Overview of the Indian Economy.pptx

7/29/2019 Overview of the Indian Economy.pptx

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Overview of the Indian Economy:Budget 2008 and beyondBy A.V. Vedpuriswar


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The Indian Economy at a glance


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GEN0190n.ppt 3

1990 1999 2000 2001 2002 2003 2004 2005 2006 2007

-91 -00 -01 -02 -03 -04 -05 -06 -07 -08

GDP at factorcost 5.6 6.1 4.4 5.8 4 8.5 7.5 9.4 9.6 8.7

Manufacturing 9 7.1 5.3 2.9 6 7.4 9.2 9.1 12.5 9.8Foodgrain (Mt) 176 210 197 213 175 213 198 209 217 219

WPI 12.1 3.3 7.2 3.6 3.4 5.5 5.1 4.1 5.9 4.1

FDI ($mn) 97 2093 3272 4734 3217 2388 3713 3034 8479FII ($mn) 0 2135 2590 1952 944 11356 9287 12494 7062 -

Forex reserves($bn) 2.2 - 40 51 72 108 136 145 272 -

IPOs (J an-Dec) - - - 525 1981 1940 12402 9918 24779 33912

The Indian Economy


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The Rupee vs Dollar


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EIU forecasts

Key indicators 200720082009201020112012Real GDP growth (%) 8.7 7.8 7.2 7.4 7.7 8Consumer price inflation (av;

%) 6.4 5.8 5.5 5.2 5 5.2Budget balance (% of GDP) -3.2 -3.1 -2.9 -2.8 -2.7 -2.5Current-account balance (%of GDP) -1.2 -2.4 -1.5 -1.5 -2.1 -2.7Lending rate (av; %) 13.1 12.8 12 11 10 10Exchange rate Rs:US$ (av) 41.3 38.5 36.4 35.5 35 34.5Exchange rate Rs:100 (av) 35.1 37.8 37.9 38 38.1 37.6


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Highlights of Economic Survey

Inflation projected at 4.4 per cent in 2007-08.

Holding 9% growth will be a challenge.

Inflation and infrastructure are the biggest growth challenges.

Skill dearth is causing attrition, wage hike; pushing inflation

Agricultural growth in FY'08 is seen at 2.6%, against 3.8% ayear ago.

Economy will slow down to 8.7% in 2007-08

Industrial growth slower at 9% in first 9 months of FY'08.


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Recommendations in survey

Phase out control on sugar, fertilisers, drugs.

Sell old oil fields to private sector.

Allow a share for foreign equity in retailing.

Raise foreign equity in insurance to 49 per cent.

Allow 100 per cent FDI in greenfield private agri banks.

Complete the process of selling 5-10% equity in previouslyidentified profit making non-navratna PSUs.


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Key challenges


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Challenges

Many parts of the economy are cut off from free trade.

Restrictions on FDI make growing businesses difficult.

Economic reforms, especially labor market reforms, have beenslow in coming.

Even without significant reform, Indias economy hasperformed so well (growing by 9.4% in the fiscal year ending in

March 2007) that it may be overheating.Huge supply side challenges remain. Especially when weconsider that by 2025 the country could have more than 580mmiddle class consumers

Although BPO, IT, Telecom, manufacturing have boomed inrecent years, Indias economy remains mostly agricultural.

- Source : The Economist


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Three main barriers to growthMultiplicity of

regulations governingproduct markets

Unfairness and

ambiguity Uneven

enforcement Reservation for

SSIs

FDI restrictions Licensing

Distortions in the

market for land.

Unclear

ownership Counter

productivetaxation

Inflexible zoning,

rent and tenancylaws

Widespread

government ownership.


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Growth inhibitors

According to McKinsey (2001) thesefactors inhibit GDP growth to the extentof 4% plus every year.


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Using resources effectively

Clearly this is the need of the hour

But what does the data tell us?


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A quick look at Union Budget2008


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GEN0190n.ppt 15

2008 Budget at a glance(Rs Crores)2006-07

(Actuals)

2007-08

(RE)

2008-09

(BE)

Revenue receipts 434,387 525,098 602,935

Capital receipts 149,000 187,275 147,949

Total receipts 583,387 709,373 750,888

Non plan exp 413,527 501,849 507,498

Plan exp 169,860 207,524 243,386

Total exp 583,387 709,373 750,884

Revenue deficit 80,222 63,488 55,184

Fiscal deficit 142,573 143,653 133,287

Primary deficit -7,699 -28,318 -57,520


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Major plan expenditure2007-08

(Rs. Crores)

2008-09

(Rs. Crores)

Rural development 17,511 18,972

Agriculture 8,544 10,075

Health & family welfare 12,049 14,878

Education 23,073 29,054

Urban development 4,808 5,674


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Where the rupee comes from?

Service & other taxes

7%

Borrowings & other

liabilities

14%

Corporation tax

24%

Income tax

15%

Customs

13%

Excise

15%

Non tax revenue

10%

Non debt capital

receipts

2%


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Where the rupee goes?

State plan assistance

7%Non plan assistance to

state govt

5%

Other non plan

expenditure

10% Subsidies

8%

Defence

11%

Interest21%

Central plan

19%

States share of

taxes/duties

19%


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Changing revenue mix

(Rs. billion) (% of total revenue)

2004 - 05 2008 - 09 2004 - 05 2008 - 09

Corp tax 830 2264 22 29

Income Tax 509 1383 13 18

Customs 563 1189 15 15

Excise 1007 1379 26 18

Service Tax 142 644 4 8

Other 9 18 0 0

Tax revenue 3060 6877 80 88

Non tax rev 751 958 20 12

Total revenue 3811 7835 100 100


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Currently, the revenue deficit is 1% of GDP.

Fiscal deficit is 2.5% of GDP.

Budget deficit

But does this tell the complete story?


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Off Balance Sheet items

Amount(Rs Crore)

% of GDP

Debt Waiver 60,000 1.12

Oil bonds 11,257 0.21

Fertiliser subsidy 7,500 0.14

Food subsidy 10,000 0.19

Sixth pay commission 25,000 0.47

Total 113,757 2.13

Fiscal deficit budgeted 133,287 2.50

Gross fiscal deficit 247,044 4.63


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What about the budget deficits ofstates?


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India vs China


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China is sitting pretty

But some economists reckon that the cautious government isunderstating its true fiscal health: it probably had a smallsurplus.

If the profits of state-owned firms were also added in, thegovernment could have a surplus of around 3% of GDP.

China's public debt has also fallen to only 17% of GDP, wellbelow the average ratio of 77% in OECD economies.

According to official estimates, China's government ran a

budget deficit of around 1% last year.

Indeed, China has the best fiscal position of any big country,giving the government plenty of room to cushion the economyif demand suddenly falls.

By contrast, India, though improving, has one of the worstfiscal positions in the world.


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However, in a recent report the IMF argued that the true total

deficit is closer to 7% of GDP once we add in the stategovernments' deficits and various off-budget items.

If the losses of state electricity companies are also added in,the total deficit could cross 8% of GDP.

India's public debt is also uncomfortably high at about 75% ofGDP.

The Indian government claims it has reduced its deficit to anestimated 3.3% of GDP in the year ending March, from 6.5% in2001-02.

(The Economist)


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Should the Fiscal Responsibility and Budget Management(FRBM) Act be scrapped? For this law seems to be having theperverse effect of making the government hide more and moreof its expenditure and not show it in the Budget. The finance

minister can then claim that he is meeting FRBM targets, whenin truth he is not. Scrapping the law might encourage morehonest budgeting.

Business Standard

Newspaper editorial


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Sectoral Reforms


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Agriculture


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Farm loan waiver

Moral hazard?

What about people who have borrowed from money lenders?

Is this the best way to help farmers?

To give a boost to agriculture?

A scorched earth policy?


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Options to minimise the damage

Lower credit limits/impose higher collateral on bad borrowers.

Reduce the risks in agricultureThis will lower the number of intermediaries and bring downthe consumer price.

And improve the realisation for farmers..

Institutional reforms to reduce the dependence onmoneylenders.

Give borrowers with good records lower interest rates.

(Subhir Gokarn)


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Get back to the fundamentals

Reduce the gap between the farmers price realisation and

what the consumer pays.

Reduce wastage because of poor roads, inadequatewarehousing and refrigerated transport.

Reduce the number of people dependent on agriculture.

Encourage organised retailing, contract farming, ebusiness

(A.V. Rajwade)

Increase output per acre.


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Industry

N bi ti k t f i k


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No big ticket reforms in keyindustries

Retail

Power


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Financial sector


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Financial sector reforms

Reduce micro management by RBI and SEBI.

Liberalise derivatives and commodity markets.

Encourage more competition and innovation

To be a global financial services player, India needs :- An open capital account

- Capable and efficient markets- World class institutions and responsive regulators- Less intervention by RBI and MOF.- (Percy Mistry, MIFC report)

R h R j C itt


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Raghuram Rajan Committeereport

India is dangerously complacent. Its concerns about over-sophisticatedmarkets resemble a clock that looks right only because it is 12 hoursbehind. Indian households put only about half of their savings in the

bank, and banks funnel less than half of their credit to private firms, .The government's financing needs crowd out other borrowers, andstate-owned banks account for about 70% of India's financial assets .The cost of these financial failings is probably a percentage point or twoof growth. They leave India's savers with too little reward for their thrift,

its poorer borrowers with too few alternatives to the moneylender andits incumbent firms with too much protection from upstarts, who cannotraise money to compete.

The Economist, April 12, 2008


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If America's subprime crisis demonstrates the pitfalls of untrammelledfinance, India illustrates the opposite danger. Since its regulators getblamed only for mishaps, not for lost growth and wasted opportunities,

they are too conservative. ... New ideas are banned unless explicitlypermitted. This helps regulators feel more secure, but it does little forthe system's stability. .For example, companies are barred from

speculating in derivatives, but many have done so anyway. Those thathave lost money now cite the very rules they broke as reason to back

out of their obligations, saying they should not pay for mistakes theywere not officially allowed to make.



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Last year the government banned futures trading in two types ofbean, rice and wheat, arguing that speculators were driving upprices,... Some in the leftist parties, now argue it should

extend the ban to other commodities, such as edible oils and

perhaps even iron and steel.This would be like shooting the messenger, argues B.C. Khatua,

chairman of the Forward Markets Commission, which regulatesfutures exchanges. Before they were shut down, . the futures

markets conveyed the message that prices of wheat and rice

would continue to rise. Sure enough, that is what happened.The Economist, April 12, 2008


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The futures market provides farmers with a sneak preview of theprices they will face in the months ahead, which should allowthem to make an informed decision about what to sow. Inprinciple, futures contracts should also allow farmers to lock in a

price for their crops, insulating them from the vagaries of the spotmarket. At the moment, farmers are too small to participate in themarket directly small banks could aggregate the demands of

farmers up to a practical size.



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Pensions

Given the dismal levels of penetration of financial services, amajority of Indian people are not contributing towards their old-age security.

The Pension Bill could bridge that gap, and give peoplegreater control over their retirement benefits.

The existing formal pension channels dont cover unorganised

sector workers.


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Pensions ( Cont..)

But the Left has been a stumbling block

In 1981, Ronald Reagan launched the 401K plan in the US.

The US pension industry, which was $60 billion then, is today a$9 trillion industry, with most of the money invested in equities.

Under the shadow of the Left, the government has not movedon increasing FDI limits from 26% to 49% in insurance .


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General economic reforms

Labour

Education

Entrepreneurship

Subsidies

Legal system

Not a great place for


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Not a great place forentrepreneurs

The same will require just five days in the US, six days inSingapore and 48 days in China.

It takes 71 days to get all requisite clearances for starting anenterprise in India.


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Legal system fails to deliver

According to a World Bank 2007 survey, Ease of Doing

Business, India is ranked 177th out of 178 countries in

enforcing business contracts.

It takes 425 days to enforce a contract in India, compared to69 days in Singapore and 241 days in China.


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Rigid Labour markets

The Industrial Disputes Act, 1947particularly, Chapter 5Bbars manufacturing companies that employ more than 100

workers from firing employees without state governmentapproval.

Employers have been reluctant to add extra staff during peakseasons because they cannot be laid off during lulls.

Despite having surplus labour in the country, many largeemployers are expanding output through capital investmentwherever possible.

The absence of a bankruptcy law and labour reforms,

especially the difficulty in retrenching workers, has alsoreduced the competitiveness of Indian firms.

(Amit Mitra, Secretary General FICCI)

Education


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Higher education is a dark spot. Though FM has enhanced

allocation for education, he hasnt done much for highereducation. Starting a few IITs is not going to make muchdifference to the country. Bold steps are called for to open thesector. While steps have been announced to invest in skillsdevelopment and education, clearly they are timid.

Nandan Nilekani, Economic Times, March 1

We are very keen to do more in these areas but we have ourresource constraints. So we cannot do everything at one go.

Manmohan Singh, Economic Times, March 1

Education

Conclusion


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Generous grants, compression, righteous rule and succour tothe downtrodden are the hallmarks of good governance.

P. Chidamabaram in his Budget speech

Conclusion

Contact Information


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Contact [email protected]

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Overview of the Indian Economy.pptx