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    March, 2014


    Cover photos: World Bank Photo Collection

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    WORLD BANK GROUP IN INDIA: COUNTRY PROGRAM SNAPSHOT India’s progress in economic and human development is one of the most significant global achievements of recent times. Between 2005 and 2010, India’s share of global GDP increased from 1.8 to 2.7 percent, and 53 million people were lifted out of poverty. India is home to globally recognized companies in pharmaceuticals, steel, and space technologies, and the country is a leader in the use of information technologies for e-government, and public service delivery. In line with these transformations, India is now among the top 10 percentile of fast growing nations and has become a prominent global voice. Progress on human development has been remarkable: life expectancy more than doubled from 31 years in 1947 to 65 years in 2012, and adult literacy more than quadrupled from 18 percent in 1951 to 74 percent in 2011. While India has made significant progress in reducing absolute poverty, it is still home to one-third of the world’s poor people. Significant development challenges remain. Helping India address these challenges is central to the World Bank Group’s goal of reducing poverty and boosting shared prosperity.

    RECENT ECONOMIC DEVELOPMENTS In recent times, India’s economic development has been remarkable. In the last decade, India grew faster than 89 percent of the world’s nations. Real GDP expanded at an average annual rate of 7.9 percent between FY2003-04 and FY2012-13. India also weathered the 2008–09 global crises relatively well, with GDP growth slowing to 6.7 percent in FY2008–09 and rebounding strongly to an average of 8.8 percent in the two subsequent years.

    Growth has been in double digits for some states—well above the all-India average. Under the government’s 11th Five-Year Plan (FY2007-2008 to FY2011-2012), some of India’s low-income states grew at a record pace with Bihar (one of the poorest states) outperforming even the most advanced states. Madhya Pradesh, Rajasthan, and Uttar Pradesh—all low-income and highly populous states—have also grown rapidly. The average annual growth rate in all low- income states combined was 8.1 percent during the duration of the 11th Five-Year Plan, marginally higher than the 8.0 percent average growth rate attained at the all-India level.

    India’s long run growth potential is high. The dependency ratio is expected to fall from 55 percent of the working-age population in 2010 to 47 percent in 2030, allowing for a higher output per capita. Savings rates are likely to rise as the relative share of the working-age group expands, which could lead to faster capital accumulation. The average schooling of the population aged 25 years and above is expected to increase from 4.4 years in 2010 to 6.0 years in 2030. Total factor productivity has grown by around 2.5 percent per year, and this rate could increase as markets integrate further and workers shift from low- to high- productivity jobs. While less than 30 percent of the population lived in cities in 2010, that amount is expected to climb to 40 percent in 2030.

    Figure 1

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    In the past two years, GDP growth has slowed while inflation remained high. In FY2012–13, the economy slowed to a ten-year low of 4.5 percent, but is expected to rebound to 4.8 percent in FY2013-14. The slowdown has been most pronounced in mining, construction and manufacturing, and the investment rate fell below 30 percent of GDP for the first time in nine years. On the other hand, agriculture has benefitted from a good monsoon and performance in the service sector – the main engine of growth of the Indian economy – is improving. Despite GDP growth falling below potential, consumer price inflation has averaged around 10 percent for the past two years due to pressure from food prices. In response to stickiness in core inflation and high inflationary expectations, the Reserve Bank of India has signaled greater commitment to inflation targeting and adopted a tighter monetary policy stance, raising policy rates three times since September 2013. Budget deficits have narrowed, but the decline in the debt-to-GDP ratio has lost momentum. The FY2013-14 central government deficit is expected to be contained at 4.6 percent of GDP, an improvement of 0.3 percentage points from a year ago and nearly two percentage points from the peak of FY2009/10. However, the deficit remains well above the 3.4 percent of GDP average recorded in the mid-2000s following the adoption of the Fiscal Responsibility legislation and prior to countercyclical stimulus in response to the global crisis. Furthermore, the decline in the central government’s debt-to-GDP ratio – which fell by more than 15 percentage points in the second half of the 2000s, driven primarily by strong GDP growth – has come to a halt in FY2012-13 and the debt ratio is expected inch up marginally to 51.5 percent of GDP by the end of FY2013-14. The exchange rate came under pressure in May – August but has remained stable since, while the current account balance improved dramatically. Between May and August 2013, the Indian rupee lost more than 18 percent in value vis-à-vis the dollar as global investors withdrew $15 billion in portfolio flows from the country on fears of tapering in the US Federal Reserve’s quantitative easing program. Similar concerns affected other emerging markets’ currencies, and evidence suggests that outflows were linked more due to India’s large exposure to international markets than country-specific vulnerabilities including inflation and the fiscal deficit. Since the summer and even as tapering began, India has substantially reduced its vulnerability to global market turmoil by containing the current account deficit (from 4.9 percent of GDP in Q1 to 0.9 percent of GDP in Q3 FY2013-14), shoring up reserves (to $294 billion, equivalent to more than 6 months of imports), and tightening monetary policy. India also experienced resurgence in capital inflows, with the important distinction that volatile portfolio flows are being replaced by more stable deposits by non-resident Indians while FDI has remained low but stable. Overall, tapering- driven depreciation last summer has likely had a net positive effect as it stimulated exports, contained import demand, and incentivized long-term investors to come back looking for bargains.

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    Despite the slowdown in growth and important downside risks, India is likely to remain one of the fastest-growing economies in the world. Growth is expected to accelerate to 5.7 percent in FY2014-15, and could improve further to 6.5 percent in FY2015-16. The authorities’ commitment to fiscal consolidation, stronger focus on inflation by the central bank, continued steps to reduce the diesel subsidy burden, and additional opening of the domestic market to foreign investors are likely to lead to further improvements in the investment climate. Strengthening economic recovery in the US and the Eurozone – which together account for nearly a third of India’s merchandise exports – and a more competitive exchange rate following the summer’s bout of depreciation, are likely to continue to support strong export performance and boost growth.

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    POVERTY AND SHARED PROSPERITY India has made significant progress in reducing absolute poverty during the last two decades. It has already achieved the first Millennium Development Goal by halving the proportion of people whose income is less than $1.25 a day.1 The less well-off are increasingly reaping the benefits of shared prosperity, with a narrowing of the gap between average consumption growth and growth of the bottom 40 percent. Most notably, rural poverty has decreased sharply since the early 1990s with a faster pace of decline after 2004-05 (Figure).2 The rate of decline increased between 2009-10 and 2011-12 in several low-income states such as Bihar, Uttar Pradesh, Rajasthan, and Chhattisgarh.

    Figure 3. Rural, Urban Population below the National Poverty Line, percent

    Despite these gains, the absolute number of poor is large. In 2009-10, nearly 400 million Indians still lived in poverty. Yet a preliminary assessment of 2011-12 data suggests that the pace of poverty reduction stepped up in the subsequent two years, with over a 100 million people moving above the $1.25 a day poverty line.3 Poverty rates also vary significantly across and within states. Each of the seven low-income states has poverty rates that are two to three times higher than those of the more advanced states. 4 Poverty rates—as well as a range of human development indicators—in the poorest states (which are also the most populous) are comparable to those of low-income countries in other parts of the world.

    1 Preliminary estimates based on the recently released household survey for 2011-12 suggest that 23 percent of people live on

    $1.25 or less per day in PPP terms. This is down from 53.6 percent of the population in 1993-94. 2 Based on national poverty lines and mixed recall period consumption aggregates.

    3A significant decline between the two years is seen