Publication: India Economic Update, December 2010
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Date
2010-12
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2010-12
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The Indian economy recovered from the slowdown at the time of the global financial crisis with strong Gross Domestic Product (GDP) growth, in particular over the first half of FY2010-11. The agricultural sector bounced back strongly after the 2010 monsoon brought normal levels of rainfall, and the industrial sector registered double-digit growth for three consecutive quarters. Inflation came down to 7.5 percent in November but then accelerated again to 8.4 percent in December because of a renewed food supply shock. The current account deficit in FY2009-10 was the largest ever (in US$ terms) and the monthly deficit widened further during the first half of FY2010-11, but the trend then reversed with import growth slowing and export growth accelerating in September-December 2010. With the significant inflation differential between India and its trading partners, the rupees real effective exchange rate (REER) strengthened. On the fiscal side, massive windfall revenue from wireless spectrum auctions and buoyant tax revenue are likely to be offset by two supplementary spending bills. Monetary policy tightening continued with increases in policy rates. This update also discusses several medium-term issues: the link between the real exchange rate and growth, a long-term look at education, demographics and growth, the challenges facing the introduction of the Goods and Services Tax (GST), and the mid-term evaluation of the eleventh development plan. On the real exchange rate, economists have pointed out that the most successful emerging market economies have maintained an undervalued exchange rate to promote exports. In India, the real exchange rate has been broadly stable since the early 1990s, and the International Monetary Fund (IMF) judges it fairly valued with respect to different measures of equilibrium. However, the growing trade deficit and a large fiscal deficit do not quite fit this picture. Discussing policies, we argue that it would be best to focus on policies that increase productivity and competitiveness.
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“World Bank. 2010. India Economic Update, December 2010. © World Bank. http://hdl.handle.net/10986/27706 License: CC BY 3.0 IGO.”
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Publication India Economic Update, March 2012(Washington, DC, 2012-03)In 2011, India's economic growth has slowed to below 7 percent and the stock markets mirrored the weakening economic conditions, but recovered somewhat in early 2012. Industrial sector output growth briefly slipped into negative territory. On the demand side, fixed investment and consumption growth slowed. India's exports were growing very strongly through 2011 despite the worsening economic conditions in Europe, which continued to be India's most important export market. The balance of payments continued to be in surplus during April-September 2011, but the Reserve Bank of India (RBI) reserves declined by a small amount since then. The rupee nevertheless depreciated by 20 percent between August and December, before recovering somewhat in early 2012. Macroeconomic policies presented a mixed picture: the central government is likely to miss the ambitious target for fiscal consolidation it had set in the FY2011-12 budget by about one percent of Gross Domestic Product (GDP). Slippages are due to lower-than-expected revenues and increasing outlays on subsidies, which had been given low budgetary allocations in anticipation of strong policy changes, which failed to materialize. In India, the slowdown in GDP growth witnessed over the last two quarters is likely to extend into the coming fiscal year because of the weakness in investment. In FY2011-12 and FY2012-13, GDP growth is forecast to reach around 7-7.5 percent, a significant slowdown from the 9-10 percent growth in the run-up to the global financial crisis. The slowdown is at least partly caused by structural problems (power projects facing delays due to the lack of coal and gas feedstock, mining and the telecom sectors hit by corruption scandals, unavailability of land and infrastructure).Publication India Economic Update, June 2010(Washington, DC, 2010-06)India's economic performance in FY2009/10 shows that the recovery from the slowdown during the global financial crisis is well underway. India's Gross domestic Product (GDP) growth in FY2009/10 has beaten expectations by reaching 7.4 percent compared with 6.7 percent in the previous year. In particular, agricultural sector growth was better than feared with a slightly positive growth rate despite the worst monsoon shortfall in three decades. Strong growth in the fourth quarter pushed annual GDP growth to 7.4 percent in 2009-10. Fourth quarter growth reached 8.6 percent (y-o-y), the highest quarterly growth rate since the end of FY2007/08. The industrial sector's robust recovery beat expectations. Growth in the last quarter of fiscal year FY2009/10 was an unexpectedly high 13.3 percent resulting in over 12 percent growth in the second half of year, nearly double the 6 percent growth witnessed in the first half. Higher inflation mars the bright picture, but there are clear indications of moderation. Inflation as measured by the wholesale price index (WPI) averaged 10 percent during February-May 2010. India's recovery after the slowdown seems well underway. Growth is projected to climb to 8-9 percent in the next two years. These growth rates are achievable without a renewed build-up of inflationary pressure as long as agricultural growth returns to trend, infrastructure constraints are alleviated, and international prices remain stable. Over the next year, sources of growth will shift from fiscal stimulus to manufacturing and, possibly a recovering agriculture.Publication India Economic Update, June 2011(Washington, DC, 2011-06)In fiscal year 2010-11, India's economy has expanded at a rate close to that observed prior to the global financial crisis. However, growth in the second half of the year slowed, and the performance of industry and investment has been particularly disappointing. Despite some fiscal consolidation and monetary tightening, inflation has emerged as a serious concern because of its effects on the poor, who are usually less able to protect themselves against rising prices, and because of its dampening effects on long-term investment, which is sensitive to interest rate expectations. India's economic growth reached 8.5 percent, helped by a strong rebound of the agriculture sector because of good rains in the 2010 monsoon season against the near-drought conditions of 2009. On the external side, exports staged an extraordinary recovery and the current account deficit narrowed, while capital flows slowed driven by a pronounced decline in foreign direct investment. Foreign institutional investment remained robust, however, and external borrowing increased to compensate partially for the decline in Foreign Direct Investment (FDI). The rupee remained stable against the U.S. dollar but showed a small real appreciation against a 36-currency trade weighted index, and Reserve Bank of India foreign reserves increased to more than $310 billion. The central government budget deficit for FY2010-11 is estimated to have reached 6 percent of Gross Domestic Product (GDP), an important contraction from the widened fiscal stance of FY2009-10. Budget implementation benefited from higher-than-expected growth in nominal GDP and related higher tax intake; although the tax-to-GDP ratio is still significantly lower than in FY2007-08. The spending-to-GDP ratio, on the other hand, was reduced by 0.7 percent of GDP despite two supplementary demands for grants.Publication India Economic Update, September 2012(Washington, DC, 2012-09)Real gross domestic product (GDP) growth has slowed to a nine year low of 6.5 percent for FY2011-12, from 8.4 percent in the two previous years. The slowdown was most pronounced in the industrial sector, and more specifically in manufacturing and mining. In the quarter ending in June 2012, industrial output growth as measured by the Index of Industrial Production (IIP) has been negative. The contraction was particularly pronounced in the production of capital goods, which is in line with falling investment demand on the expenditure side of the National Accounts. The current account deficit reached a record 4.2 percent of GDP in FY2011-12, because of decelerating export growth and high crude prices. Merchandise exports grew by 41 percent in September 2011, but their growth slowed to 2 percent by August 2012 (measured as 12-months cumulative exports compared with the same 12 months of the previous year). Inflation reached 7.6 percent in August 2012. This represents a marked slowdown since September 2011, but there has been an uptick in food prices in recent months. Also, higher domestic prices for fuel, which are necessary to rein in spending on subsidies, will contribute to inflationary pressure. Inflation is therefore expected to reach 8 percent at end-March 2013. Real GDP growth is forecast to reach around 6.0 percent in FY2012-13, after 5.3 percent growth Q4 of FY2011-12 and 5.5 percent growth in Q1 of FY2012-13. The slowdown is at least partly caused by structural problems. These include power shortages, which are partly caused by the financial difficulties facing the electricity sector as discussed in the special topic section of this update, the corruption scandals that have hit the mining and telecom sectors, investor uncertainty because of pending changes in legislation (mining, taxes, land acquisition), and the tightening constraints of land and infrastructure. Tighter macroeconomic policies, slow growth in the core Organization for Economic Co-operation and Development (OECD) countries, and worries about another global recession also weigh on growth. Important signals to revive domestic growth drivers to lift sentiment more than produce instant efficiency gains could come from reforms recently announced and, more importantly, the reform of direct taxes, the implementation of the long-delayed Goods and Services Tax (GST), and passage of the land acquisition and mining bills. This update also looks closely at two important topics for medium- and long-term growth, namely India's Right to Education (RTE) Act, which aims to shape elementary education, and the financial difficulties in the Indian power sector.Publication India Development Update, October 2013(Washington, DC, 2013-10)Although the recent market turmoil has been driven primarily by external factors, it has magnified India's macroeconomic vulnerabilities. India was just one of a large number of emerging market economies whose currency and capital account were adversely affected by a large outflow of portfolio investment this summer. The current downturn presents an opportunity to push ahead with critical reforms. The current situation is unlikely to place an insurmountable stress on the economy, but it does offer an opportunity for measures to strengthen the business environment, attract more Foreign Direct Investment (FDI), and increase productivity. The rupee depreciated sharply in May-August 2013, mainly caused by market fears of an early end to the Federal Reserve's stimulus program. As global investors shifted funds into US treasuries, the May-August fall in the rupee closely mirrored movements in other emerging market currencies and US T-bonds. The current account deficit moderated and exports performance improved. After reaching a record high of 6.5 percent of Gross Domestic Product (GDP) in the third quarter FY2013, the current account deficit improved to 3.6 percent of GDP in the fourth quarter. The decline in poverty has accelerated, but vulnerability remains high. Between 2005 and 2012, India lifted 137 million people out of poverty and reduced the poverty headcount (at the national poverty line) to 22 percent of the population. The depreciation in the rupee is unlikely to have major adverse effects and provides an opportunity to accelerate growth through further progress on the reform agenda. Financing of the gap is expected to come in roughly equal parts from FDI and institutional flows in FY2014, with a growing contribution from FDI in FY2015.
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