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 2
General: AV
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 3
General: AV
4. Figure 1: Three Phases of Growth
(Phase III Result of radical reform)
02 August 2008 4
General: AV
-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
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 5
General: AV
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 6
General: AV
8. Fig 3: Per Capita Income
02 August 2008 8
General: AV
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
9. Fig 4: Per Capita Consumption
02 August 2008 9
General: AV
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)
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 10
General: AV
11. Fig 6: Investment Led
02 August 2008 11
General: AV
15%
20%
25%
30%
35%
40%
Gdcf
-
GDP
ratio
&
moving
avg
(%)
Gdcf/Gdp MaGdcf/gdp
13. CONTRIBUTION TO DEMAND
02 August 2008 General: AV 13
55.0%
57.7%
47.8%
34.0%
26.9%
60.1%
11.6% 12.0%
5.4%
-7.6%
13.6%
-14.7%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
92-3to97-8 97-8 to 02-3 02-3to07-8
PFCEdm GDCF GFCE Net exports
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 14
General: AV
15. Investment: Total, Fixed & Private (ratio to GDP)
02 August 2008 15
General: AV
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
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 16
General: AV
17. FDI : Inward and outward
02 August 2008 17
General: AV
0
5
10
15
20
25
30
35
F
D
I
(
U
S
$
b
i
l
l
i
o
n
)
FDI Inbound FDI Outbound
19. Sector Drivers
Manufacturing
GDP/Value Added
Investment: GCF, GFCF
Communication
Competition and efficiency
Trade, Agriculture, Construction
Labor intensive
02 August 2008 19
General: AV
20. Drivers of Growth
02 August 2008 General: AV 20
manufacturing
16%
trade
14%
communication
11%
agriculture(crop)
10%
construction
10%
real
estate,ownership of
dwellings & business
services
8%
banking & insurance
8%
other services
7%
transport by other
means
6%
Rest
10%
Contribution to Growth (2002-3 to 2007-8)
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
.
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
02 August 2008 22
General: AV
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 the
leading sectors
11th Plan target of 9% average growth will be met
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 Manf)
02 August 2008 General: AV 24
25. Global Cost Push?
02 August 2008 General: AV 25
-10%
0%
10%
20%
30%
40%
50%
60%
70%
All Food
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)
Mineral Oils and refinery products
02 August 2008 General: AV 31
32. Inflation in India (WPI) and USA(PPI)
02 August 2008 General: AV 32
-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
33. Inflation: India-WPI Manf, UK-PPI
Manf, USA PPI Ind
02 August 2008 General: AV 33
-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
34. Inflation Convergence: US & India
19th Junel 2008 34
Mumbai Isec: AV
-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)
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)
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
37. Monetary Accommodation?
02 August 2008 General: AV 37
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
11%
13%
15%
17%
19%
21%
23%
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
M
o
n
e
y
(
r
e
a
l
)
g
r
o
w
t
h
M
o
n
e
y
(
M
3
)
G
r
o
w
t
h
M3 M3rlc
38. Real Interest Rate Convergence: US-India
19th Junel 2008 38
Mumbai Isec: AV
-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)
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.
Every one cannot be hurt unless GDP declines!
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
Energy Sector: Oil shock
Investment Environment
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 will
increase, perhaps with a lag.
CAD : U-shape
02 August 2008 General: AV 42
43. Excess Capital Flows-over CAD (% of GDP)
02 August 2008 43
General: AV
-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))
44. Current Act and Goods & Services Deficit
02 August 2008 44
General: AV
-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)
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, 2007
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 47
General: AV
Notas del editor
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.