1. 11 OUTLOOK FOR THE INDIAN ECONOMY PRESENTATION at SANEI SEMINAR ISLAMABAD Rajiv Kumar April 23, 2008

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

3. 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)

4. 44 Global Context No link-up with world economy pre-1980 Relationship between Growth of GDP World and India (1951-1979)

5. 55 Global Context Post-1980 integration with the world economy Relationship between Growth of GDP World and India (1980-2006)

6. 66 Global Context Narrowing of the real interest rate differential reversed since January 2007 Real Interest Rate Differential with Developed Countries (1999-07)

7. 77 Global Context Inverse relationship with world oil price World Oil price and India’s GDP growth (1974-2006) Real $ / barrel Futures Price Average Mar-0895.14 Apr-0894.63 May-0894.47 Jun-0894.30 Jul-0894.09 Aug-0893.86 Source: www.nymex.com

8. 88 Expenditure composition of India GDP Fall in the share of consumption in 2000s but still higher than in China

9. 99 Growth Driven by Soaring Investment: China Falling consumption share more dramatic in China

10. 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 1994-002000-051994-012001-07 Final consumption expenditure63.237.675.267.2 Gross capital formation29.954.426.336.4 Net exports6.97.9-1.5-3.6 Total100.0 Source: Computed from WDI and CSO data.

11. Global Context Indian growth rate to finally converge to Chinese by 2013-14?

12. Sectoral Composition of GDP

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

14. 14 Sectoral Growth (Quarterly Growth Rate) Manufacturing growth rate higher than services growth in 15 out of 31 quarters from 2000-01

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

16. 16 Industrial Growth: Controlled Vs Overall Industry 16 IIPManuCore Elect ricityCoal Crude Petroleum Petroleum RefinerySugar Nitrogenous fertilizer (N) Phosphatic fertilizer (P2O5) 2001-02 2.7 2.93.5 3.14.2-1.23.9-3.9-2.53.1 2002-03 5.76.05.0 3.24.83.65.02.2-1.70.6 2003-04 7.07.46.1 5.15.00.88.4-13.80.7-8.1 2004-05 8.49.25.8 5.36.21.94.6-18.56.711.7 2005-06 8.29.16.1 5.26.5-5.22.239.30.54.4 2006-07 11.612.58.4 7.35.95.712.430.81.89.2 2007-08 (Apr – Feb) 8.7 9.1 5.66.65.60.47.2 Growth of industries subject to government price control lower than those where prices are market determined

17. 17 IIPManufacturing (Apr-Feb) 2001 2.62.8 2002 5.86.0 2003 6.97.4 2004 8.29.0 2005 8.19.1 2006 11.212.2 2007 8.79.1 Growth of IIP Overall industry and manufacturing growth slowdown in 2007 first time since 2001

18. 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, 1993-94 to 2004-05 Share in GDP (%)Share in Employment (%) 1993-941999-002004-051993-94 1999- 00 2004-05 1. Agriculture, forestry and fishing28.925.018.864.859.858.4 2. Industry25.925.327.515.617.418.2 Of which: Manufacturing15.814.815.911.312.111.7 3. Services45.249.753.719.722.723.4 Of which: Trade11.913.014.97.88.28.4 Of which: Retailn.a 7.47.3 Wholesalen.a 0.81.1 Total100.0 n.a: Not available. Source: Computed based on data from CSO, NSSO and EAC Report (2007).

19. 19 Growth of Employment ( 1993-94 to 2004-05) Annual Employment Growth by Sector (%) 1994-002000-05 Agriculture, forestry and fishing-0.342.41 Industry2.913.77 Manufacturing2.052.19 Services3.423.47 Total0.982.89 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)

20. 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) 2003-042004-052005-062006-072007-08(P) Exports6628585206105152128083153700 Imports80003118908157056191254239068 Trade balance-13718-33702-51904-63171-85368 % of GDP-2.3-4.8-6.4-6.9-7.3 Invisible receipts535086953389687115074138089 Invisible payments2570738301476856166970919 Invisibles, net2780131232420025340567169 % of GDP4.64.55.25.85.7 Current account14083-2470-9902-9766-18198 % of GDP2.3-0.4-1.2-1.1-1.6 Capital account (net)17338286292495446372107000 % of GDP2.94.13.15.19.1 Change in Reserves-26159 -15052-36606-88802 (-increase, +decline)

21. 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

22. Direction of Trade 22 Exports Share (%)Imports Share (%) 2000-012006-072000-012006-07 1U S A21.814.9CHINA P RP3.09.4 2U A E6.19.5SAUDI ARAB1.37.2 3CHINA P RP1.96.6U S A6.16.3 4SINGAPORE2.14.8SWITZERLAND6.44.9 5U K5.44.4U A E1.34.7 6HONG KONG6.23.7IRAN0.44.1 7GERMANY4.53.1GERMANY3.54.1 8ITALY3.12.8NIGERIA0.13.8 9BELGIUM3.42.7AUSTRALIA2.13.8 10JAPAN4.22.3KUWAIT0.23.2 Pakistan0.61.5 Pakistan 0,150.4 Total (1 to 10)58.755.024.451.4 Major shift towards China in India’s trade; China replaces US as the biggest trade partner in 2007-08

23. 23 WPI Inflation (Week to Week)

24. 24 WPI Inflation ( Monthly Average)

25. 25 Global Commodity Prices (Base Year = 2005) Index % Change Commodities2007 Q2March 2008 Mar 07 to Mar 08 Wheat134.9288.5120.9 Maize160.4237.637.9 Rice112.2201.577.8 Barley176.4240.545.6 Soybean oil151.5266.594.4 Palm oil193.5311.9102.5 Sunflower oil58.8113.993.6 Groundnuts134.7221.070.0 Iron Ore130.3216.366.0 Energy122.8189.066.0 Spot crude123.9190.968.1 Natural Gas115.1148.929.2 Coal120.1256.7120.8

26. 26 Fiscal Scene Centre and state finances have improved steadily since 2001-02

27. 27 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

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

29. Deepening Democracy ….

30. 30 Interest rate (Base Year = 2005)

31. Real Effective Exchange Rate (REER) (Base Year = 1993-94) 31 Export-weighted (36-Country) Trade-weighted (36-Country) 1993-94100.0 1994-95 104.9104.3 1995-96 100.198.2 1996-97 99.096.8 1997-98 103.1100.8 1998-99 94.393.0 1999-00 95.396.0 2000-01 98.7100.1 2001-02 98.6100.9 2002-03 96.098.2 2003-04 99.199.6 2004-05 98.3100.1 2005-06 100.5102.4 2006-07 97.498.5 2006-07( Apr-Nov) 96.597.6 2007-08 (Apr-Nov) 105.3106.4 Since 1993-94, largest annual appreciation of the rupee (over 9%) happened in 2007-08

32. 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. 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 2006- 07 and 8 per cent for the medium term Economy growing over 9% last two years Estimates for 2008-09 are around 8%

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

35. 35 Thank You.

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

37. 37 Growth Forecasts 2007-08

38. 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. 39 Index of Leading Economic Indicators (Quarterly) LEI forecasts a growth rate at 9.2 per cent for 2007-08 & 7.9 % for 2008-09 (Apr-Dec)

40. 40 GDP Growth Forecasts for 2007-08 2006-07 2007-08 (CSO) 2007-08 (ICRIER) Forecast Agriculture, forestry & fishing 3.82.63.5 Industry11.08.910.0 Manufacturing12.09.011.0 Services11.110.610.7 Total9.68.79.2

41. 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 2004-05 2005-06 2006-07 (RE)2007-08 (BE) 2007-08 (Apr-Dec)* Gross Revenue (Tax+ Non-Tax) 15.913.521.814.926.6 Net Tax Revenue (net of State Share) 20.2 28.016.727.0 Direct Taxes 25.826.623.516.639.0 Corporate Tax 30.122.544.615.037.1 Taxes on Income Other than Corporate Income 19.023.328.719.742.7 Indirect Taxes 16.917.419.317.716.9 Customs 18.512.925.720.717.0 Union Excise duties 9.212.25.411.05.1 Other Taxes 62.7100.353.729.844.4 Non-Tax Revenue 5.6-4.90.26.722.4 Total Expenditure 11.925.714.910.914.3 Revenue Expenditure 5.514.815.210.113.6 Capital Expenditure 709.4239.712.814.021.8 * Growth over the corresponding period of 2006-07

42. 42 Fiscal Scene Central and state debt positions have been improving since 2004-05, 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. 43 Fiscal Forecast for 2007-08 @ Includes revenue receipts and non-debt capital receipts; # Calculated excluding transactions relating to SBI transfer; Numbers are in Rs. Crore. 2007-08 (BE) Actuals up to Dec 07 Forecast for 2007-08 Revenue Receipts 486422355646555017 Tax Revenue 403872295994 460007 Non Tax Revenue 8255059652 95010 Total Receipts@ 494042#361144 539658# Total Expenditure 644990#438722 666148# Revenue Expenditure557900394856598161 Of which: Interest payments 158995111764 177978 Capital Expenditure 87090#43866 67987# Fiscal Deficit 15094877578 126490 Revenue Deficit 7147839210 43145 Receipts much above budget estimates, revenue expenditure higher Fiscal and revenue deficits lower than budget estimates

44. Table: Central Government Budget 2008-09 (Rs. Crore) 2006-07 (Actuals) 2007-08 (RE) 2008-09 (BE) %Change 3 over 2% Change4 over 3 Revenue Receipts (3+4)43438752509860293520.914.82. Gross Tax Revenue47151258541068771524.217.5 Corporation tax14430618612522636129.021.6 Income tax8556111832013831438.316.9 Customs8632710076611893016.718.0 Excise duties1176121279471378748.87.8 Service tax37597506036446034.627.43. Net Tax Revenue (Net of States' Share)35118243177350715022.917.54. Non-Tax revenue83205933259578512.22.65. Recoveries of Loans589344974497-23.70.06. Other Receipts*5345941016511.21611.37. Total Expenditure*58338767384275088415.511.48. Revenue Expenditure51460958858665811914.411.8 Of which: Interest payments15027217197119080714.411.09. Capital Expenditure*68778852569276524.08.810. Revenue Deficit (8-1)80222 (1.9)63488 (1.4)55184 (1.0)-20.9-13.111. Fiscal Deficit [7- (1+5+6)]142573 (3.5)143653 (3.1)133287 (2.5)0.8-7.2*Excludes transactions related RBI

45. 45 Fiscal Forecast for 2007-08 2007-08 (RE ) ACTUALS FOR 2007-08 Revenue Receipts 10.611.9 Tax Revenue 8.8 9.9 Non Tax Revenue 1.8 2.0 Total Receipts@ 10.8# 11.6# Total Expenditure 14.1# 14.3# Revenue Expenditure12.212.8 Of which: Interest payments 3.5 3.8 Capital Expenditure 1.9# 1.5# Fiscal Deficit 3.3 2.7 Revenue Deficit 1.5 0.9 @ 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. 46 Tax-GDP Ratio: Centre (Gross) Direct taxes overtaking indirect taxes in the current year

47. 47 Employment