The Indian Economy: Current Performance and Short-Term Prospects

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Abstract

This paper provides an update on the historical and recent performance of the Indian economy. It reviews India’s growth performance, and the supporting performance of savings and investment, productivity and international trade. It highlights the performance of a dynamic sector (automobiles) and a laggard sector (agriculture) and comments on the structure of income growth in recent times. It also points out emerging constraints on rapid economic growth, e.g., increasing regional and personal inequality, rising unemployment, infrastructural constraints and the fiscal deficit. It assesses the prospects for economic growth in the near term.

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Source: Maddison (2006). Table 1: Comparative Macroeconomic Performance of India and Britain, 1600-1947

Whereas the European colonial powers and the settlement countries, e.g., the US, recorded positive rates of growth of per capita GDP, period growth rates in the colonies were stagnant if not negative, before their respective independence.! However, India’s colonial experience was not unique since most colonies that did not result in settlements had poor records of economic growth, even stagnation (Tables 2 and 3). Table 2 shows levels of GDP per capita in the major European colonial powers and some colonies for about 500 years. Table 3 provides information on growth rates in the same countries.

Table 3: Growth of per capita GDP in European Colonial Powers and Former Colonies, 1500- 1998 (annual average compound growth rates)

Note: Figures in parentheses denote shares in real GDP. Source: Reserve Bank of India. Note: Figures in parentheses denote shares in real GDP. Table 5: Growth Rates of Real GDP (per cent)

N.B. (a) 2002-03 was a significant drought year and its inclusion raised the standard deviation of the growth rate. If 2002-03 is excluded the average growth for 2001-02 to 2005-06 would have been 7.55 % and the standard deviation 1.2.

Source: Based on data from Handbook of Indian Statistics (2006), Reserve Bank of India. Real GDP growth was at 9.0 per cent in 2005-06 and accelerated to 9.4 per cent in 2006-07. This comes on the back of two good years for GDP growth: 8.5 per cent in 2003-04 and 7.5 per cent in 2004-05. As a consequence of such rapid growth India is now a huge market witl a large and young population. As much as 95.1 per cent of India's billion plus population is below the age of 65, with almost a third being younger than 14. A Reuters report estimates that by the time these children enter the labour force India will be a US$1 trillion plus (at market exchange rates) economy. By some reckoning India's middle class (those earning between US$2000 to $22,000 a year) is 300 million strong. More importantly this young

Source: Bosworth and Collins (2007) Table 6: Sources of Growth in India: Aggregate and by Major sectors (percent per year)

Source: Economic Survey, Government of India, 2006-07 |Savings and Investment (Base: 1999-2000) as per cent of GDP at Current Market Prices

Table 8: India: Key Fiscal Indicators (per cent of G DP)

Source: IMF (International Financial Statistics) and RBI.

Source: Economic Survey Government of India Table 10: Commodity Composition of India’s Exports

Table 12: Invisibles Account (Net) US $ million Furthermore, the Foreign Direct Investment (FDI) regime has been further liberalized and the World Investment Report 2006 mentions India as among the top 15 recipients of FDI with improved prospects for the intermediate run.

Table 11: India’s Merchandise Trade

Income Figures in Rs. 000 per annum at 2001-02 prices, households in ‘000 numbers Table 13: Growing Prosperity - All India

Source: Economic Survey: Government of India 2006-07

Figure 2: Investment in Indian Agriculture Source: Computed from Figures provided by Reserve Bank of India The stark conclusion about the near stagnation of productivity in Indian agriculture in the post reform period at the aggregate can be contrasted with the figures on yields reported for individual crops. Y ields for major foodgrains grew faster in the 1980s than in the post reform period. The performance of some individual non-foodgrains has, however, been better in the post reform period. However, the performance of all non-foodgrains as a whole remains lacklustre.

Source: Author's computation based on Reserve bank of India’ Handbook of Statistics on the Indian Economy. le 15: Average Growth rates of Area, Production and Yield under Foodgrains, Non-foodgrains and All Crops. (percentages)

Figure 3: Agricultural Subsidies in India at 2000-01 prices (Rs. Billion) Source: Computed from Mullen et al. (2005)

Source: Author's calculations based on data in Handbook of Statistics on the Indian Economy, 2001, Reserve Bank of India for data upto 1998-99 and Handbook of Statistics on the Indian Economy, 2003-04 for data since 1998-99. . Increasing regional inequality The aggregate economic growth narrative presented above masks substantial spatial variations. The regional variation in economic growth in India has remained stubbomly high despite the reforms. Table 16 presents mean growth rates and standard deviation for fifteen major states of India. In almost every year the mean growth rate has been lower than the (spatial) standard deviation of these growth rates, indicating persistently high spatial varia- bility. As a consequence per capita incomes show a tendency to diverge across Indian states. This increasing divergence across the states gets reflected in other critical areas as well, e.g. the regional incidence of poverty, particularly rural poverty. Figure 4 shows that economic reforms have been accompanied by a rising coefficient of variation (across fifteen major Indian states) of the head count ratio of poverty. This coefficient of variation has had a distinct upward trend - particularly in the 1990s.

Figure 4: C oefficients of Variation of Head C ount Ratios in the Rural, Urban and Aggregte Sectors Jha (2001) shows that there is lack of convergence (in a formal statistical sense) in the incidence of rural poverty across Indian states both in terms of their ranks with respect to poverty as well as in terms of their levels of poverty. In fact in respect of the critical magnitudes of poverty, mean consumption and inequality of consumption, economic reforms do not seem to have made much difference to the inequality across Indian states for any category except urban mean Nee reat This lack of convergence extends itself to the level of NSS agro-climatic zones (NSS regions)” as Jha and Sharma (2003) point out. Further, as Jha (2004) has shown, there has been some increase of personal inequality in India as a consequence of the economic reforms program.

*To make the data comparable across rounds UP and Uttarakhand, Bihar and Jharkhand, and MP and Chattisgargh were each lumped together. The new states of Uttarakhand, Jharkhand and Chattisgarh were formed by splitting UP, Bihar and MP, respectively, in 2000. Table 17: Distribution of the Burden of Deprivation in Rural India

Table 18: Mean Consumption, Poverty and Inequality in Rural India at the National Level (Poverty Line Rs. 399 per capita per month)

N.B. Variations across the 20 states and 63 NSS regions constituting these states studied are recorded here. Thus the averages here need not tally with those for the country as a whole. Table 19: Variation of Mean Consumption, Poverty and Inequality across 20 States and 63 Constituent NSS regions in India

Source: Economic Survey, Government of India, 2006-07