11 OUTLOOK FOR THE INDIAN ECONOMY PRESENTATION at SANEI SEMINAR ISLAMABAD Rajiv Kumar April 23, 2008

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

3 Projected Years Global Context 3 While Indian growth is higher than world growth, the two are clearly correlated GDP Growth: India & World (3-Year Moving Average)

44 Global Context No link-up with world economy pre-1980 Relationship between Growth of GDP World and India ( )

55 Global Context Post-1980 integration with the world economy Relationship between Growth of GDP World and India ( )

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

77 Global Context Inverse relationship with world oil price World Oil price and India’s GDP growth ( ) Real $ / barrel Futures Price Average Mar Apr May Jun Jul Aug Source:

88 Expenditure composition of India GDP Fall in the share of consumption in 2000s but still higher than in China

99 Growth Driven by Soaring Investment: China Falling consumption share more dramatic in China

10 Decomposition of GDP Growth: China Vs India High growth driven by domestic investment, consumption and net exports in China, while the contribution by net exports negative in India Table 2.1: Contribution to GDP Growth by Consumption, Investment and Net Exports: China Vs India ChinaIndia Final consumption expenditure Gross capital formation Net exports Total100.0 Source: Computed from WDI and CSO data.

Global Context Indian growth rate to finally converge to Chinese by ?

Sectoral Composition of GDP

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

14 Sectoral Growth (Quarterly Growth Rate) Manufacturing growth rate higher than services growth in 15 out of 31 quarters from

15 Monsoon and Agriculture Growth 15 Agriculture growth closely follows monsoon Better monsoon this year means a better agricultural turnout

16 Industrial Growth: Controlled Vs Overall Industry 16 IIPManuCore Elect ricityCoal Crude Petroleum Petroleum RefinerySugar Nitrogenous fertilizer (N) Phosphatic fertilizer (P2O5) (Apr – Feb) Growth of industries subject to government price control lower than those where prices are market determined

17 IIPManufacturing (Apr-Feb) Growth of IIP Overall industry and manufacturing growth slowdown in 2007 first time since 2001

18 Employment 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 Table 7.1: Share in GDP and Employment of Selected Sectors, to Share in GDP (%)Share in Employment (%) Agriculture, forestry and fishing Industry Of which: Manufacturing Services Of which: Trade Of which: Retailn.a Wholesalen.a Total100.0 n.a: Not available. Source: Computed based on data from CSO, NSSO and EAC Report (2007).

19 Growth of Employment ( to ) Annual Employment Growth by Sector (%) Agriculture, forestry and fishing Industry Manufacturing Services Total Strong growth in employment during in all sectors “Jobless growth” of 1990s replaced by high-employment generating growth in this decade (61 million new jobs during )

20 Balance of Payments Widening trade deficits compensated by rising invisibles surplus Huge capital inflows continuing, and to cross 9% of GDP this year! 5.1: India's Balance of Payments: Selected Indicators (US$ Mn) (P) Exports Imports Trade balance % of GDP Invisible receipts Invisible payments Invisibles, net % of GDP Current account % of GDP Capital account (net) % of GDP Change in Reserves (-increase, +decline)

21 India’s Balance of Payments Trends Mounting gap represents lost opportunities to raise investment levelsMounting gap represents lost opportunities to raise investment levels Further reforms necessary to raise the absorptive capacityFurther reforms necessary to raise the absorptive capacity

Direction of Trade 22 Exports Share (%)Imports Share (%) U S A CHINA P RP U A E6.19.5SAUDI ARAB CHINA P RP1.96.6U S A SINGAPORE2.14.8SWITZERLAND U K5.44.4U A E HONG KONG6.23.7IRAN GERMANY4.53.1GERMANY ITALY3.12.8NIGERIA BELGIUM3.42.7AUSTRALIA JAPAN4.22.3KUWAIT Pakistan Pakistan 0,150.4 Total (1 to 10) Major shift towards China in India’s trade; China replaces US as the biggest trade partner in

23 WPI Inflation (Week to Week)

24 WPI Inflation ( Monthly Average)

25 Global Commodity Prices (Base Year = 2005) Index % Change Commodities2007 Q2March 2008 Mar 07 to Mar 08 Wheat Maize Rice Barley Soybean oil Palm oil Sunflower oil Groundnuts Iron Ore Energy Spot crude Natural Gas Coal

26 Fiscal Scene Centre and state finances have improved steadily since

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

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

Deepening Democracy ….

30 Interest rate (Base Year = 2005)

Real Effective Exchange Rate (REER) (Base Year = ) 31 Export-weighted (36-Country) Trade-weighted (36-Country) ( Apr-Nov) (Apr-Nov) Since , largest annual appreciation of the rupee (over 9%) happened in

Index of Real Effective Exchange Rate 32 Current phase of appreciation of REER of about 11% since Aug 06 to Nov 07 preceded a REER depreciation of 8-9% during Jul 05 to Aug 06

33 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 and 8 per cent for the medium term Economy growing over 9% last two years Estimates for are around 8%

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

35 Thank You.

36 CPI Inflation ( Monthly Average) CPI inflation also has come down but remains at about 6%

37 Growth Forecasts

38 Index of Leading Economic Indicators (LEI) LEI consists of: –Production of machinery & equipment –Sales of heavy commercial vehicles –Non-food credit –Railway freight traffic –Cement sales –Corporate performance (sales) –Fuel & metal prices –Real interest rate Principal component index approach

39 Index of Leading Economic Indicators (Quarterly) LEI forecasts a growth rate at 9.2 per cent for & 7.9 % for (Apr-Dec)

40 GDP Growth Forecasts for (CSO) (ICRIER) Forecast Agriculture, forestry & fishing Industry Manufacturing Services Total

41 Revenue-Expenditure Growth Trends High growth in direct taxes and indirect tax growth broadly on track Huge growth in capital expenditure arising from purchase of RBI stake in SBI (RE) (BE) (Apr-Dec)* Gross Revenue (Tax+ Non-Tax) Net Tax Revenue (net of State Share) Direct Taxes Corporate Tax Taxes on Income Other than Corporate Income Indirect Taxes Customs Union Excise duties Other Taxes Non-Tax Revenue Total Expenditure Revenue Expenditure Capital Expenditure * Growth over the corresponding period of

42 Fiscal Scene Central and state debt positions have been improving since , but the levels remain high by international/ past Indian standards Mounting off-budget liabilities: oil bonds, securities to FCI, arrears of fertilizer subsidies and losses of state utilities, all about 2% of GDP

43 Fiscal Forecast for Includes revenue receipts and non-debt capital receipts; # Calculated excluding transactions relating to SBI transfer; Numbers are in Rs. Crore (BE) Actuals up to Dec 07 Forecast for Revenue Receipts Tax Revenue Non Tax Revenue Total # # Total Expenditure # # Revenue Expenditure Of which: Interest payments Capital Expenditure 87090# # Fiscal Deficit Revenue Deficit Receipts much above budget estimates, revenue expenditure higher Fiscal and revenue deficits lower than budget estimates

Table: Central Government Budget (Rs. Crore) (Actuals) (RE) (BE) %Change 3 over 2% Change4 over 3 Revenue Receipts (3+4) Gross Tax Revenue Corporation tax Income tax Customs Excise duties Service tax Net Tax Revenue (Net of States' Share) Non-Tax revenue Recoveries of Loans Other Receipts* Total Expenditure* Revenue Expenditure Of which: Interest payments Capital Expenditure* Revenue Deficit (8-1)80222 (1.9)63488 (1.4)55184 (1.0) Fiscal Deficit [7- (1+5+6)] (3.5) (3.1) (2.5) *Excludes transactions related RBI

45 Fiscal Forecast for (RE ) ACTUALS FOR Revenue Receipts Tax Revenue Non Tax Revenue Total 10.8# 11.6# Total Expenditure 14.1# 14.3# Revenue Expenditure Of which: Interest payments Capital Expenditure 1.9# 1.5# Fiscal Deficit Revenue Deficit 1.5 Includes revenue receipts and non-debt capital receipts; # Calculated excluding transactions relating to SBI transfer. Both fiscal and revenue deficits lower than budget estimates

46 Tax-GDP Ratio: Centre (Gross) Direct taxes overtaking indirect taxes in the current year

47 Employment