Briefing Notes for the Launch in New Delhi, March 2009
Growth moderates but remains robustThe global slowdown that has come in the aftermath of the financial crisis is having an adverse impact on the real economies of South Asia. However, the adverse impact is not as strong as in some other, more open, economies of the Asia-Pacific region. The Indian economy is estimated to grow at 7.1% in 2008, thus providing an anchor of economic stability in the region. Government took measures to improve the liquidity of the financial sector and relaxed monetary policy. Government also introduced fiscal stimulus packages which should soften the economic downturn, and further strengthen domestic demand. Supported by these measures, the economy is expected to grow at around 6.0% in 2009. The economy of India performed relatively well during 2005-2007 by maintaining its growth momentum along with moderate inflation, resilient capital markets, a manageable current account deficit and favourable foreign exchange reserves. From 2005 to 2007, India achieved an average growth rate of 9.4%, aided by strong performances by industry and services. An investment boom, growth in consumer demand, rising incomes, ample bank credit and robust exports sustained the vibrancy in industry and services. India’s economy also benefited from significant inflows of foreign investment and the Government’s efforts to contain the fiscal deficit while at the same time stepping up public expenditure for employment generation programmes.
Rapid increase in inflationInflation has been driven up in all the countries of South Asia, partly by unrelenting pressures from higher international commodity prices, particularly the prices of oil, basic metals and selected food items. In India, the consumer price index for industrial workers rose from 6.2% in 2007 to 9% in 2008. Price increases in food and fuel groups were higher than those of other groups. As a result, life became more challenging for large segments of the population. To contain inflation, the Government reduced customs and excise duties on raw materials and products. The monetary policy was kept tight for part of 2008. With fall in oil and other commodity prices in international markets, inflation is expected to come down in 2009.
Fiscal situation deterioratedIn India, after several years of fiscal consolidation facilitated by strong economic growth, the budget in 2008 remained under pressure. The deficit of the central Government was brought down to 2.7 % of GDP in 2007, and a target of 2.5% was set for 2008. However, due to stimulus packages to contain deceleration in economic growth, significant increases in Government salaries and Government subsidies for food, fertilizer and certain fuel products, budget deficit is estimated to rise to 6% of GDP in 2008.
External balances under pressureThe surge in prices of fuel oil, food and other commodities created severe problems for the external balances of most countries in South Asia. In India, the global financial crisis and slowdown brought down exports growth but deceleration in growth in imports was slower, due to strong growth in imports of capital goods, project growth and crude oil. Consequently, the trade deficit and current account deficit as a percentage of GDP increased in 2008. Management of the current account deficit did not pose difficulties because of the comfortable foreign exchange reserves.
Poverty and widespread inequalities remain major challengeAmong long-term challenges, poverty remains a major problem for most countries in South Asia. Also, economic and social inequalities remain widespread. The main challenge for countries in the subregion, therefore, is not only to improve growth rates on a sustained basis but also to make them more inclusive for a rapid reduction in poverty and inequality. The composition of sectoral growth has important implications for pro-poor growth. Agriculture, construction and small and medium-sized enterprises (SMEs) generate pro-poor growth through employment generation, and should be supported.
To benefit from employment opportunities, the development of human resources is essential. In turn, education and health services are key to the development of human resources. Public provision of these services is crucial to the poor, as they can not afford to pay the prices charged by private providers. Print and public media should be vigorously used to change people’s attitude towards girls’ education and other forms of social exclusions and to ensure that the poorest of the poor have access to information on available opportunities.
Social safety nets are also essential for the poor and vulnerable who are unable to benefit from economic growth directly or indirectly. This support should be strengthened to provide a coping mechanism for the poor, especially in the event of macroeconomic shocks such as current global economic crisis. Without such interventions to address the problem of poverty and inequality, rapid economic growth cannot be sustained over the long term, for there are clear links between inequality and social unrest and violence.
Lack of physical infrastructure is a major impediment to business growth in South Asia, most notably shortcomings in electricity service. Huge gaps between supply and demand of electricity exist in several countries in the subregion, and these gaps will widen unless new electricity capacity is added. Involvement of the private sector through private public partnerships is the only way to meet the growing needs for energy. Along with generating more electricity, it is important to efficiently utilize existing capacity. Transmission and distribution losses are massive, partly due to theft. Rehabilitation and proper maintenance of the distribution system should be a priority to minimize transmission and distribution losses.