Status of Indian Economic Reforms A hiatus or a pause before acceleration?

1. INTRODUCTION

Growth in Real GDP Averaged at 6% per Year during 19802005 India is in an enviable position among developing countries Fear of competition is receding confidence among Indian industries in their ability to compete in the world market. Success of IT is spilling over to manufacturing Indias standing as an economic power in the South Asian region and the world has risen None of this would have happened but for systemic reforms initiated in 1991 Origins of reforms

INTRODUCTION (continued)

Break from the Hindu rate of grown of 3.75% per year from 1950-80 Piece-meal and hesitant reforms of 1980s accompanied by fiscal profligacy and debt accumulation generated unsustainable growth Macroeconomic crisis of 1991 Approach to IMF and the World Bank

INTRODUCTION (continued):

Systemic reforms Initiated Reforms not reversed as they were after the 1966 crisis Collapse of the Soviet Union Chinas rapid growth after 1978 Table 1

2. POST-REFORM PERFORMANCE 2.1 GDP Growth

Table 2 Peak rate of 7.8% in 1996-97 Since then fluctuations in the range of 4% 8.5% Adjustment for monsoons and business cycle

2.2 Poverty Reduction

Table 3 Fluctuations of Poverty Ratio around 50% during 1950-1980 Reduction since 1980 Still a long way to go

2.3 Fiscal performance

Table 4 Slackening of fiscal consolidation efforts Failure to address subsidies Tax take low Progress in tax reforms High public debt

2.4 Domestic Savings and Investment

Table 5 Public sector dissaving Puzzling dominance of direct saving in physical assets Current account surplus for 3 years in a row Unhealthy accumulation of reserves

2.5 External Sector 2.5.1 Exports of Goods and Services

Table 6 China versus India Contribution of Software and BPO

2.5.2 Service Exports and BPO

AIMA task force report IT and ITES share in GDP and employment growth Backlash

2.5.3 Foreign Direct Investment

Table 7 Modest inflows Poor climate for FDI Ministry of finance assessment Bottlenecks

2.5.4 Special Economic Zones

Attempt to imitate China Failure of past attempts

2.5.5 Exchange Rate and Reserves

Fear of Floating Capital account convertibility

2.6 Financial Sector Reforms

Mixed picture in different segments Sea change compared to financial repression of pre-reform era Interest rates largely deregulated Greater competition from private banks and foreign banks Government pre-empts reduced significantly Establishment of autonomous Board of Financial Supervision Residential norms on capital adequacy Improved debt recovery and restructuring mechanism Government Securities Market with primary dealers as market matures Delivery Version Payment System Establishment of Clearing Corporation of India

2.6 Financial Sector Reforms Continued

Improvements in reach and depth of banking sector, its balance sheet, capital structure, net profits and NPAs. New financial products introduced Government Security Market has experienced increases in market size, lower yields and longer maturities Monetary Policy more independent and based on indirect instruments Turnover in foreign exchange markets increased Despite achievements problems remain Risk Assessment mechanisms not up to standard Not ready for Basel-II Public ownership a major problem Success in reforming of equity markets Creation of SEBI, National Stock Exchange Transactions costs fall and markets are integrated nationally

3. SOCIAL SECTORS AND NATIONAL COMMON MINIMUM PROGRAM

Consensus on poverty eradication as overarching objective of development Differences on strategies for achieving the objective Trickle down versus Pulling Up Employment guarantee Program

4. CONCLUSION:

Reform process stalled Plethora of committees and commissions to study issues studied several times earlier Actions cannot be delayed in several areas Further opening of the economy to external competition Have to move away from protectionism Attract larger inflows of FDI including in manufacturing Push for further liberalization of trade in goods and services in the Doha Round

CONCLUSION (Contd):

Financial sector reforms including further divestment Set up a date certain for capital account convertibility Fiscal consolidation Tax and Expenditure reforms Rethinking Fiscal Federalism Privitization National Investment Fund

Table 1 GDP Per Capita (1990 International Dollars): 17001998 and 2003
1700 1820 1870 1913 1950 1973 1998 2003
China India

600 550

600 533

530 533

552 673

439 619

839 853

3117 4980 1746 2880

Source for: 1700-1998: Maddison, Angus. 2002. Growth and Interaction in the World Economy: The West and the Rest over the Past Millennium, OECD Observer. Source for 2003: World Bank, 2005, Table 1.1.

Table 2 Real GDP Growth

Period/ Average Annual Growth Rate (%)

19501980

19801990

19911992

19921997

19972002

2002-03

2004-05

2005-06* Projection

2005-06** Apr-Sept

Real GDP

3.50

5.9

1.3

7.1

5.5

4.0

6.9

7.0-7.5

8.1

Population Read GDP per capita

2.2

2.1

2.0

1.9

1.7

1.7

1.6

1.6

1.6

1.3

3.8

-0.7

5.2

3.8

2.3

5.3

5.9

6.5

Sources: MOF (2005a), Annex Table 1.6, * RBI, (2005c) ** http://mospi.nic.in/t1.htm

Table 3 PERCENTAGE OF POPULATION LIVING IN POVERTY

RURAL August 1951 November 1952 September 1961 July 1962 July 1973 June 1974 July 1977 June 1978 1983 July 1987 June 1988 July 1993 June 1994 July 1999 June 2000 Target for 2007 (Tenth Five-Year Plan) 47.4 47.2 56.4 53.1 45.7 39.1 37.3 27.1 21.1

URBAN 35.5 43.6 49.0 45.2 40.8 38.2 32.4 23.6 15.1

NATIONAL 45.3 46.5 54.9 51.3 44.5 38.9 36.0 26.1 19.3

Sources: World Bank (2000), Annex Table 1.1 and MOF (2005a), pp.225-227

Table 4 Fiscal Deficit (% of GDP)

Centre 1990-91 1996-97 2002-03 2003-04 2004-05
(Revised)

States 3.3 2.7 4.7 4.4 3.8 3.7

Consolidated 9.4 6.4 10.1 8.4 8.3 7.7

6.6 4.1 5.9 4.8 4.5 4.3

2005-06
(Budget)

Source: Rao (2005), Table A4, RBI (2005a), Table 11

Table 5 Savings and Investment Rates

Sources: Central Statistical Organization (CSO), National Accounts Statistics, 2004 and earlier issues

1990-1991 Gross Domestic Savings Public Household: Financial Physical Corporate TOTAL PRIVATE Net Capital Inflow Gross Domestic Investment (Adjusted for errors and omissions) Public Household Corporate TOTAL PRIVATE

1995-1996

2001-2002

2003-2004

23.1 1.1 19.3 8.3 11.0 2.7 22.0 3.2

26.3 (0.1) 10.4 11.2 4.6 15.8

25.1 2.4 18.2 8.9 9.3 4.5 22.7 1.7

26.8 (0.2) 7.7 9.3 9.6 18.9

23.5 -2.8 22.8 11.2 11.6 3.5 26.3 -0.4

23.1 (-1.0) 6.0 12.6 5.1 18.1

28.1 -0.3 24.3 11.4 12.9 4.1 28.4 -1.8

26.3 (3.3) 5.6 12.9 4.5 17.4

Table 6 External Sector

1948 Share in World Merchandise Exports Rank Share in World Commercial Services Export Rank 1983 1993 2004

2.2 (0.9)*

0.5 (1.2)*

0.6 (2.5)*

0.8 (6.5)*
30 (3)* 1.9 (2.9)* 16 (9)*

*China Source: International Trade Statistics, Tables I.5, I.7 and II.2, Geneva, World Trade Organization, 2005.

Table 7 Foreign Capital Inflows and Reserves (US$ Million)

19901991 FDI Portfolio TOTAL Reserves External Debt (Total) 97 6 103 1000* 83801 19971998 3525 1828 5353 29367 93531 20032004 4673 11,377 16050 112959 98488 20042005 5535 8909 14444 1415142 104551

Cumulative
44,5112 55,4672 99,9782 142,1813 122,1474

Short Term
Debt Service (%)

8544
35.3

5046
17.8

2745
14.1

4569

7,2754

1 As of August 1991, 2 as of March 31, 2005, 3 as of November 18, 2005, 4 as of June 30, 2005 Sources: RBI (2005b), Table 46, p.898, MOF (2005a), Table 6.2