Macroeconomic Performance and Policies

Transcription

1 Macroeconomic Performance and Policies Shankar Acharya Conference on India s Economy: Performance and Challenges February 10, 2010, New Delhi. 1

2 Outline I. Review of Macroeconomic Developments A. Growth B. Inflation C. External Balance D. Fiscal Deficit E. Savings- Investment F. Comparative Overview II. Major Challenges Faced post 2000 A. Fiscal Consolidation B. Foreign Capital Surge III. Key Issues for Future A. Restoring Fiscal Balance B. Convertibility and Exchange Rate Management C. Role of the Reserve Bank D. Coping with a difficult International Economy 2

3 Review of Macroeconomic Developments

4 Table 1: Growth of Real GDP (Percent per year) 1992/ / / / / / / / / / / /08 (1) (2) (3) (4) (5) (6) (7) (8) (9) GDP (factor cost) Agriculture Industry Services Per capita GDP Source: CSO. Note: Industry includes Construction. 4

5 Table 2: Sectoral Composition of Growth Share in real GDP (%) Contribution to GDP Growth (% ) Average of Average of /92 to 1996/ /97 to 2001/ /02 to 2007/08 (1) (2) (3) (4) (5) Agriculture Industry Services GDP(Factor Cost) Source: CSO. 5

6 Table 3: Expenditure Composition of Growth Share in real GDP (%) Contribution to GDP Growth (% ) Average of Average of /92 to 1996/ /97 to 2001/ /02 to 2007/08 (1) (2) (3) (4) (5) Investment (GDCF) Government Final Consumption Private Final Consumption Net Exports of Goods and Services (including Discrepancies) GDP( Factor Cost) Source: CSO. 6

7 Table 4: Inflation Trends (Percent per year) WPI (AC) CPI(IW) WPI(MP) GDP Deflator (1) (2) (3) (4) 1992/ /97(average) / /02(average) / /08 (average) / / / / / / Sources: Reserve Bank of India: Handbook of Statistics on Indian Economy and Bulletins. WPI (AC) = Wholesale Price Index (All Commodities) 1993/94=100. CPI (IW) = Consumer Price Index (Industrial Workers) For 1992/ /07,1993/94=100. For 2007/08, 2001=100. WPI (MP) = Wholesale Price Index (Manufactured Products) 1993/94=100. 7

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9 Table 5: Balance of Payments Indicators (Percent of GDP at current market prices) 2000/ / / / / / / /08 Merchandise Exports Imports Trade balance (A-B) Invisibles, net of which Software Exports Current Transfers Current Account Balance Net Capital Inflows of which Foreign Direct Investment Foreign Portfolio Investment External Assistance External Commercial Borrowing NRI Deposits Short Term Trade Credit Memo Items Foreign Exchange Reserves (year end US $ billion) Increase in Reserves (US $ billion) Net Capital Inflows (US $ billion) Non Oil Export Growth (%) Non Oil Import Growth (%) Services Export Growth (%) Oil Imports ( US $ billion) Exchange Rate (Rs/US $)

10 Table 6: Consolidated Deficits of Central and State Governments (As Percentage to GDP at current market prices) Fiscal Deficit Revenue Deficit Primary Deficit 1988/ /91 (Average) / /97 (Average) / /01 (Average) / / / / / / /08 (RE) Sources: Reserve Bank of India: Handbook of Statistics on Indian Economy and Annual Report, 2007/08. 10

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12 The Investment- Savings boom (As % of GDP) Difference (1) (2) (3) (4)= (3)-(2) Gross Domestic Investment Gross Domestic Savings of which: Households Private Corporate Government Companies Government Administration Private Corporate Investment Source: CSO. 12

13 Macro overview comparison (1) (2) (3) 1992/ / / / / /08 Economic Growth (% per year) Inflation (GDP deflator, % per year) Current Account Deficit (% of GDP) Combined Fiscal Deficit (% of GDP) Gross Domestic Investment (% of GDP) Source: RBI 13

14 Major Challenges Faced post 2000

15 Table 9: Deficits of Central and State Government (As Percentage of GDP at current market prices) Centre States Combined Year Fiscal Deficit Revenue Deficit Fiscal Deficit Revenue Deficit Fiscal Deficit Revenue Deficit 2001/ / / / / / /08 (RE) Sources: Reserve Bank of India: Handbook of Statistics on Indian Economy and Annual Report, 2007/08. 15

16 Table 10: Centre's Fiscal Position- A Summary Review (As percent of GDP at current market prices) 2000/ / / / / / / /08(RE) (1) Revenue Receipts (2) Tax Revenue (net to centre) (3) Non-tax Revenue (4) Expenditure (5) Revenue Expenditure (6) Capital Expenditure (7) Revenue Balance (1-5) (8) Fiscal Balance Source: Economic Survey- various issues and Budget papers for 2008/09. 16

17 Table 11: State's Fiscal Position- A Summary Review (As percent of GDP at current market prices) 2000/ / / / / / / /08 (RE) (1) Revenue Receipts (2) Tax Revenue (3) Non-tax Revenue (4) Expenditure (5) Revenue Expenditure (6) Capital Expenditure (7) Revenue Balance (1-5) (8) Fiscal Balance Sources: Economic Survey- various issues and Annual Report , RBI. 17

18 Table 12: Capital Inflows and Reserves ($ billion) 2000/ / / / / / / /08 1. Net Capital Inflows of which (percent share) : Foreign Direct Investment Foreign Portfolio Investment External Commercial Borrowing Non-Resident Deposits Other Current Account Balance Increase in Foreign Exchange Reserves* Sources: Reserve Bank of India: Handbook of Statistics on Indian Economy and Bulletins. * Differs from (1) + (2) because of errors and omissions and valuation charges. 18

19 Sources: Reserve Bank of India: Handbook of Statistics on Indian Economy and Bulletins. 19

20 Key Issues for the Future

21 Restoring Fiscal Balance Commodity Price shock of early Controlled Prices plus 6 th Pay Commission award leads to surge in Fiscal Deficit. EAC estimates budgeted fiscal deficit will be overshot by 5% of GDP. Main avenues for fiscal adjustment : a) Raising prices of oil, fertilizers and foodgrain. b) Large- scale divestment/ privatization of PSUs. 21

22 Convertibility and Exchange Rate Management The Impossible Trinity Full CAC not necessary for rapid growth Premature move to the full CAC is dangerous Premature move to full CAC undermines autonomy over exchange rate policy. 22

23 Figure 3: THE IMPOSSIBLE TRINITY Full capital controls Monetary independence Increased capital mobility Exchange-rate stability Pure float Full financial integration Monetary union Source: Jeffrey Frankel, No single currency regime is right for all countries at all times, Princeton Essays in International Finance No.215, August

24 Role of the Reserve Bank Current objectives/ responsibilities of RBI Low inflation Sustainable economic growth Orderly forex markets Financial stability Bank regulation/ supervision Managing Government debt Single objective of inflation (Rajan Report) inappropriate for India at present Can consider shedding debt management 24

25 Coping with Weak International Economy Managed flexibility of exchange rate Premium on short-run liquidity management Move cautiously on CAC at present Avoid restrictions on current account Loosen monetary policy Avoid oil supply crisis Contain/ reduce rising fiscal deficit Reinvigorate economic reforms ( infrastructure, privatization, labour laws, education, agriculture) 25

26 Thank You 26