The Indian Economy: Current Concerns

C. Rangarajan
The Indian economy is currently passing through a
difficult phase. Growth has slowed down and inflation
remains high. The fiscal and current account deficits are also
at a high level. We need to address these issues if we have
to achieve a sustained high growth rate. !owever these
developments should not hide the fact that over the seven
year period "eginning #$$%&$' the average annual growth
rate has "een (.) per cent. We should not also under&
estimate the changes that have occurred in the Indian
economy over the last two decades. *or should we overloo+
the impact of poor economic performance of the advanced
economies after the international financial crisis. While the
,- has shown some improvement many countries in the
Europe are caught in a second recession. These
developments are "ound to affect the growth prospects of
the Indian economy.
The year .//. is a landmar+ in the post&independent
economic history of India. The country faced a severe
economic crisis triggered in part "y a serious "alance of
payments situation. The crisis was converted into an
opportunity to effect some fundamental changes in the
content and approach to economic policy.
There is a common thread running through all the
measures introduced since 0uly .//.. The o"jective is
simple and that is to improve the efficiency of the system.
The regulatory mechanism involving multitudes of controls
had fragmented capacity and reduced competition even in
the private sector. The thrust of the new economic policy is
towards creating a more competitive environment in the
economy as a means to improving the productivity and
2
efficiency of the system. This is to "e achieved "y removing
the "arriers to entry and the restrictions on growth of firms.
While the industrial policy see+s to "ring a"out a greater
competitive environment domestically the trade policy see+s
to improve international competitiveness su"ject to the
protection offered "y tariffs which are coming down. The
private sector is "eing given a larger space to operate in as
much as some of the areas earlier reserved e1clusively for
the pu"lic sector are also now allowed to the private sector.
In these areas the pu"lic sector will have to compete with
the private sector even though the pu"lic sector may
continue to play a dominant role. What is sought to "e
achieved is an improvement in the functioning of the various
entities whether they are in the private or pu"lic sector "y
injecting an element of competition. There is however
nothing in the new economic policy which ta+es away the
role of the -tate or the pu"lic sector in the system. The *ew
Economic 2olicy of India has not necessarily diminished the
3
role of state3 it has only redefined it e1panding it in some
areas and reducing in some others. 4s it has "een said
somewhat parado1ically 5more mar+et6 does not mean 5less
Government6 "ut only 5different Government6.
Trends in Growth
That our economic reforms are on the right trac+ is
vindicated "y the performance of the economy since the
launch of reforms. In the post&reform period "eginning .//#&
/) the economy has grown at an average rate of './ per cent
per annum a significant improvement over the pre&reform
period 7Ta"le .8.
Coming to the more recent period as mentioned earlier
economic growth in the seven year period "eginning #$$%&$'
despite the crisis affected year of #$$(&$/ was at an average
of (.) per cent. This clearly represented an acceleration in
4
the pace of growth. 2er capita G92 grew at an average of :.$
per cent in these seven years.
5
Ta"le .
Growth in G92 at factor cost and its Components at #$$;&$% prices
(Percent per annum)
Agricul-
ture
Forestry
&
Fishing
Mining
&
Quar-
rying
Manu-
fac-
turing
Cons-
truc-
tion
Electri
-city,
gas,
and
ater
supply
!rade,
hotels,
storage,
transport and
communica-
tions
Finance,
insu-
rance, real
estate &
"usiness
ser#ices
Commu-
nity, social
and
personal
ser#ices
$%P
at
Factor
cost
1980-81 12.9 12.2 0.2 13.2 5.7 5.7 1.9 4.1 7.5
1981-82 4.6 13.7 8.2 5.5 9.5 6.2 8.1 2.1 5.7
1982-83 -0.3 11.9 3.3 -7.0 6.6 5.4 9.5 7.7 2.9
1983-84 10.1 2.9 10.2 5.4 6.9 5.1 9.8 3.7 7.8
1984-85 1.6 1.2 4.2 3.5 10.8 4.8 7.5 6.9 4.0
1985-86 0.3 5.5 3.2 5.7 7.9 7.9 9.8 5.7 4.3
1986-87 -0.4 12.2 5.5 2.4 10.3 6.0 10.5 7.5 4.5
1987-88 -1.6 3.8 5.6 5.7 7.8 5.3 7.3 7.2 3.7
1988-89 15.6 16.2 8.5 7.0 9.7 5.8 9.8 6.0 10.1
1989-90 1.2 7.6 8.8 7.0 9.7 7.4 12.4 7.9 6.3
1990-91 4.0 10.5 4.8 11.8 6.7 5.1 6.2 4.4 5.4
1991-92 -2.0 3.4 -2.4 2.1 9.7 2.6 10.8 2.6 1.6
1992-93 6.7 0.9 3.1 3.5 6.9 5.6 5.4 6.0 5.3
1993-94 3.3 1.4 8.6 0.6 7.5 6.9 11.2 4.5 5.7
1994-95 4.7 9.3 10.8 5.4 9.4 9.9 3.9 2.3 6.4
1995-96 -0.7 5.9 15.5 6.0 6.8 13.2 8.1 7.3 7.4
1996-97 9.9 0.6 9.5 1.9 5.4 8.1 6.2 8.1 7.8
1997-98 -2.6 9.8 0.1 10.5 7.7 7.5 11.7 8.3 4.5
1998-99 6.3 2.8 3.1 6.3 7.0 7.6 7.8 9.7 6.6
1999-00 2.7 3.2 3.2 8.4 5.5 8.2 9.2 11.5 6.5
2000-01 -0.2 2.4 7.7 6.2 2.1 7.3 4.1 4.7 4.4
2001-02 6.3 1.8 2.5 4.0 1.7 9.2 7.3 4.1 5.7
2002-03 -7.2 8.8 6.8 7.9 4.7 9.4 8.0 3.9 4.0
2003-04 10.0 3.1 6.6 12.0 4.8 12.0 5.6 5.4 8.4
2004-05 0.05 8.2 8.7 16.1 7.9 10.7 8.7 6.8 7.6
2005-06 5.1 1.3 10.1 12.8 7.1 12.0 12.6 7.1 9.5
2006-07 4.2 7.5 14.3 10.3 9.3 11.6 14.0 2.8 9.6
2007-08 5.8 3.7 10.3 10.8 8.3 10.9 12.0 6.9 9.3
2008-09 0.1 2.1 4.3 5.3 4.6 7.5 12.0 12.5 6.7
2009-10 1.0 6.3 9.7 7.0 6.3 10.3 9.4 12.0 8.4
2010-11 7.0 5.0 7.6 8.0 3.0 11.1 10.4 4.5 8.4
2011-12 2.8 -0.9 2.5 5.3 7.9 9.9 9.6 5.8 6.5
&ource ('asic data)( )ational *ncome Accounts, C&+
)ote( for years prior to ,--.--/, the 0111--- "ase series is ta2en "ac2ards "ased on splicing3
6
,nder the severe impact of the glo"al crisis the Indian
economy registered a growth of '.( per cent in #$$(&$/ after
having registered a growth rate e1ceeding / per cent for
three consecutive years. <y any standard the Indian
economy was a"le to protect itself reasona"ly well in the
tur"ulent conditions of the financial crisis.
The growth rate pic+ed up soon and the economy
achieved a growth rate of (.; per cent in #$$/&.$ despite a
severe drought.
The growth rate was maintained at (.; per cent in #$.$&
.. as well. There was a su"stantial jump in agricultural
production. The monsoon was good and therefore the
agricultural G92 grew at :.$ per cent. The manufacturing
sector grew "y :.' per cent and the services sector "y /.; per
cent.
7
Economic activity moderated =uite su"stantially in #$..&
.#. The overall growth rate was '.% per cent. Growth in the
last =uarter was a low %.) per cent. While agriculture grew at
#.( per cent which came on top of a sharp increase in the
previous year the performance of the manufacturing sector
was a great disappointment. It grew at #.% per cent. The
service sector also showed some deceleration. The low
growth was caused "y supplyside "ottlenec+s price shoc+s
and wea+ investment demand. Coal output fell. -o also did
several other minerals. The investment sentiment was
affected "y various factors including non&economic. The
e1ternal environment was also not hospita"le.
In the current fiscal the monsoon was disappointing to
"egin with. <ut rains were normal in the months of 4ugust
and -eptem"er #$.#. >anufacturing is yet to pic+ up. ?ur
>arch&-eptem"er manufacturing sector showed a negative
growth of &$.; per cent. We can see an improved
8
performance in the second half of the year. -ome recent
decisions relating to @9I as well as pricing of petroleum
products should help to change the investment sentiment.
?n the whole the growth rate in the current year may stay
"etween %.% and ' per cent perhaps closer to ' per cent.
4s I loo+ ahead the ne1t fiscal #$.)&.; may turn out to
"e "etter. The growth rate can "e one per cent higher than
this year that is around : per cent. The full impact of the
change in investment sentiment may "e reflected through the
year resulting in higher growth in manufacturing. There will
also "e a special emphasis on achieving the production and
capacity creation targets in the infrastructure sectors that lie
in the pu"lic domain such as coal power roads and
railways.
2otential Rate of Growth
9
In the light of India6s economic performance in recent
years a fre=uently as+ed =uestion is whether India has the
potential to grow at ( to / per cent in a sustained way. In
#$$:&$( India6s domestic savings rate was )'.( per cent and
the investment rate was )( per cent. -ince then these rates
have come down significantly. !owever the rates already
achieved indicate the potential that e1ists. Even with an
incremental capital&output ratio of ; the investment rate
achieved in the past should ena"le the Indian economy to
grow at / per cent. This however is the potential and to
achieve it we must also ta+e actions to remove the
constraints that may come in the way. We need to reverse
the declining trend in savings rate and investment rate. In
this conte1t I would li+e to highlight three macro economic
concerns and two sectoral constraints.
10
>acro Economic Concerns
Inflation
@irst and foremost we must tame inflation. We have
had three years of high inflation. 0ust to give one num"er
inflation as measured "y wholesale price inde1 stood at ..#
per cent in 4pril #$$/. .$./ per cent in 4pril #$.$ /.: per
cent in 4pril #$.. and :.% per cent in 4pril #$.#. 4s of
*ovem"er #$.# it stood at :.# per cent. The retail inflation
still stands higher at /.% per cent. Inflation is largely due to
certain severe supply constraints particularly of agricultural
products. The fact that inflation is triggered primarily "y
supply side shoc+s does not mean that monetary policy and
fiscal policy have no role to play. @ood price inflation if it
persists long enough gets generaliAed. This has happened
as evidenced "y inflation in manufacturing prices rising from
%.) per cent in >arch #$.$ to (.# per cent in *ovem"er #$...
11
Thus monetary policy and fiscal policy have to play their
part in containing the overall demand pressures.
!igh growth does not warrant a higher level of inflation.
We must use all of our policy instruments B interventions in
the foodgrains mar+et monetary policy and fiscal policy B to
"ring down the current inflation and re&anchor inflationary
e1pectations to the %&' per cent comfort Aone.
<alance of 2ayments
The second macro&economic concern relates to the
"alance of payments. India6s current account deficit 7C498
remained low till #$$(&$/. -ince then it has started clim"ing.
The C49 rose sharply in #$..&.# to touch ;.# per cent of the
G92. Trade deficit was .$.# per cent of G92. While this was
a sharp rise from the trade deficit of :.% per cent in #$.$&..
the adjusted trade deficit e1cluding gold remained more or
less at same level. There was a huge increase in import of
12
gold in #$..&.#. It rose to C'# "illion as compared to C;)
"illion in the previous year. The year #$..&.# also faced
difficulties in financing the C49. Capital flows were
inade=uate to cover the C49 and reserves had to "e drawn
down. It is this mismatch "etween C49 and capital flows
that put pressure on the rupee. The C49 continues to
remain at a high level in the current fiscal. In the -econd
Duarter it touched %.; per cent of G92. Gold imports
continue to remain high. We need to dissuade the attraction
for the yellow metal. 4n attractive return on financial assets
and taming of inflation will play a +ey role. @or the year as a
whole the C49 may show a marginal increase over last year.
?ver the medium term efforts must "e made to +eep the
C49 around the managea"le level of #.% per cent of G92.
This is desira"le to impart much needed sta"ility on the
e1ternal payment front and to reduce the ris+ the domestic
economy runs from volatility in international financial
mar+ets.
13
@iscal 9eficit
The third macro&economic concern is fiscal
consolidation which is a necessary pre&re=uisite for
sustained growth. In the wa+e of the international financial
crisis India li+e many other countries adopted an
e1pansionary fiscal policy in order to stimulate demand. 4s
a conse=uence the fiscal deficit of the Government of India
which was coming down started rising. In #$$(&$/ the fiscal
deficit was ' per cent of G92. It rose to '.; per cent in the
ne1t year. ,nli+e other countries in the advanced world
where there is a continuing de"ate regarding when to
terminate the e1pansionary fiscal policies we in India have
ta+en a decision to initiate the process of fiscal
consolidation. In #$.$&.. the fiscal deficit came down to ;.:
per cent of G92 and it was projected to fall to ;.' per cent in
#$..&.#. !owever the actual deficit turned out to "e %./ per
cent of G92. The "udget for the current year indicated a
14
deficit of %.. per cent of G92. The @inance >inister has
recently said that it could "e around %.) per cent. To gain
credi"ility it is important that the fiscal deficit is "rought
down close to this level. The @inance >inister has outlined a
programme of fiscal consolidation which will ta+e the fiscal
deficit down to ) per cent of G92 over the ne1t five years.
This is indeed a reassuring message. While efforts must "e
made to raise the revenue&G92 ratio there is an imperative
need to contain e1penditures more particularly su"sidies
which need to "e pruned well focused and prioritiAed. This
calls for several policy actions which may not "e popular.
*evertheless such actions are needed. It is in this conte1t
one must understand the action of the Central government to
raise the price of diesel.
-ectoral Constraints
In the medium term the two sectors which pose a major
challenge are the farm economy and the power sector. The
15
first of these the farm economy is primarily constrained "y
the relatively low levels of yield in major cereal crops and
pulses as compared to other 4sian economies especially
China. We have large science and technology
esta"lishments for agricultural research. <ut the results in
terms of productivity gains leave much to "e desired. Thus
necessary steps must "e ta+en to revitaliAe the traditional
crop agriculture which is vital to food security and farm
income. E=ually as shifts in demand occur reflecting
changes in income and taste agricultural production must
also respond to them. The last two years have clearly shown
how a decline in agricultural production can cause serious
distortions in the economy. It is therefore imperative that
we aim at G92 originating from agriculture and allied
activities growing at ; per cent per annum.
The second challenge for the country is the shortage of
physical infrastructure of which the single most important
16
item is electricity. -hortage of electric power leads not only
to direct production losses "ut also results in inefficiency in
a "road range of areas impacting profita"ility and
competitiveness. Recent data clearly indicate a short fall in
achieving the targets for capacity creation during the
Eleventh 2lan. This is despite the fact that the achievement
in capacity creation in the ..
th
2lan is significantly higher
than that in the .$
th
2lan. Government is the largest player in
production transmission and distri"ution of power and a
high order of Government intervention in capacity creation
and other supportive components of electricity "usiness is
crucial to sustaining a high growth rate of ( per cent. 4 more
aggressive path of capacity creation must start immediately.
Constraints such as the availa"ility of coal land ac=uisition
and environmental issues need to "e tac+led so that the
desired growth in capacity e1pansion can "e achieved.
17
In many ways the coming decade will "e crucial for
India. If India grows at ( to / per cent per annum it is
estimated that per capita G92 will increase from the current
level of ,-C.'$$ to ,-C ($$$&.$$$$ "y #$#%. Then India
will transit from "eing a low income to a middle income
country. We need to overcome the low growth phase as
=uic+ly as possi"le as growth is the answer to many of our
socio&economic pro"lems. In the recent period we have
launched a num"er of schemes aimed at "roadening the
"ase of growth. These include the employment guarantee
scheme universalisation of education e1pansion of rural
health and food security. 4ll these programmes have made
a su"stantial demand on pu"lic e1penditure. This has "een
made possi"le only "ecause of the strong growth that we
have seen in recent years. Growth has facilitated raising
more resources "y the Government.
18
Reforms are on the move again. The recent decisions of
the Government to raise the price of diesel as well as to
promote foreign direct investment in several sectors signify
Government6s intent to move forward with the reforms. The
rating agencies and other analysts while assessing India6s
economy need to ta+e note of four factors. ?ne the current
growth of '.$ per cent of India is still a high growth in the
present world situation. There are a very few countries in the
world which have such a growth. ?f course our intention is
to accelerate the rate of growth and move on a higher
trajectory of growth as =uic+ly as possi"le. -econd India is
committed to fiscal consolidation. @inance >inister has
recently outlined the road map. Third reforms are once
again on the top of the agenda of the Government as
evidenced "y the recent decisions. @ourth apart from
reforms all efforts are "eing made to clear the "ottlenec+s
that come in the way of faster implementation of the
investment decisions.
19
9evelopment has many dimensions. It has to "e
inclusive3 it must "e poverty reducing and it must "e
environment&friendly. We need to incorporate all these
elements in the growth process. 4 strong and "alanced
growth will ena"le the economy to achieve multiple goals
including lowering inflation and reducing poverty.
20