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

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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 (