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UNDER EMBARGO
UNTIL 12:00 BANGKOK TIME,
05:00 GMT, 6 MAY 2010
India
Briefing Notes for the Launch in New Delhi, 6 May 2010
Economic growth slows, but the rate among the highest in the world
Global economic crisis affected countries of South Asia adversely but generally to a lesser
extent as compared to countries in other subregions of Asia and the Pacific. The crisis
penetrated domestic economies of the subregion through substantial decline in exports and
slowdown in capital inflows. Therefore, the impact of the crisis was less pronounced on these
economies. Many of the countries of the subregion have been facing security problems
ranging from internal conflicts to terrorist attacks linked to global geopolitical issues, thus
adversely impacting on their macroeconomic performance.
India felt the crisis after a period of high growth momentum that had reached an annual
average of 8.8% over the previous five years. In 2008, growth was 7.7% during the first half
of the fiscal year, but fell to 5.8% in the second half (October 2008 to March 2009). Even so,
at 6.7% India achieved one of the world’s highest growth rates in 2008. While the economy
largely sustained the momentum of the previous five years, both external and domestic
demand was affected by the crisis. There was a slowdown in the services sector, in domestic
private consumption, in investment demand and in manufacturing output.
By the beginning of the third quarter of 2009, despite the uncertain global macroeconomic
scenario, domestic and external financing conditions showed signs of improving and the
business outlook turned positive, signalling a revival of industrial activity. From August to
November 2009 industrial output grew in double digits, while GDP growth during the second
quarter of the fiscal year 2009 (July to September 2009) was 7.9%. According to the
preliminary estimates, GDP grew by 7.2% for the full fiscal year 2009. This recovery is
remarkable given the fact that the agriculture output declined by 0.2% due to poor weather
conditions as a result of delayed and sub-normal monsoon. Both the industrial and services
sectors grew by over 8%. With a revival in investment and private consumption, growth in
exports and strong expansion in industrial production in recent months, growth in GDP is
projected to accelerate to 8.3% in 2010.
Inflation remains a key policy concern
A sharp increase in food and fuel prices in 2008 created hardships for large populations in
countries of the subregion. As inflation adversely affects the poor disproportionately, it is a
serious problem for many countries in South Asia with high incidence of poverty. Therefore,
controlling inflation is and will remain a major challenge for the subregion. In India,
consumer prices, particularly of food, remain stubbornly high and the consumer price index
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ESCAP’s Economic and Social Survey of Asia and the Pacific 2010 – Briefing notes: India
(for industrial workers) rose to about 9.0% in 2008. Inflationary pressures continued into
2009, largely resulting from the poor monsoon with adverse impact on food supplies, firming
up of global commodity prices and the Government expansionary fiscal stance. Inflation as
measured by the consumer price index was around 12.0% in 2009. A faster increase in food
prices has become a cause of concern.
Trade declines sharply but workers’ remittances stay strong
The global economic crisis impacted adversely on expansion of both exports and imports. At
the same time, workers’ remittances held up strongly and provided support to the current
account balance. In India, the balance of payments came under pressure in 2008, when the
current account deficit widened to 2.4% of GDP in 2008. Furthermore, net capital inflows fell
to $9.1 billion in 2008 as compared with net capital inflows of $108 billion in 2007,
reflecting the unstable nature of those flows. Both exports and imports fell in 2009 but
workers’ remittances remained strong. The current account deficit further widened to 3.3% of
GDP for the first nine months of fiscal year 2009.
Coordinated use of monetary and fiscal policies
As for all other subregions of Asia and the Pacific, Governments in South Asia used
expansionary fiscal and monetary policies to counter the negative fallout of the global
slowdown and moderate the decline in growth. Of some concern is the continuation of high
budget deficit in some countries. Moving forward, it is important that governments in the
subregion prepare a clear roadmap of fiscal consolidation to be implemented at the earliest to
contain growing public debt. Central banks showed much more willingness to implement a
range of monetary-easing and liquidity-enhancing measures including reduction in the cash
reserve ratio, the statutory liquidity ratio and key policy rates in support of expansionary
fiscal policies. Looking ahead, and as inflationary pressures increase, there are signs that
monetary policy has started to tighten. The Reserve Bank of India in January 2010 raised the
cash reserve ratio by 0.75% to 5.75% and in March 2010 policy interest rates were raised by
25 basis points, pushing the repo rate up to 5%. In April 2010, it raised both the cash reserve
ratio and the repo rate by 25 basis points each. It was part of a fine balancing act between
containing inflationary pressures and supporting the domestic economy as the global
recovery process remains weak.
The Government of India introduced a large fiscal stimulus package to boost domestic
demand and contain the adverse impact of the global economic crisis. Fiscal stimulus was in
the form of tax relief to boost demand, and increased expenditure on public projects to create
employment and public assets. The Government renewed its efforts to increase infrastructure
investments in telecommunications, power generation, airports, ports, roads and railways,
besides expansion of the National Rural Employment Guarantee Scheme as a part of fiscal
stimulus in 2009 budget. The fiscal stimulus also included write-off of agricultural loans and
revision of salaries of Government staff (undertaken in 2008 and 2009). Fiscal stimulus
spending over 2008 and 2009 is estimated at the equivalent of 7.1% of GDP. As a result, the
budget deficit increased from 2.6% GDP in 2007 to 5.9% of GDP in 2008 and is estimated to
rise to 6.5% of GDP in 2009. The budget for the fiscal year 2010 attempted to address the
challenge of fiscal consolidation in the face of growing public debt by raising revenues and
containing unproductive expenditure. As a result, budget deficit is expected to come down to
5.5% of GDP in 2010.
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ESCAP’s Economic and Social Survey of Asia and the Pacific 2010 – Briefing notes: India
Yet another challenge for the economy is to manage portfolio capital inflows, mainly foreign
institutional investments (FIIs) that are leading to build up of bubbles in capital markets and
putting upward pressure on the exchange rates. The Bombay Stock Exchange Sensitive Index
(SENSEX) appreciated by more than 100 per cent between early March 2009 and end of
2009 as the FII inflows returned to the capital markets and Indian rupee appreciated by
around 6% in 2009.
Sustained high and inclusive economic growth needed for rapid poverty reduction
Widespread poverty continues to be a serious problem for all countries in South Asia.
Therefore, accelerating economic growth is crucial to bring down poverty levels. The
challenge will be how to make growth more inclusive by spreading its benefits to larger
segments of the population. More resources should be devoted to provision of basic services
such as education, health, sanitation and housing particularly for those belonging to lower
income groups. Targeted programmes for the benefit of the poor in the broader framework of
social protection should also be a priority. The Indian National Rural Employment Guarantee
Scheme being successfully implemented in India can be replicated in many developing
countries. The scheme provides guaranteed employment at minimum wage for 100 days each
year to every rural household whose adult members volunteer to do unskilled manual work.
The inadequacies of physical infrastructure remain a key constraint holding back the potential
of economic growth. Of particular concern is electricity shortage, where disruptions in the
supply of electricity are compromising growth as a result of closures of factories and
economic activities. Quality of life and human capital are adversely affected in case of
frequent electricity outages of long durations. Huge investments are needed to enhance
capacity of electricity generation. At the same time, renovation of transmission and
distribution lines is necessary to minimize electricity losses. Potentials of trade in electricity
among countries of the subregion should be explored and subregional cooperation in
electricity generation and distribution should be promoted to overcome electricity shortages.
Published by the UN Economic and Social Commission for Asia and the Pacific – May 2010
Not an official document
http://www.unescap.org/survey2010
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