NS4053 Winter Term 2015 India: High Growth Scenario.

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 state-level laws. •Most of the labor laws were formed during pre-independent 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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