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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 2 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 3 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 4 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. 5 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 6 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. 7 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. 8 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 9 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 10 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 11 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. 12 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. 13