Transcript India High Growth Scenario, Brookings, 2014

NS4053
Winter Term 2015
India: High Growth Scenario
Overview I
• Rakesh Mohan and Muneesh Kapur, “Secular Stagnation:
Can India Buck the Trend?” Brookings, October 2014
• India’s GDP has growth at an average of over 6% for the
last 35 years
• Places country in a small elite group of high growth
countries
• Most important question for India now is whether the
country can join an even smaller elite by maintaining a
sustained high growth path over the next three decades
• Question posed five years ago would have reived almost
unanimous yes
• Situation has changed with more uncertainty now with
the possibility of secular stagnation in many advanced
countries – many repercussions for emerging economies
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Overview II
• Despite high growth over last three decades, per capita of
India remains around $1,500
• Even if per capita income growth around 7% per annum it
will only reach around $6,000 by 2035
• Viewed in this context, India does not have the option of
not aiming at high growth
• Paper wants to develop a scenario that suggests high
growth well within realms of possibility for India
• Finds India can growth a 8% per annum over next 15-20
years even if sustained slowdown in advanced countries
• Predicated on global trade recovering as a result of
growing emerging economies and developing countries
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Overview III
• Still it will take strong policy action by Indian
policymakers in terms of macroeconomic stability
particularly
• Fiscal stabilization and
• Continuous structural action to stimulate high public and private
investment
• The institutional development reforms now needed to
move up the ladder towards upper middle income states
will be much harder than those achieved in the past
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Great Slowdown 2012-14 I
• First need to assess the growth slow-down of 2012-14
• Slowdown occurred after almost a decade of consistent
high growth including sharp recovery from 2008-09 crisis
• Monetary and fiscal policy response to the global crisis
was rapid, but overshooting on the stimulus
• Caused high but unsustainable growth – 9% in 2009-11
• Sowed the seeds for inflation and current account
pressures
• Inflation is still to come down to the desired level of 4-5%
• Fiscal correction is a work in progress.
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Great Slowdown 2012-14 II
• Delayed and incomplete withdrawal of fiscal stimulus led
to crowding out of the private sector
• Simultaneously, high nominal interest rates in an
environment of subdued growth also hindered corporate
profitability and investment
• Global environment has imparted headwinds
• Growth in exports and services during 2012-2014 was
almost a third of that during 2003-07.
• Strong boost to domestic demand during 2009-14 lead to
growing current account deficit from 1.3% GDP in 2007 to
4.7% in 2012-13 – clearly above desirable and sustainable
levels
• Another feature of slowdown was near collapse of
manufacturing growth – unprecedented in Indian history
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A Simulation for 2017-32 I
• Historically, Indian growth accelerations have been
accompanied by
• Higher gross domestic investment rates
• Largely financed from correspondingly increasing domestic
savings
• Projections aim to provide a consistent macroeconomic
framework for returning Indian annual GDP growth to
around 7% in the near future then ascending to 8-9% over
2017-2032
• Task is to work out implications for the kind of
movements that would be needed in key macroeconomic
magnitudes to make such growth possible
• The results then provide some sense as to the feasibility
of achieving such a growth objective.
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A Simulation for 2017-32 II
Scenario entails:
• Gross capital formation rate to increase from about 35%
in 2012-13 to around 39% 2017-22 and further to 43%
during 2027-32
• Appears achievable in view of the actual investment rate
of 38% during 2007-08
• Corresponding rates of domestic savings would be about
36% during 2017-22, rising to 41% during 2027-32
• Seem reasonable, given domestic saving rate almost
reached 37% in 2007-08
• In this scenario the absorption of external savings kept at
around 2.55% of GDP – judged consisted with a
sustainable current account deficit.
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A Simulation for 2017-32 III
Overall efficiency of economy
• One crude measure – the incremental capital output ratio
-- ICOR
• Indian ICORs have ranged between 3.5 and 4.5 for much
of the past three years
• Projections imply an ICOR of about 4.2 over the next
couple of decades
• Therefore assuming a relatively high levels of efficiency
in resource use, but one that is consistent with Indian
historical achievements
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A Simulation for 2017-32 IV
Sector Implication
• Key feature of growth path is that even with relatively
optimistic agriculture growth scenarios of around 4% per
year, overall GDP growth rates in excess of 8% really not
possible without manufacturing growth approaching 10%
• A high rate of manufacturing growth was achieved during
2005-08, India has never sustained such a rate of growth
over a decade.
• Indian manufacturing over a period of a couple of
decades is a key element of the scenario
• With the Indian economy now more open, future
development of Indian manufacturing has to be
internationally competitive
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A Simulation for 2017-32 V
• Although the Indian factor endowment is abundant in
labor, Indian manufacturing has not been generally
competitive in labor using sectors
• Needs to be a focused effort at correcting this as, much
as China and other East Asian countries have done over
the past 30-40 years
• Need to tackle legacy issues connected with regulatory
impediments that constrain the use of both land and
labor in Indian manufacturing.
• There has been a traditional prejudice against the
location of industries in Indian cities which is where
skilled labor likely to be available
• Urban land ceiling regulations and other zoning
requirements have limited the amount of land fo
industrial development
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A Simulation for 2017-32 VI
Archaic Labor laws –
• There are over fifty national laws and many more statelevel laws.
• Most of the labor laws were formed during preindependent era by the British, with aim of checking the
growth of Indian Manufacturing industries.
• Since independence few reforms in laws.
• Govern how workers:
• can be hired and fired,
• their safety and compensation.
• There are laws on
• how many times a factory must be painted,
• how the toilets must be tiled and
• the correct place for an employee to spit.
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Assessment
• High sustained growth is possible in India, bur will
require
• Double digit manufacturing growth
• In turn this will require:
• Maintenance of appropriate interest rates
• A realistic and competitive real exchange rate and
• Removing impediments in labor and land markets
• In addition Indian cities must become more hospitable
towards the location of manufacturing activities.
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