Indian Economic Reforms: A More Difficult Phase FOURTH ANNUAL CONFERNCE LAHORE SCHOOL OF ECONOMICS 25 APRIL 2008 Rajiv Kumar 1

PLAN OF THE PAPER INDIAN ECONOMIC PERFORMANCE: A BRIEF RECAP CAN THE GROWTH BE SUSTAINED? NECESSARY REFORMS FOR INCLUSIVE GROWTH REVISITING THE ROLE OF THE STATE

GDP Growth in Current Decade Decadal Growth Rates

(Current Account & Capital Account as a % GDP) Global Integration (Current Account & Capital Account as a % GDP) 4

Real Interest Rate Differential with Developed Countries (1999-07) Global Context Real Interest Rate Differential with Developed Countries (1999-07) Narrowing of the real interest rate differential reversed since January 2007 5 5

World Oil price and India’s GDP growth (1974-2006) Global Context World Oil price and India’s GDP growth (1974-2006) Real $ / barrel Futures Price   Average Mar-08 95.14 Apr-08 94.63 May-08 94.47 Jun-08 94.30 Jul-08 94.09 Aug-08 93.86 Inverse relationship with world oil price Source: www.nymex.com 6 6

Globalisation:The Difference China Vs India Table 2.1: Contribution to GDP Growth by Consumption, Investment and Net Exports: China Vs India   China India 1994-00 2000-05 1994-01 2001-07 Final consumption expenditure 63.2 37.6 75.2 67.2 Gross capital formation 29.9 54.4 26.3 36.4 Net exports 6.9 7.9 -1.5 -3.6 Total 100.0 Source: Computed from WDI and CSO data. High growth driven by domestic investment, consumption and net exports in China, while the contribution by net exports negative in India 7

Sectoral Composition of GDP

Increasing Role of Services in Indian Growth In 2000s, services contributing nearly two thirds of GDP growth 9

Growth of IIP IIP Manufacturing (Apr-Feb) 2001 2.6 2.8 2002 5.8 6.0 2003 6.9 7.4 2004 8.2 9.0 2005 8.1 9.1 2006 11.2 12.2 2007 8.7 Overall industry and manufacturing growth slowdown in 2007 first time since 2001 10

Industrial Growth: Controlled Vs Overall Industry IIP Manu Core Electricity Coal Crude Petroleum Petroleum Refinery Sugar Nitrogenous fertilizer (N) Phosphatic fertilizer (P2O5) 2001-02 2.7 2.9 3.5 3.1 4.2 -1.2 3.9 -3.9 -2.5 2002-03 5.7 6.0 5.0 3.2 4.8 3.6 2.2 -1.7 0.6 2003-04 7.0 7.4 6.1 5.1 0.8 8.4 -13.8 0.7 -8.1 2004-05 9.2 5.8 5.3 6.2 1.9 4.6 -18.5 6.7 11.7 2005-06 8.2 9.1 5.2 6.5 -5.2 39.3 0.5 4.4 2006-07 11.6 12.5 7.3 5.9 12.4 30.8 1.8 2007-08 (Apr – Feb) 8.7 5.6 6.6 0.4 7.2 Growth of industries subject to government price control lower than those where prices are market determined 11 11

Share in Employment (%) Table 7.1: Share in GDP and Employment of Selected Sectors, 1993-94 to 2004-05   Share in GDP (%) Share in Employment (%) 1993-94 1999-00 2004-05 1. Agriculture, forestry and fishing 28.9 25.0 18.8 64.8 59.8 58.4 2. Industry 25.9 25.3 27.5 15.6 17.4 18.2 Of which: Manufacturing 15.8 14.8 15.9 11.3 12.1 11.7 3. Services 45.2 49.7 53.7 19.7 22.7 23.4 Of which: Trade 11.9 13.0 14.9 7.8 8.2 8.4 Of which: Retail n.a 7.4 7.3 Wholesale 0.8 1.1 Total 100.0 n.a: Not available. Source: Computed based on data from CSO, NSSO and EAC Report (2007). Overwhelming proportion of workforce in the fast shrinking agriculture Limited labour absorption by the booming service sector Continued strong growth in manufacturing required for employment growth 12

Annual Employment Growth by Sector (%) Growth of Employment ( 1993-94 to 2004-05) Annual Employment Growth by Sector (%)   1994-00 2000-05 Agriculture, forestry and fishing -0.34 2.41 Industry 2.91 3.77 Manufacturing 2.05 2.19 Services 3.42 3.47 Total 0.98 2.89 Strong growth in employment during 2000-05 in all sectors “Jobless growth” of 1990s replaced by high-employment generating growth in this decade (61 million new jobs during 2000-05) 13

5.1: India's Balance of Payments: Selected Indicators (US$ Mn)   2003-04 2004-05 2005-06 2006-07 2007-08(P) Exports 66285 85206 105152 128083 153700 Imports 80003 118908 157056 191254 239068 Trade balance -13718 -33702 -51904 -63171 -85368 % of GDP -2.3 -4.8 -6.4 -6.9 -7.3 Invisible receipts 53508 69533 89687 115074 138089 Invisible payments 25707 38301 47685 61669 70919 Invisibles, net 27801 31232 42002 53405 67169 4.6 4.5 5.2 5.8 5.7 Current account 14083 -2470 -9902 -9766 -18198 2.3 -0.4 -1.2 -1.1 -1.6 Capital account (net) 17338 28629 24954 46372 107000 2.9 4.1 3.1 5.1 9.1 Change in Reserves -26159 -15052 -36606 -88802 (-increase, +decline) Widening trade deficits compensated by rising invisibles surplus Huge capital inflows continuing, and to cross 9% of GDP this year!

WPI Inflation (Week to Week)

WPI Inflation ( Monthly Average) 16

Global Commodity Prices (Base Year = 2005)   Index % Change Commodities 2007 Q2 March 2008 Mar 07 to Mar 08 Wheat 134.9 288.5 120.9 Maize 160.4 237.6 37.9 Rice 112.2 201.5 77.8 Barley 176.4 240.5 45.6 Soybean oil 151.5 266.5 94.4 Palm oil 193.5 311.9 102.5 Sunflower oil 58.8 113.9 93.6 Groundnuts 134.7 221.0 70.0 Iron Ore 130.3 216.3 66.0 Energy 122.8 189.0 Spot crude 123.9 190.9 68.1 Natural Gas 115.1 148.9 29.2 Coal 120.1 256.7 120.8

Fiscal Scene Centre and state finances have improved steadily since 2001-02 18

Tax-GDP Ratio: Centre and States Combined Direct taxes (mostly corporate and individual income taxes) rising from 2% of GDP in 2000-01 to about 7% of GDP 2007-08

Total Expenditure on Subsidies, Infra & Agriculture ( % to GDP)

Interest rate (Base Year = 2005)

Real Effective Exchange Rate (REER) (Base Year = 1993-94) Export-weighted (36-Country) Trade-weighted 1993-94 100.0 1994-95 104.9 104.3 1995-96 100.1 98.2 1996-97 99.0 96.8 1997-98 103.1 100.8 1998-99 94.3 93.0 1999-00 95.3 96.0 2000-01 98.7 2001-02 98.6 100.9 2002-03 2003-04 99.1 99.6 2004-05 98.3 2005-06 100.5 102.4 2006-07 97.4 98.5 2006-07( Apr-Nov) 96.5 97.6 2007-08 (Apr-Nov) 105.3 106.4 Since 1993-94, largest annual appreciation of the rupee (over 12%) happened in 2007-08 22

Potential Growth of the Indian Economy OECD (2007) has computed the growth rate of potential output for India at 8.5% for 2006 IMF Working Paper (Sept. 2007) estimated it between 7.4 to 8.1% for 2006-07 and 8 per cent for the medium term Economy growing over 9% last two years Estimates for 2008-09 are around 8% 23

Raising Potential Output Growth Reforms Infrastructure Education Business climate Public expenditure efficiency 24

GLOBALIZATION: THE DIFFERENCE CHINA: The Communist Party- playing the perfect coordinating role and overseeing the delivery of public goods and services. INDIA: WILL ACHIEVE DESPITE THE GOVERNMENT!! IS THIS SUSTAINABLE

THE ADDED COMPLICATIONS INCLUSION REGIONAL DIVERGENCES PLURALISTIC HETEROGENOUS SOCIETY ENVIRONMENT

ROLE OF THE STATE DOES NOT IMPLY REVERSAL TO THE LICENCE-CONTROL RAJ DOES NOT ALSO IMPLY A PAUSE ON NEEDED STRUCTURAL REFORMS

ROLE OF THE STATE DELIVERY OF PUBLIC GOODS AND SERVICES EDUCATION HEALTH LAW AND ORDER AND SECURITY URBAN PLANNING INFRASTRUCTURE R&D SCIENCE AND TECHNOLOGY

ROLE OF THE STATE EXTERNAL RELATIONS AND ACCESS TO FOREIGN MARKETS ACCESS TO INTERNATIONAL AND REGIONAL PUBLIC GOODS AND SERVICES CLIMATE CHANGE - INTERNATIONAL MIGRATION EXTREMISM TRAFFICKING

THE WAY FORWARD FOCUS ON GOVERNANCE REFORMS ENFORCING ACCOUNTABILITY REAL OUTCOME BASED BDUGETING EMPOWERING THE BENEFICIARIES MOBILISING THE CIVIL SOCIETY MUCH GREATER USE OF THE RIGHT TO INFORMATION

THE WAY FORWARD NECESSARY EDUCATION SECTOR REFORMS IMPROVING PRIMARY & SECONDARY PUBLIC EDUCATION SYSTEMS REHABILITATE PRIMARY HEALTH SERVICES INCREASING PUBLIC EXPENDITURE ON PHYSCIAL INFRASTRUCTURE ENSURE EQUALITY OF OPPORTUNITY

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