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

2. 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

3. GDP Growth in Current Decade
Decadal Growth Rates

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

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

6. World Oil price and India’s GDP growth (1974-2006)
Global Context
World Oil price and India’s GDP growth ( )
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: 6 6

7. Globalisation:The Difference China Vs India
Table 2.1: Contribution to GDP Growth by Consumption, Investment and Net Exports: China Vs India
China
India
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

8. Sectoral Composition of GDP

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

10. 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

11. Industrial Growth: Controlled Vs Overall Industry
IIP
Manu
Core
Electricity
Coal
Crude Petroleum
Petroleum Refinery
Sugar
Nitrogenous fertilizer (N)
Phosphatic fertilizer (P2O5)
2.7
2.9
3.5
3.1
4.2
-1.2
3.9
-3.9
-2.5
5.7
6.0
5.0
3.2
4.8
3.6
2.2
-1.7
0.6
7.0
7.4
6.1
5.1
0.8
8.4
-13.8
0.7
-8.1
9.2
5.8
5.3
6.2
1.9
4.6
-18.5
6.7
11.7
8.2
9.1
5.2
6.5
-5.2
39.3
0.5
4.4
11.6
12.5
7.3
5.9
12.4
30.8
1.8
(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

12. Share in Employment (%)
Table 7.1: Share in GDP and Employment of Selected Sectors, to
Share in GDP (%)
Share in Employment (%)
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

13. Annual Employment Growth by Sector (%)
Growth of Employment
( to )
Annual Employment Growth by Sector (%)
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 in all sectors
“Jobless growth” of 1990s replaced by high-employment generating growth in this decade (61 million new jobs during ) 13

14. 5.1: India's Balance of Payments: Selected Indicators (US$ Mn)
(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!

15. WPI Inflation
(Week to Week)

16. WPI Inflation
( Monthly Average) 16

17. 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

18. Fiscal Scene
Centre and state finances have improved steadily since 18

19. 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

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

21. Interest rate
(Base Year = 2005)

22. Real Effective Exchange Rate (REER) (Base Year = 1993-94)
Export-weighted
(36-Country)
Trade-weighted
100.0
104.9
104.3
100.1
98.2
99.0
96.8
103.1
100.8
94.3
93.0
95.3
96.0
98.7
98.6
100.9
99.1
99.6
98.3
100.5
102.4
97.4
98.5
( Apr-Nov)
96.5
97.6
(Apr-Nov)
105.3
106.4
Since , largest annual appreciation of the rupee (over 12%) happened in 22

23. 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% 23

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

25. 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

26. THE ADDED COMPLICATIONS
INCLUSION
REGIONAL DIVERGENCES
PLURALISTIC HETEROGENOUS SOCIETY
ENVIRONMENT

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

28. 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

29. 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

30. 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

31. 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

32. Thank You.