Indian Economy

Mathew Joseph
Senior Consultant, ICRIER

Lecture to Management Students

MDI, Gurgaon
25 January 2011

1
 Structure
1. An Overview

2. India’s recovery from global crisis

3. India back to pre-crisis growth trajectory?

4. Twin risks in the economy

– Inflation
– Balance of payments

5. The next reform agenda

6. India-China comparison
– Post-reform growth trajectory
– Demand drivers of growth
– Sector composition of growth
– Demographic advantage

7. Share of India in world economy: Past and Future

2
1. An Overview

3
 Indian economy: An Overview
• 12th in terms of GDP at market exchange rates ($1.3 trillion) and 4th in
terms of GDP at purchasing power parity exchange rates ($3.8 trillion) in
2009

• 2.3% of global GDP at market exchange rates and 5.2% of global GDP at
purchasing power parity exchange rates

• Relatively a closed economy till 1991 and opened up after the external
payments crisis of 1991

• Average growth rate about 4% before 1991and moved up to 6.5% post

reforms

• Growth rate rose to nearly 9% in the pre-crisis 5-years, 2003-08

• Per capita GDP rose 3 times from $374 in 1990 to $1134 in 2009
4
2. Recovery from
Global Crisis

5
Recovery from Global Crisis

•Growth fell to 6.7% in 2008-09 from 9.2% in 2007-08

•Smart recovery to 7.4 % in 2009-10 and 8.9% in H1 2010-11 (average growth

rate, 2003-08 : 8.9%)

•Slowdown buffered and recovery powered by large fiscal stimulus (5.5% of GDP)
supported by massive monetary easing (9.5% of GDP)
6
3. India Back to Pre-
Crisis Growth Trajectory?

7
Potential Growth Rate of Indian
Economy

•Potential growth rate: the maximum sustainable rate at which an economy can grow
without raising the rate of inflation

•India’s potential growth rate rose from about 5.5% in late1990s to above 8.5% in mid-2000s

•Growth potential has fallen after crisis to about 7.5% and below

•Current growth rate above potential and has triggered inflationary pressures
8
 Post-crisis Saving and Investment:
India-China Contrast
Savings as % of GDP Investment as % of GDP
60 60

50 50

40 40

30 30

20 20

10 10

0 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

China India China India

Source: WDI Database, World Bank 2010.

•Both savings and investment rates declined in India following the crisis; in China both rose

•In India consumption ratio rose following crisis, both for households and government; China the opposite
9
4. Twin Risks in the
Economy

10
 Inflation

Source: Office of the Economic Adviser, Ministry of Industry and Commerce; Labour Bureau, Ministry of Labour and Employment.

•CPI inflation above 5% right back from April 2006

•Though falling , rate remain at 7.5-8.5% 11

 Month-on-Month Inflation
Annualised Month-on-Month Seasonally Adjusted Rate of WPI and CPI (IW) Inflation (3-Month Moving Average)

Source: Computed based on data from Office of the Economic Adviser, Ministry of Industry and Commerce;
Labour Bureau, Ministry of Labour and Employment.

Month-on-month inflation indicates rising inflationary pressures, at annualized 12-15% for WPI and
8-9% for CPI 12
Inflation and Agriculture
WPI Inflation CPI-IW Inflation WPI Food Inflation
1971-80 9.4 8.0 7.7
1980-90 8.0 9.0 8.6
1990-00 8.1 9.5 10.2
2000-06 5.1 4.0 2.9
2006-10 5.7 8.6 10.2
2005-06 4.4 4.2 5.4
2006-07 6.5 6.8 9.6
2007-08 4.8 6.2 7.0
2008-09 8.0 9.1 9.1
2009-10 3.6 12.4 15.3
2010-11 (Apr-Dec) 9.4 11.2* 16.5

*April-November.
Source: Office of the Economic Adviser, Ministry of Commerce & Industry; Labour Bureau,
Ministry of Labour and Employment.

•Rising inflation from 2006-07

•Inflation linked with food inflation and, in turn, the state of agricultural output vis-à-vis
consumer demand
13
Declining Agricultural Potential
Growth Rate

•”Inflationary surge” in 2008-09 and 2008-10 due to agricultural supply shocks, the
gradually rising inflation from 2006 due to falling agricultural potential growth rate

•Potential growth rate in agriculture declined from 3.5% in 2006-07 to 2.5% in

2009-10

14
 Investment in Agriculture
(Average Annual Growth in Per cent)

Total Agriculture

1961-70 6.1 7.6

1970-80 5.0 7.3

1980-90 5.4 -2.6

1990-00 7.9 9.3

2000-05 9.0 3.2

2005-09 11.2 16.1

Source: CSO.

•Huge underinvestment in agriculture in 1980s and early 2000s

•Government support to agriculture through input subsidies (water, electricity, urea

fertilizers, etc.

•Government investment in irrigation declined sharply

•Agriculture subject to huge restrictions with regard to pricing, movement and sale
of products

•“Subsidy-control regime” not congenial for a breakthrough in production 15

 Index of Per Capita Availability of
Major Agricultural Food Products

Source: Computed based on data from Department of Agriculture and Co-operation; CSO.

•Per capita income rising by 5.5% per annum but per capita food availability either
stagnant or falling

•Per capita income rising at 7.5% per annum during 2003-08

•Rising food demand falling short of supply

16
Rising Current Account Deficits
(% of GDP)
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2008-09

2009-10
2007-08
Trade balance Invisibles balance Current account balance

•Progressive deterioration in trade balance since 2003-04, from 2.3% to 9.0% in

2009-10

•Invisibles surplus declining since 2008-09

17
 Structural Break in India’s
Merchandise Imports
The Trend in the Quantum Indices of Merchandise Exports and
3000 Imports, Q4 1998-99 to Q3 2009-10 (Base: 1978-79=100)

2500

2000

1500

1000

500

0
Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Exports trend Q4 2003-04 – Q3 2009-10 Imports trend Q4 2003-04 – Q3 2009-10

Exports trend Q4 1998-99 – Q3 2003-04 Imports trend Q4 1998-99 – Q3 2003-04

While high domestic growth sucks in huge imports, India lags behind in export competitiveness

18
Index of Real Effective Exchange Rate (REER) for the Rupee
(36-Currency Export Weighted, Base: 2004-05=100)

130
125
120
115
110
105
100
95
90
85
80
Sep-99

Sep-00

Sep-01

Sep-02

Sep-03

Sep-04

Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10
Mar-99

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10
RECX REWX
Source: Constructed based on data from IFS, IMF, Labour Bureau (Ministry of Labour and
Employment), and Office of the Economic Adviser (Ministry of Commerce and Industry)

•Substantial real appreciation of the rupee from both nominal appreciation and high
inflation (more in terms of consumer price index than wholesale price index)

•Huge inflow of portfolio capital putting upward pressure on rupee despite rising current
account deficits

19
 Risks to Growth
• Inflation and rising current account deficits
– Structural and not cyclical

• Central bank raised policy rates six times since March

2010 and likely to raise again

• Rising global commodity prices and rising interest rates

to hurt corporate profits and bring growth down

• Structural reforms necessary to raise the potential

growth rate beyond 7-8 per cent
20
5. The Next Reform
Agenda

21
“The Second Generation Reforms”

• To policy and procedural reforms to pave the way for speedy

infrastructure building

• Agricultural reforms to liberate the farmer for enhanced food

production and its better distribution

• Educational reform at school, vocational and college levels to

raise the labour productivity and remove skill shortages

• Regulatory reforms for vastly improving the “ease of doing

business” in India

• Raising government efficiency in the delivery of public services

22
6. India-China Comparison
a. Post-reform growth
trajectory

23
 Source: WDI database, World Bank 2010.

•China’s trend rate of growth rising from about 5% pre-1978 to 10% after reforms

•India’s from 4% pre-1991 to 6.5% after reforms.

24
 Source: WDI database, World Bank 2010.

•Per capita GDP somewhat higher in India till 1990 and now more than 3 times larger for China

•While India’s per capita income rose three times since 1990, China’s by 12 times

25
Will India Catch up with China in
Growth?

Source: WDI database, World Bank 2010.

•May be by 2016-17?

26
6. China-India Comparison
b. Demand drivers of growth

27
 •China, from 40%
in 1990s to >50%
in 2000s

•India, from 22% to

35%

•China, from 35%

to 45%

•India, steep rise

from 25% to >35%

•Both savings and

investment ratios fell
during crisis in India
but rose in China
Source: WDI database, World Bank 2010.
28
 Source: WDI database, World Bank 2010.

•Chinese household consumption ratio fell sharply over time and remain at considerably low levels (35%)

•In India also consumption ratio has fallen but still at high levels (nearly 60%)

29
Source: WDI database, World Bank 2010.

•Net exports ratio increasingly negative for India

•For China net exports increasingly positive

30
 •Exports all along
below imports and
the gap widened
in the 2000s

•Exports
exceeding
imports and the
gap widened in
the 2000s

Source: WDI database, World Bank 2010.

31
Demand-side Contribution to Growth:
India Vs China
Demand Contribution to GDP Growth by Components (%)

CHINA INDIA
C I NX C I NX
1993 59.5 78.6 -38.1 76.1 27.5 -3.6
1994 30.2 43.8 26.0 51.7 71.0 -22.7
1995 44.7 55.0 0.3 64.8 24.7 10.5
1996 60.1 34.3 5.6 74.1 -1.6 27.5
1997 37.0 18.6 44.4 78.5 68.0 -46.5
1998 57.1 26.4 16.5 90.9 0.5 8.6
1999 74.7 23.7 1.6 75.5 64.3 -39.8
2000 65.1 22.4 12.5 57.8 -22.4 64.6
1993-00 53.6 37.9 8.6 71.2 29.0 -0.2

2001 50.0 50.1 -0.1 78.3 -13.4 35.1

2002 43.6 48.8 7.6 47.9 98.9 -46.8
2003 35.3 63.7 1.0 48.7 52.4 -1.1
2004 38.7 55.3 6.0 43.6 71.3 -15.0
2005 38.2 37.7 24.1 55.0 63.8 -18.8
2006 38.7 42.0 19.3 43.1 45.5 11.3
2007 40.6 39.7 19.7 61.8 55.7 -17.5
2008 45.7 45.1 9.2 59.5 44.0 -3.5
2001-08 41.4 47.8 10.9 54.8 52.3 -7.0
C= Consumption; I= Investment; and NX= Net exports in goods and services.
Source: National Bureau of Statistics, China and Central Statistical Organisation, India.

•Investment and export driven Chinese growth

•Domestic consumption and investment driven Indian growth

32
6. India-China Comparison
c. Sector composition of growth

33
 •Services-dominant
economy

•Industry-dominant
economy

Source: WDI database, World Bank 2010.

34
 •Industry share
under 30% and
manufacturing
about 15%

•Industry share
above 45% and
manufacturing
above 30%

Source: WDI database, World Bank 2010.

35
 Contribution to GDP Growth by Broad Sectors (%)

CHINA INDIA
Agriculture Industry Services Agriculture Industry Services
1993 7.9 65.5 26.6 17.9 25.7 56.4
1994 6.6 67.9 25.5 22.1 36.5 41.4
1995 9.1 64.3 26.6 -2.8 41.0 61.8
1996 9.6 62.9 27.5 34.0 22.5 43.5
1997 6.8 59.7 33.5 -16.5 22.9 93.6
1998 7.6 60.9 31.5 24.6 16.4 59.0
1999 6.0 57.8 36.2 10.8 18.3 71.0
2000 4.4 60.8 34.8 -1.4 36.9 64.5
1993-00 7.2 62.5 30.3 11.1 27.5 61.4

2001 5.1 46.7 48.2 25.7 12.1 62.2

2002 4.6 49.7 45.7 -45.3 46.1 99.2
2003 3.4 58.5 38.1 25.1 22.4 52.6
2004 7.8 52.2 40.0 0.1 35.4 64.5
2005 6.1 53.6 40.3 12.4 28.0 59.6
2006 5.3 53.1 41.7 7.9 29.8 62.3
2007 3.3 54.2 42.4 10.0 24.0 66.0
2008 6.5 50.6 42.9 4.3 15.3 80.4
2001-08 5.3 52.3 42.4 5.0 26.6 68.4
Source: National Bureau of Statistics, China and Central Statistical Organisation, India.

•industry contributing to over 50% of GDP growth in China whereas in India it

is just half of that

•Service sector accounting for over a two-thirds of growth in India whereas in

China it is only two-fifths

36
6. India-China Comparison
d. Demographic advantage

37
 Percentage of Population of Age 15-59 Years
75

70

65

60

55

50

45

40

35
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
Japan USA India China

Source: UN Population Division, 2010.

•“Demographic dividend” rising till 2035 for India whereas China it is falling from now onward

•In 2020, average age 29 years in India, 37 in China & the US, 45 in west Europe, and 48 in Japan

38
7. Share of India in World
Economy: Past and Future

39
 Global Share: Historical Past
World Economy in Transition: 0-1998 AD (Share in World Output in %)
0-1500 1500-1820 1820-1913 1913-1950 1950-1998

Western Europe 14.1 21.8 32.0 28.7 22.7

Germany 5.2 3.7 7.4 6.3 4.8
UK 1.8 3.4 8.0 7.1 3.9
Former USSR 2.8 4.5 7.9 9.2 5.7
US 0.5 0.9 14.0 24.5 22.5
Latin America 3.0 1.9 3.6 6.8 8.6
Japan 2.6 3.3 2.6 2.9 7.2
Asia (excl. Japan) 66.4 58.8 30.7 17.6 24.3
China 24.7 28.6 14.7 6.0 8.8
India 27.4 20.5 10.0 5.3 4.4
Africa 8.4 5.8 3.2 3.3 3.2
World 100.0 100.0 100.0 100.0 100.0
Source: Constructed from Angus Maddison (2001): The World Economy – A Millennial Perspective. OECD.

•In first 18 centuries, Asia mainly India and China (>50%) dominated global economy and trade

•In 19th century, centre of gravity shifted to Europe (in the wake of industrial revolution and colonialism) and to
the US in 20th century

40
Futuristic Scenario
World Economy: Future Economic Power Shifts (2008-2040)
(% Share of World GDP in PPP)
2008 2014 2020 2030 2040
Germany 4.2 3.8 3.4 2.8 2.3
US 20.4 19.2 17.6 15.3 13.9
Japan 6.2 5.6 4.7 3.7 2.9
China 11.3 16.3 22.2 30.9 37.4
India 4.9 6.3 8.5 14.3 20.8

World 100.0 100.0 100.0 100.0 100.0

Source: World Bank for GDP in terms of purchasing power parity in 2008; Author's projections for
2014-2040.

•“Reemergence” of Asia since the 1990s

•China overtaking US before 2020 and India soon after 2030

•“Restoration” of pre-19th century order?

41
Thank You.

42