Bangkok (UN Information Services) – India’s economy has entered into a “new phase of high growth,” with expansion of nine per cent forecast for 2008, buoyed by investment and savings amid increasing productive capacity, according to the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
In its Economic and Social Survey of Asia and the Pacific, ESCAP said the sustained expansion of the Indian economy would see growth at between 8.5 and 9.5 per cent over the medium term, following growth of 8.7 per cent in 2007. The main drivers of the growth lay in the industrial and services sectors which compensated for a slowdown in agriculture.
But there are also concerns over sustaining the high level of growth and whether India “is growing beyond its growth potential” with strains on labour force capacity and capital stock as well as creating inflationary “instabilities.”
“India could achieve and sustain a 10 per cent growth rate by further improving the country’s business environment, by developing its physical infrastructure and human capital,” ESCAP said.
Inflation eases but outlook raises concern
Inflationary pressures eased in 2007 to 5.5 per cent from 6.7 per cent a year earlier, but ESCAP warned that pressures could persist as international commodity prices, especially oil and food prices, remain high. ESCAP expects inflation at five per cent for 2008.
Underlying the price pressures were high food prices, as well as demand-supply gaps in the domestic production of major food staples and oil seeds amid rising global prices.
ESCAP says that for all South Asian economies, sustaining the momentum of higher growth could be undermined by high oil and food prices. “Should oil and food prices remain very high, they will compromise economic growth while putting pressure on budgets, inflation rates and the balance of payments in countries throughout the sub-region,” ESCAP said.
ESCAP pointed to positive developments in India’s fiscal deficit in 2007, which dropped to 3.1 per cent of gross domestic product (GDP) from 3.7 per cent of GDP in 2006, reflecting government efforts to improve revenues and efficiencies in allocating public spending. A resetting of expenditure priorities has led to higher outlays for the social sector.
Capital inflows point to strong macroeconomic fundamentals
Higher capital inflows, reflected by foreign direct investment which reached US$19.4 billion in 2006, were attributed to a strengthening of macroeconomic fundamentals, greater investor confidence and sufficient global liquidity.
ESCAP also reported India enjoying a sound trade performance with both exports and imports continuing to grow strongly, and a surplus in net invisible payments ensuring India’s current account deficit remained around 1.1 per cent of GDP in 2006. “For 2007 alone, both exports and imports are estimated to have grown by more than 20 per cent,” ESCAP said.
Domestic public debt remains a “serious problem”
But ESCAP, in a wider reference to the South Asia region, warned that public debt remains a “serious problem”, especially domestic public debt. “High domestic public debt pushes up interest rates and crowds out private investment, which is much needed to promote economic growth,” ESCAP said.
India’s fiscal deficits have increased the combined debt of the central and state governments from about 70 per cent of GDP in 1990 to about 87 per cent over 2002 to 2004. Public debt had eased recently to around 82 per cent for fiscal year 2006.
ESCAP warns that servicing the public debt is the “real burden.” In India, interest payments alone accounted for at least 28 per cent of the revenue of the central and state governments in 2005.
In order to address the debt issues, ESCAP calls for the vigorous pursuit of policies that promote growth and the strengthening of tax administration to overcome low revenues due to inefficient tax systems.
ESCAP said given the issue of widespread poverty the demand for public spending remains high. “The challenge for governments is to contain wasteful public spending and orient it towards priority sectors,” it said.
Agriculture’s revitalization key to reducing poverty
ESCAP, in a wider view of the Asia Pacific region, said efforts to reduce poverty in the region required the promotion of productivity in the agriculture sector.
“Agriculture appears to be neglected, even though it still provides jobs for 60 per cent of the working population and shelters the majority of the region’s poor people,” it said in its Survey.
The Survey goes on to note that growth and productivity in the sector have slowed and the green revolution appears to have by-passed million. “In South Asia, growth in agriculture dropped from 3.6 per cent in the 1980s to three per cent in 2002-2003,” ESCAP said.
ESCAP said that by raising the average agricultural productivity across the region some 218 million, a third of the region’s poor, could be taken out of poverty. India, China, Bangladesh and Indonesia would gain the most.
It also noted that “large gains in poverty are also possible through comprehensive liberalization of global agricultural trade, which could lift a further 48-51 million people out of poverty in the region.”
The policy focus needs to be on revitalizing agriculture. This, ESCAP said, requires connecting the poor to markets through improvements to rural infrastructure, the availability and management of water, agricultural technology, increasing the capacity to adapt technologies, and speeding up diversification and commercialization.
ESCAP says improving land distribution and access to credit and extension are also important, as well as making macroeconomic policy “friendlier to agriculture, all enabling the poor to make a dent on poverty by themselves.”
It also called for support for those looking to shift from agriculture to industry and services, whether it is still in rural areas or by way of migration to the cities.
Further information on the Survey can be found at:
For more information, please contact:
Hak-Fan Lau, UN Information Services, ESCAP
Tel.: +66-2-288-1866, Mob.: +66-84700-1147
Ari Gaitanis, UN Information Services, ESCAP
Tel.: +66-2-288-1862, Fax: +66-2-288-1052