india’s growth prospects - .india’s growth prospects ... – savings rate: 8.9% of gdp (1950/51)
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Indias Growth Prospects
China and India : Whats in it for Africa?OECD Development Centre
Salle des Nations, Tour EuropeLa Defense, France1617 March 2006
Saumitra Chaudhuri
Member, Economic Advisory Council to Prime Minister
2
Background 1950s onwards
Perception of the Problem and the Experience
Saumitra Chaudhuri
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Saumitra Chaudhuri
The Beginning State & Plans (I)
Fact Sheet Low levels of income population mostly rural (83%)
and an agrarian economy (57% share in GDP) Growth rate of GDP of about 2% Savings rate: 8.9% of GDP (1950/51) Investment rate: 8.7% of GDP (1950/51) Trade balanced, exports 2.1% of world trade Low education rates 18% literate 1951 (8% in 1931) Nearly 60% of population below (nutritionally defined)
poverty line
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Saumitra Chaudhuri
The Beginning State & Plans (II)
Option chosen State control and Planning First Plan targets modest increase in the growth rate
to about 3.9%; By pushing the investment rate to 11% by 1961 and
20% by 1968 and no more thereafter Second Plan was more aggressive and eventually the
Investment rate was pushed up to 15% by mid-60s, and crossed 20% only in the end of 70s
SI gap met through multilateral and bilateral assistance = current account deficit
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Saumitra Chaudhuri
The Beginning State & Plans (III)
Unexpected consequences Rate of growth however fails to exceed 3.5% on average up to the
end of the 1970s Better health care and food supply resulted in population growth
rising from 1.25% to 2.30% Food scarcity becomes acute famine in 1966 and 1967 Trade surpluses vanish; foreign exchange becomes extremely
serious constraint First currency devaluation in mid-1960s bring little relief because
it is not accompanied by other necessary steps India missed the bus during the first phase of rapid world trade
expansion that began in the 1960s and her share of rising world exports experienced serious decline
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Saumitra Chaudhuri
Indias export presence withered..
With a closed economy, the share of India in world exports fell dramatically from 2.1% in 1950 to 0.5% by 1990. Even today, Indias share is just short of 1%
India's Share of World Exports Declined Rapidly
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
1950 1973 1990 1998 2004 2005
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Saumitra Chaudhuri
Stylized constraints circa 1965
The early approach as partially modified through the experience of the first decade developed into posing the agenda of development in terms of dealing with: Food (wage good) bottleneck inflation and political unrest Investible resources limitations Foreign exchange constraints
Absence of focus on trade and private enterprise continues to persist; while
Nature of State control moves into a different level focused increasingly on using financial intermediation as a point of leveraging domestic savings into growth with cross-sectional equity
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Saumitra Chaudhuri
Institutional fallout is severe .
Thus our policy was crafted to operate on each of the following separately and individually Food pricing, procurement & distribution Savings and Investment pre-emption of the first and
licensing on the second Foreign exchange strict control & severe penalties
Created an intrusive policy architecture And a large number of diverse control regimes
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Saumitra Chaudhuri
Reforms gradually address them
Beginning in the 1980s, slowly some of the unintended excesses sought to be addressed Relaxation introduced in industrial licensing So also in external trade policy Some liberalization of the capital market
However, the core of the institutional architecture remained relatively untouched, which diluted the impact of the early initiatives at reform
The greatest achievement of the 1980s was perhaps in opening up the policy makers mind to the economic potential of moving to reform mode
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Saumitra Chaudhuri
Watershed year 1991
During the 1980s, attempt to ramp up economic growth through higher public spending, abandoning previous caution on fiscal excess
Part of the fiscal deficit financed from overseas also finances larger trade deficits
Currency remains over-valued, which combined with the all of the other misalignments is catalyzed by high oil prices due to first Gulf War + domestic political crisis metamorphoses into an external payments problem in 1990-91
Economic reforms launched from 1991 onwards
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Saumitra Chaudhuri
Returning to stylized constraints
Wage good bottleneck and food security sorted out by mid-1980s thanks to the Green Revolution and the consequential increase in agricultural productivity creates better political climate
Foreign exchange scarcity eases as the benefits of reform impact external trade in goods and services and encourages private capital inflows
The investible resources constraint breached by the late 1990s on the back of rising incomes and higher private savings rate; reinforced through fiscal consolidation since 2002/03
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Saumitra Chaudhuri
Food constraint relaxed mid-1980s
Basket of food intake has also diversified considerably and away from a pre-dominance of grain
Availability numbers ignore private stocks
300
350
400
450
500
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
1950s 1960-1983
1984-2005 3 MVA
All Log. (All)
grams per capita per day
Availability of food grain - cereals plus pulses
1951 to 2005
Availability numbers ignore changes in private stocks
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Saumitra Chaudhuri
Improved external payment position
Current A/c deficit has risen in 2004/05 and in 2005/06, partly due to higher oil & other imports and partly due to defence & private gold purchases
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
% G
DP
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Current A/c Capital A/c Aid
1960-75 1975-91 1991-2006
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Saumitra Chaudhuri
Savings rate touches 25% in 1995
5%
10%
15%
20%
25%
30%
35%
1951
1956
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
5%
10%
15%
20%
25%
30%
35%
Savings Investment
per cent GDP
Savings stabilizes >20% in 1980s & touches 25% in 1995; then falls due to govt dis-savings; improves 2003 on
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Saumitra Chaudhuri
Household saving cross 20% in 2000
0%
5%
10%
15%
20%
25%
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
Physical Gross Fin Savings
Net Fin Savings Household Savings
% o
f GD
P a
t cur
rent
, m
arke
t pri
ces As h/holds
borrow for homes etc, their net financial savings flatten out, despite higher gross savings
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Saumitra Chaudhuri
Investible Resources & Growth
5%
10%
15%
20%
25%
30%
35%
1951
1956
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Savings Investment Growth 3yr-mva
India's Economic Growth: 1950/51 to 2005/06
Growth tracks the increase in domestic savings & investment while the degree of volatility reduces
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Saumitra Chaudhuri
Fiscal bumps, but consolidation
Consolidated fiscal deficit down to
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Outcomes of Growth
Growth, structural change, social indicators and
the new operating constraints
Saumitra Chaudhuri
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Saumitra Chaudhuri
Indias growth outcome
In the period 1951-81 growth averaged >3% Some increase in the 1980s, partly due to fiscal expansion Volatility high mostly because of the cycle of good and
bad harvests Growth rate in agriculture lifts somewhat in the process of
the Green Revolution, but does not show sustained acceleration
Non-agriculture industry & services Growth much more steady and increasingly de-linked from
fortunes of agriculture; and Driving the present phase of acceleration in economic growth
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Saumitra Chaudhuri
Growth outcome 1950-91 (1)
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
GDP /cap Aggregate GDP
Linear (