india’s growth prospects - .india’s growth prospects ... – savings rate: 8.9% of gdp (1950/51)

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  • 1

    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

  • 3

    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

  • 4

    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

  • 5

    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

  • 6

    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

  • 7

    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

  • 8

    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

  • 9

    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

  • 10

    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

  • 11

    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

  • 12

    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

  • 13

    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

  • 14

    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

  • 15

    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

  • 16

    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

  • 17

    Saumitra Chaudhuri

    Fiscal bumps, but consolidation

    Consolidated fiscal deficit down to

  • 18

    Outcomes of Growth

    Growth, structural change, social indicators and

    the new operating constraints

    Saumitra Chaudhuri

  • 19

    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

  • 20

    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 (

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