Briefing Notes for the Launch in New Delhi, 6 May 2010
Economic growth slows, but the rate among the highest in the worldGlobal economic crisis affected countries of South Asia adversely but generally to a lesser extent as compared to countries in other subregions of Asia and the Pacific. The crisis penetrated domestic economies of the subregion through substantial decline in exports and slowdown in capital inflows. Therefore, the impact of the crisis was less pronounced on these economies. Many of the countries of the subregion have been facing security problems ranging from internal conflicts to terrorist attacks linked to global geopolitical issues, thus adversely impacting on their macroeconomic performance.
India felt the crisis after a period of high growth momentum that had reached an annual average of 8.8% over the previous five years. In 2008, growth was 7.7% during the first half of the fiscal year, but fell to 5.8% in the second half (October 2008 to March 2009). Even so, at 6.7% India achieved one of the world’s highest growth rates in 2008. While the economy largely sustained the momentum of the previous five years, both external and domestic demand was affected by the crisis. There was a slowdown in the services sector, in domestic private consumption, in investment demand and in manufacturing output.
By the beginning of the third quarter of 2009, despite the uncertain global macroeconomic scenario, domestic and external financing conditions showed signs of improving and the business outlook turned positive, signalling a revival of industrial activity. From August to November 2009 industrial output grew in double digits, while GDP growth during the second quarter of the fiscal year 2009 (July to September 2009) was 7.9%. According to the preliminary estimates, GDP grew by 7.2% for the full fiscal year 2009. This recovery is remarkable given the fact that the agriculture output declined by 0.2% due to poor weather conditions as a result of delayed and sub-normal monsoon. Both the industrial and services sectors grew by over 8%. With a revival in investment and private consumption, growth in exports and strong expansion in industrial production in recent months, growth in GDP is projected to accelerate to 8.3% in 2010.
Inflation remains a key policy concernA sharp increase in food and fuel prices in 2008 created hardships for large populations in countries of the subregion. As inflation adversely affects the poor disproportionately, it is a serious problem for many countries in South Asia with high incidence of poverty. Therefore, controlling inflation is and will remain a major challenge for the subregion. In India, consumer prices, particularly of food, remain stubbornly high and the consumer price index (for industrial workers) rose to about 9.0% in 2008. Inflationary pressures continued into 2009, largely resulting from the poor monsoon with adverse impact on food supplies, firming up of global commodity prices and the Government expansionary fiscal stance. Inflation as measured by the consumer price index was around 12.0% in 2009. A faster increase in food prices has become a cause of concern.
Trade declines sharply but workers’ remittances stay strongThe global economic crisis impacted adversely on expansion of both exports and imports. At the same time, workers’ remittances held up strongly and provided support to the current account balance. In India, the balance of payments came under pressure in 2008, when the current account deficit widened to 2.4% of GDP in 2008. Furthermore, net capital inflows fell to $9.1 billion in 2008 as compared with net capital inflows of $108 billion in 2007, reflecting the unstable nature of those flows. Both exports and imports fell in 2009 but workers’ remittances remained strong. The current account deficit further widened to 3.3% of GDP for the first nine months of fiscal year 2009.
Coordinated use of monetary and fiscal policiesAs for all other subregions of Asia and the Pacific, Governments in South Asia used expansionary fiscal and monetary policies to counter the negative fallout of the global slowdown and moderate the decline in growth. Of some concern is the continuation of high budget deficit in some countries. Moving forward, it is important that governments in the subregion prepare a clear roadmap of fiscal consolidation to be implemented at the earliest to contain growing public debt. Central banks showed much more willingness to implement a range of monetary-easing and liquidity-enhancing measures including reduction in the cash reserve ratio, the statutory liquidity ratio and key policy rates in support of expansionary fiscal policies. Looking ahead, and as inflationary pressures increase, there are signs that monetary policy has started to tighten. The Reserve Bank of India in January 2010 raised the cash reserve ratio by 0.75% to 5.75% and in March 2010 policy interest rates were raised by 25 basis points, pushing the repo rate up to 5%. In April 2010, it raised both the cash reserve ratio and the repo rate by 25 basis points each. It was part of a fine balancing act between containing inflationary pressures and supporting the domestic economy as the global recovery process remains weak.
The Government of India introduced a large fiscal stimulus package to boost domestic demand and contain the adverse impact of the global economic crisis. Fiscal stimulus was in the form of tax relief to boost demand, and increased expenditure on public projects to create employment and public assets. The Government renewed its efforts to increase infrastructure investments in telecommunications, power generation, airports, ports, roads and railways, besides expansion of the National Rural Employment Guarantee Scheme as a part of fiscal stimulus in 2009 budget. The fiscal stimulus also included write-off of agricultural loans and revision of salaries of Government staff (undertaken in 2008 and 2009). Fiscal stimulus spending over 2008 and 2009 is estimated at the equivalent of 7.1% of GDP. As a result, the budget deficit increased from 2.6% GDP in 2007 to 5.9% of GDP in 2008 and is estimated to rise to 6.5% of GDP in 2009. The budget for the fiscal year 2010 attempted to address the challenge of fiscal consolidation in the face of growing public debt by raising revenues and containing unproductive expenditure. As a result, budget deficit is expected to come down to 5.5% of GDP in 2010.
Yet another challenge for the economy is to manage portfolio capital inflows, mainly foreign institutional investments (FIIs) that are leading to build up of bubbles in capital markets and putting upward pressure on the exchange rates. The Bombay Stock Exchange Sensitive Index (SENSEX) appreciated by more than 100 per cent between early March 2009 and end of 2009 as the FII inflows returned to the capital markets and Indian rupee appreciated by around 6% in 2009.
Sustained high and inclusive economic growth needed for rapid poverty reductionWidespread poverty continues to be a serious problem for all countries in South Asia. Therefore, accelerating economic growth is crucial to bring down poverty levels. The challenge will be how to make growth more inclusive by spreading its benefits to larger segments of the population. More resources should be devoted to provision of basic services such as education, health, sanitation and housing particularly for those belonging to lower income groups. Targeted programmes for the benefit of the poor in the broader framework of social protection should also be a priority. The Indian National Rural Employment Guarantee Scheme being successfully implemented in India can be replicated in many developing countries. The scheme provides guaranteed employment at minimum wage for 100 days each year to every rural household whose adult members volunteer to do unskilled manual work.
The inadequacies of physical infrastructure remain a key constraint holding back the potential of economic growth. Of particular concern is electricity shortage, where disruptions in the supply of electricity are compromising growth as a result of closures of factories and economic activities. Quality of life and human capital are adversely affected in case of frequent electricity outages of long durations. Huge investments are needed to enhance capacity of electricity generation. At the same time, renovation of transmission and distribution lines is necessary to minimize electricity losses. Potentials of trade in electricity among countries of the subregion should be explored and subregional cooperation in electricity generation and distribution should be promoted to overcome electricity shortages.