1. 11 Indian Economic Reforms: A More Difficult Phase FOURTH ANNUAL CONFERNCE LAHORE SCHOOL OF ECONOMICS 25 APRIL 2008 Rajiv Kumar

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

5. 55 Global Context Narrowing of the real interest rate differential reversed since January 2007 Real Interest Rate Differential with Developed Countries (1999-07)

6. 66 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

7. 77 Globalisation:The Difference 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.

8. Sectoral Composition of GDP

9. 99 Increasing Role of Services in Indian Growth In 2000s, services contributing nearly two thirds of GDP growth

10. 10 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

11. 11 Industrial Growth: Controlled Vs Overall Industry 11 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

12. 12 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).

13. 13 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)

14. 14 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)

15. 15 WPI Inflation (Week to Week)

16. 16 WPI Inflation ( Monthly Average)

17. 17 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

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

19. 19 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

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

21. 21 Interest rate (Base Year = 2005)

22. Real Effective Exchange Rate (REER) (Base Year = 1993-94) 22 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 12%) happened in 2007-08

23. 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 2006- 07 and 8 per cent for the medium term Economy growing over 9% last two years Estimates for 2008-09 are around 8%

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

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. 32 Thank You.