Date: 10 May 2012
The event will be held in New Delhi , India , with the participation of distinguished participants from academia, government, civil society, international organizations, and the press. The list of well known participants making opening remarks, presentations and commenting on the publication includes:
Mr. Kaushik Basu
Chief Economic Advisor to the Government of India and
Professor of Economics, Cornell University
Mr. Pami Dua
Delhi School of Economics, University of Delhi
Mr. Ram Gopal Agarwala
Distinguished Fellow, Research and Information System for
Developing Countries (RIS)
Chief Economist, ESCAP and Director
ESCAP Subregional Office for South and
Country briefing note <download pdf file>
GDP is projected to grow faster in 2012 as compared to 2011
Despite moderation in economic activity, the economy of India maintained strong growth momentum in fiscal year 2011 in which GDP grew by 6.9% as compared to 8.4% in fiscal year 2010.
To contain inflationary pressures, the monetary policy stance remained firmly anti-inflationary, which contributed to the deceleration in growth in the short-term. While the global slowdown may have dampened export growth, high inflation and interest rates exerted downward pressure on private consumption growth, which is the main driver of overall economic expansion, accounting for nearly 60% of nominal GDP. Investment growth also slowed significantly.
On the output side, the slowdown in growth was mainly due to lower industrial growth, at 3.9%, in 2011 as compared to 7.2% in the previous year. Slower growth of the agriculture sector, at 2.5%, in 2011 should be seen in the context of a high base when the sector grew by 7% in the previous year. The services sector was clearly the main driver of growth as it expanded by 9.4%, more or less the same level in 2010.
The Indian economy's strong fundamentals, namely high savings and investment rates and rapidly expanding labour force and middle class will ensure a steady economic performance with some volatility in GDP growth rates from year to year. The economy of India is expected to expand by 7.5% in 2012, an improvement from 6.9% in the previous year. There are indications that the economy is turning around as core sectors, including manufacturing, show signs of recovery.
Inflation remains stubbornly high
Inflationary pressures persisted in India due to strong demand and structural rigidities on the supply side. Consumer price inflation for industrial workers was 8.4% in 2011, relatively high but down from 10.4% in 2010.
Tighter monetary policy had an impact in reducing aggregate demand and improved food supplies also played a role in mitigating price pressures. The persistence of inflation at elevated levels and the generalization of inflationary pressures to manufacturing products continued to be the major policy concern in the country. Persistently high inflation has kept inflation expectations high while an increase in the fiscal deficit in 2011 also had inflationary implications.
To protect the poor from high foodgrains prices, the Government of India has a targeted public distribution system under which poor are provided a fixed quantity of foodgrains per month at subsidized prices. To contain food inflation, structural measures might also be required due to downward stickiness in food prices, especially in the case of protein-rich items. In line with increased prosperity, the food habits of consumers have been changing from cereals to proteins, fruits and vegetables, and to contain food inflation, supply of these items has to be enhanced.
Signs of easing monetary policy to support growth
Since the beginning of 2010, India has continued to tighten its monetary policy and raised policy rates 13 times between March 2010 and January 2012. However, with some slowdown in growth and easing of inflationary pressure, the cash reserve ratio of scheduled banks was lowered by 50 basis points in January 2012 to add liquidity in the banking system and enhance availability of credit to the private sector to support growth. Moreover, the policy rate was cut by 50 basis points to 8% in April 2012 to support growth.
Budget deficit rises again after being successfully contained in recent years
The Government of India has successfully followed a plan to reduce its budget deficit in recent years. The target for 2011 was to bring the deficit down to 4.6% of GDP from 4.9% of GDP in 2010.
However, it could not achieve this target due to lower-than-expected tax revenue as a result of lower economic growth and higher-than-expected expenditures. The increased expenditures included subsidy payments resulting from elevated global oil and fertilizer prices. The budget deficit rose to 5.9% of GDP in 2011 and it is expected to narrow to 5.1% of GDP in the current fiscal year.
Current account deficit widened due to stronger growth in imports than exports
In India , merchandise exports growth decelerated sharply to a monthly average of 13.6% in October-November from 40.6% in the first half of fiscal year 2011. However, because imports moderated less than exports, the trade deficit widened.
Services exports continued to play a vital role in the country's external sector as information technology (IT) and business process outsourcing continue to lure Western firms to India . Workers' remittances to India are large and have been growing. Despite this, the current account deficit increased to 3.6% of GDP in 2011 from 2.7% of GDP in 2010.
This, combined with the rebalancing of global portfolios by foreign institutional investors and the tendency of exporters to defer repatriating their export earnings, has put significant pressure on the Indian rupee. The rupee depreciated by about 11% against the dollar between March 2011 and the same month one year later.
Workers' remittances play a major and positive role in the economy
Remittances from overseas workers are quite substantial and play a major role in the South Asian economies. Governments should consider some special and innovative institutional arrangements to protect migrants and provide social protection coverage. In this regard, a commission should be created to put forward a uniform stance of countries in South Asia to oversee migration and enhance its positive aspects.
Once established, the South Asian Migration Commission could formulate the framework for a coherent and comprehensive response to the issues surrounding migration generally applicable to all the countries in South Asia . By looking into best practices regionally and internationally, the Commission could help in designing policies that harness the benefits of migration in the best possible way for all stakeholders and minimize their negative effects.
Severe energy shortages require urgent response including enhanced regional cooperation
On the physical infrastructure side, several countries in the subregion, such as Bangladesh , Nepal and Pakistan , are facing severe electricity shortages.
To address energy shortages, the following measures must be undertaken urgently: setting up viable new power projects; minimizing transmission and distribution losses, including theft of electricity; increasing exploration of natural gas, crude oil and coal; tapping of regional markets and setting up infrastructure for energy imports; and incentivizing the development of renewable energy resources.
Due to limited public resources, involvement of the private sector should be enhanced and public-private partnerships should be encouraged.
Widespread poverty continues to remain a major long-term development challenge
Widespread poverty continues to be a major challenge in South Asia despite some notable success in reducing it over time. Even today, at least one in every three persons in South Asia is classified as poor.
To fight against poverty, countries need to continue to implement economic reforms to improve productivity, strengthen public institutions, improve economic governance and build social safety nets to protect the more vulnerable segments of the population.
To promote more inclusive growth, the provision of basic services, such as health care and education, should remain the principal priority in the policy agendas of all governments. Generating ample employment opportunities are crucial for the poor to earn a livelihood.
Policy brief: Living with high commodity prices <download pdf file>