%
4%
5%
6%
7%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
C
a
p
i
t
a
l
F
l
o
w
s
(
%
G
D
P
)
ExcessCapital flow Portfolio (FII)
Linear (ExcessCapital flow) Linear ( Portfolio (FII))
02 August 2008 General: AV 43
44. Current Act and Goods & Services Deficit
-3%
-2%
-1%
0%
1%
2%
3%
4%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
P
a
y
m
e
n
t
s
B
a
l
a
n
c
e
(
%
G
D
P
)
Goods &ServicesDef CurntAct Def
Poly.(Goods &ServicesDef) Poly.(Curnt Act Def)
02 August 2008 General: AV 44
45. 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
46. 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,
02 August 2008 General: AV 46
47. 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
Editor's Notes
India’s Economic Growth: From Socialist Rate of Growth to Bharatiya Rate of Growth, Working Paper No. 122, ICRIER, February 2004.
Propelling India from Socialist Stagnation to Global Power: Growth Process, Vol. I (Policy Reform, Vol. II), Academic Foundation, New Delhi, 2006.
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.
India’s Economic Growth: From Socialist Rate of Growth to Bharatiya Rate of Growth, Working Paper No. 122, ICRIER, February 2004.
Propelling India from Socialist Stagnation to Global Power: Growth Process, Vol. I (Policy Reform, Vol. II), Academic Foundation, New Delhi, 2006.
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.
J curve effect. (1) Heavily protected-import liberalisation: drastic change in relative prices. (2) Fall in measured productivity-capital immobility & obsolesence (3) Acceleration after lag: I embodied technology, S curve of diffusion, unfamiliar tech HR adjusting, learning. Adjusted R square = 0.57.
Related to next three figures
2000-2002 pessimism, 2003-2004 Cyclical recovery, 2005-2006 cyclical up swing projected to 10% growth, 2007 back to trend. 2008-9 below trend because of global developments, particularly oil/commodities but also financial crisis (indirect effect of).
Per Capita Gdp growth: To 7.3% in 2003-4 to 2007-8 from 3.7% (1980-1 to 1991-2) ; Average income will double in ten years instead of in a generation.
Avg. Private Consumption Gr rt: Almost doubled during the past five years from previous 12 years (and doubled from what it was 10 years prior to that)
Similar picture for Gross Fixed Investment
Growth rate of : Total output (blue-accelerated), Total Investment (red-accelerated sharply), Private Final consumption Expenditure (purple-accelerated) and Govt final consumption expenditure (green-declerated).
Contribution of Govt final consumption down to 5.4% from average of 11.8% in past 10 years (12% & 11.6%).
GCF: 5 yr avg. 33.5% of GDP from 23.9% in previous 5 yrs (+9.5%). 2007-8 up to 38.4% of GDP i.e Chinese levels.
GFCF: 5 yr avg. 30.3% of GDP from 23% in previous 5 yrs (+7.3%). 2007-08 up to 34.6% of GDP (9% gr at 3.8 Icor).
I fixed private: Up 6.8% (4 yrs avg) out of total 7.3% (5 yrs avg).
Year 2005 2006 2007
Fdi Net $4.7 8.4 9.4 bi
Inward $7.7 19.4 22.1 bi
Outward $2.9 11.0 12.7 bi
Net domestic product per person, Capital intensity-Capital stock per person, Total factor productivity
June 2008: All Commodity index (+62%), Food price Index(44.4%). India Primary Food =6.4 (latest 5.8%).
Inflation: Rise of 66% in January 2008, peak of 102% in March 2008. 46.5% in June 2008.
Rise of 66% in January 2008.
Rise of 70% in January 2008 (up from 46.6% in December 2007). Crude oil(3) avg of Brent, Dubai, WTI.
Oil 92.9% Iron ore 66%
Contribution of Minerals (iron ore, dark blue) and Fuel (brown) has gone up during 2008.
Other contributors include cotton & yarn, food products (grains, F&V, spices, grain mill prds), fertilisers & chemicals.
WPI has to be compared to PPI. The USA is the largest and perhaps the most competitive global market in the World for goods. Inflation has accelerated more than in India.
CPI: Regrettably we do not have an aggregate CPI that we need for monitoring inflation. That is why we gave the private consumption deflator in the survey. I expect that to be about 50% higher this year i.e. 6-6.5%.
Solutions proposed at that time (some in Working paper #2) to deal with large capital inflows and their negative impact:
Remove restrictions on capital outflow (some actions were taken).
Slow debt inflow through an interest tax, higher reserve requirement or auction of right to borrow (instead ECB QRs tightened)
Remove import controls. Reduce “peak” import duties (non-agricultural) to 7.5% (from 10%). Counter proposals prevailed.
Allow greater symmetry in exchange rate fluctuation through greater upward flexibility.
Sterilize a greater proportion of reserve accumulation through MSS.
Interbank Call money rates were below the Repo rate during this period (=> No need to raise the Repo rate at that time).
Solutions proposed at that time (some in Working paper #2):
Remove restrictions on capital outflow (some actions taken).
Slow debt inflow through an interest tax, higher reserve requirement or auction of right to borrow (instead ECB QRs tightened)
Remove import controls. Reduce “peak” import duties (non-agricultural) to 7.5% from 10% (counter advise prevailed).
Allow greater symmetry in exchange rate fluctuation through greater upward flexibility .
Sterilize a greater proportion of reserve accumulation through MSS.
During 2008-9, growth will be below the trend rate of 8.8 to 8.9. Likely to revert back towards trend in 2009-10
11th Plan CAD average is 1.9% of GDP. Worst case (high oil prices) 2.5%.
Capital Flows exclude “other capital”. FII/equity and ECB/debt: High variability. FDI Uptrend with variation in growth rate. Current year: (Global risk/liquidity preference vs. liquidity) Net negative (2008 to date). Medium Term: Surplus capital flows/reserve accum
Exports (G&S) to Oil/natural resource exporters will increase, perhaps with a lag. At worst CAD U shaped. Probability of avg. CAD exceeding 2.5% of GDP during 11th Plan is low.
Sustaining Employment and Equitable Growth: Policies For Structural Transformation Of The Indian Economy,” Working Paper No. 3/2006-PC, Planning Commission, March 2006. http://planningcommission.nic.in/reports/wrkpapers/rpwpf.htm.
Sustaining Employment and Equitable Growth: Policies For Structural Transformation Of The Indian Economy,” Working Paper No. 3/2006-PC, Planning Commission, March 2006. http://planningcommission.nic.in/reports/wrkpapers/rpwpf.htm.
India’s Economic Growth: From Socialist Rate of Growth to Bharatiya Rate of Growth, Working Paper No. 122, ICRIER, February 2004.
Propelling India from Socialist Stagnation to Global Power: Growth Process, Vol. I (Policy Reform, Vol. II), Academic Foundation, New Delhi, 2006.
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.
