OUTLOOK FOR THE INDIAN ECONOMY PRESENTATION at SANEI SEMINAR ISLAMABAD

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OUTLOOK FOR THE INDIAN ECONOMY
PRESENTATIONat SANEI SEMINAR ISLAMABAD

• Rajiv Kumar
• April 23, 2008

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Global Integration (Current Account Capital
Account as a GDP)
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Global Context
GDP Growth India World(3-Year Moving Average)
Projected Years
While Indian growth is higher than world growth,
the two are clearly correlated
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Global Context
Relationship between Growth of GDP World and
India (1951-1979)
No link-up with world economy pre-1980
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Global Context
Relationship between Growth of GDP World and
India (1980-2006)
Post-1980 integration with the world economy
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Global Context
Real Interest Rate Differential with Developed
Countries (1999-07)
Narrowing of the real interest rate differential
reversed since January 2007
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Global Context
World Oil price and Indias GDP growth
(1974-2006)
Real / barrel
Inverse relationship with world oil price
Source www.nymex.com
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Expenditure composition of India GDP
Fall in the share of consumption in 2000s but
still higher than in China
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Growth Driven by Soaring Investment China
Falling consumption share more dramatic in China
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Decomposition of GDP Growth China Vs India
High growth driven by domestic investment,
consumption and net exports in China, while the
contribution by net exports negative in India
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Global Context
Indian growth rate to finally converge to Chinese
by 2013-14?
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Sectoral Composition of GDP
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Increasing Role of Services in Indian Growth
In 2000s, services contributing nearly two thirds
of GDP growth
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Sectoral Growth (Quarterly Growth Rate)
Manufacturing growth rate higher than services
growth in 15 out of 31 quarters from 2000-01
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Monsoon and Agriculture Growth

• Agriculture growth closely follows monsoon
• Better monsoon this year means a better
  agricultural turnout

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Industrial Growth Controlled Vs Overall Industry
Growth of industries subject to government price
control lower than those where prices are market
determined
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Growth of IIP
Overall industry and manufacturing growth
slowdown in 2007 first time since 2001
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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

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Growth of Employment ( 1993-94 to 2004-05)

• 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)

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Balance of Payments

• Widening trade deficits compensated by rising
  invisibles surplus
• Huge capital inflows continuing, and to cross 9
  of GDP this year!

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Indias Balance of Payments Trends

• Mounting gap represents lost opportunities to
  raise investment levels
• Further reforms necessary to raise the absorptive
  capacity

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Direction of Trade
Major shift towards China in Indias trade China
replaces US as the biggest trade partner in
2007-08
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WPI Inflation (Week to Week)
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WPI Inflation ( Monthly Average)
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Global Commodity Prices (Base Year 2005)
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Fiscal Scene
Centre and state finances have improved steadily
since 2001-02
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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
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Total Expenditure on Subsidies, Infra
Agriculture ( to GDP)
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Deepening Democracy
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Interest rate (Base Year 2005)
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Real Effective Exchange Rate (REER)(Base Year
1993-94)
Since 1993-94, largest annual appreciation of the
rupee (over 9) happened in 2007-08
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Index of Real Effective Exchange Rate
Current phase of appreciation of REER of about
11 since Aug 06 to Nov 07 preceded a REER
depreciation of 8-9 during Jul 05 to Aug 06
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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

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Raising Potential Output Growth

• Reforms
• Infrastructure
• Education
• Business climate
• Public expenditure efficiency

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Thank You.
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CPI Inflation ( Monthly Average)
CPI inflation also has come down but remains at
about 6
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Growth Forecasts 2007-08
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Index of Leading Economic Indicators (LEI)

• LEI consists of
• Production of machinery equipment
• Sales of heavy commercial vehicles
• Non-food credit
• Railway freight traffic
• Cement sales
• Corporate performance (sales)
• Fuel metal prices
• Real interest rate
• Principal component index approach

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Index of Leading Economic Indicators (Quarterly)
LEI forecasts a growth rate at 9.2 per cent for
2007-08 7.9 for 2008-09 (Apr-Dec)

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GDP Growth Forecasts for 2007-08
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Revenue-Expenditure Growth Trends
Growth over the corresponding period of 2006-07

• High growth in direct taxes and indirect tax
  growth broadly on track
• Huge growth in capital expenditure arising from
  purchase of RBI stake in SBI

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Fiscal Scene

• Central and state debt positions have been
  improving since 2004-05, but the levels remain
  high by international/ past Indian standards
• Mounting off-budget liabilities oil bonds,
  securities to FCI, arrears of fertilizer
  subsidies and losses of state utilities, all
  about 2 of GDP

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Fiscal Forecast for 2007-08
_at_ Includes revenue receipts and non-debt capital
receipts Calculated excluding transactions
relating to SBI transfer Numbers are in Rs.
Crore.

• Receipts much above budget estimates, revenue
  expenditure higher
• Fiscal and revenue deficits lower than budget
  estimates

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• Table Central Government Budget 2008-09 (Rs.
  Crore) 2006-07 (Actuals)
• 2007-08
  (RE) 2008-09 (BE) Change 3 over 2 Change4
  over 3
• Revenue Receipts (34)43438752509860293520.914.82.
  
• Gross Tax Revenue47151258541068771524.217.5
  
• Corporation tax14430618612522636129.021.6
• Income tax8556111832013831438.316.9
  Customs8632710076611893016.718.0 Excise
  duties1176121279471378748.87.8 Service
  tax37597506036446034.627.43. Net Tax Revenue
  (Net of States' Share)35118243177350715022.917.54.
  Non-Tax revenue83205933259578512.22.65.
  Recoveries of Loans589344974497-23.70.06. Other
  Receipts5345941016511.21611.37. Total
  Expenditure58338767384275088415.511.48. Revenue
  Expenditure51460958858665811914.411.8 Of
  which Interest payments15027217197119080714.411.0
  9. Capital Expenditure68778852569276524.08.810.
  Revenue Deficit (8-1)80222 (1.9)63488
  (1.4)55184 (1.0)-20.9-13.111. Fiscal
  Deficit 7- (156)142573 (3.5)143653
  (3.1)133287 (2.5)0.8-7.2Excludes
  transactions related RBI

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Fiscal Forecast for 2007-08

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_at_ Includes revenue receipts and non-debt capital
receipts Calculated excluding transactions
relating to SBI transfer.
Both fiscal and revenue deficits lower than
budget estimates
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Tax-GDP Ratio Centre (Gross)
Direct taxes overtaking indirect taxes in the
current year
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Employment