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(Reporting by Sridhar Krishnamswami)
Some Perspectives on the Indian Economy
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| (Address by Dr. Y.V.Reddy, Governor, Reserve Bank of India at the Peterson Institute for International Economics, Washington D.C., USA on October 17, 2007)
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| Mr. Chairman and Friends,
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| I am greatly honored by the invitation extended to me by the Peterson Institute for International Economics to share some of my thoughts on the Indian economy. This meeting is reflective of the recently observed growing interest and confidence in the status and future of the Indian economy. Today, I intend to submit that, since independence in 1947, the Indian economy has been on the whole, on a path of gradually self-accelerating development accompanied by reasonable stability. There has been a noticeable acceleration in the level of confidence and the performance of the Indian economy in the 21st century. The short-term prospects, despite recent global uncertainties, continue to be, by and large, benign for India. Over the medium-term, there are several challenges and opportunities. The public policy may, therefore, have to specially focus on these aspects in order to meet not only the expectations of the global community, but also, and more importantly, the aspirations of millions of people in India, particularly the poor and the underprivileged from diverse backgrounds.
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| I. Self-Accelerating Growth since Independence and in the New Millennium
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| Before independence, during the first five decades of the 20th century (1900-01 to 1946-47), the annual average growth performance of the Indian economy was dismal, averaging 0.9 per cent. Since the beginning of the planned development process in the early 1950s, the GDP growth displayed a self-accelerating tendency reaching a level of around 6.0 per cent in the 1990s. Two exceptions during this phase were the dipping of the growth rate in the 1970s to 2.9 per cent and during the crisis year of 1991-92 when the growth was as low as 1.4 per cent. The record of inflation in India has been satisfactory. Since independence, the wholesale price inflation, on an average basis, was above 15 per cent in five out of fifty years. In thirty six years, out of fifty, inflation was in single digit and on most occasions high inflation was due to external and domestic shocks such as sharp rise in fuel and food prices.
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| In the new millennium, the GDP growth rate has accelerated further averaging 6.9 per cent during the seven-year period 2000-01 to 2006-07, while the growth rate in the last four years (2003-04 to 2006-07) averaged 8.6 per cent. In 2005-06 and 2006-07, it has grown still higher at 9.0 per cent and 9.4 per cent, respectively. During this phase too, in one year during 2002-03, the growth rate dipped to 3.8 per cent due to drought conditions in several parts of the country leading to significant fall in agricultural production. The acceleration of growth during this period has been accompanied by a significant moderation in volatility, especially in industry and services sectors. It is also useful to recognize that the growth process in India is mainly driven by domestic consumption, which contributed, on an average, to almost two-thirds of the overall demand.
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| The strengthening of economic activity in the recent years has been supported by persistent increase in gross domestic investment rates from 24.3 per cent of GDP in 2000-01 to 33.8 per cent in 2005-06 and domestic saving rate from 23.7 per cent in 2000-01 to 32.4 per cent during 2005-06. It may also be noted that over 90 per cent of investment during this period was financed by domestic savings.
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| In tandem with acceleration in the rate of investment in the economy, there has been evidence of a pickup in productivity and efficiency of capital use. Some of the recent studies relating to India have indicated an increase in total factor productivity (TFP) growth in recent years. For instance, Rodrick and Subramanian, in an IMF working paper of 2004, point out that India seems to have achieved a large amount of productivity growth from relatively modest reforms.
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| While growth rate has picked up in the new millennium, the inflation rate has moderated to still lower levels ensuring price stability. Since 2000-01, annual inflation rate as measured by Wholesale Price Index has averaged below 5 per cent, despite the recent oil price shock. The highest annual inflation, on a point-to-point basis recorded in the new millennium was for 2002-03 (6.5 per cent) when the growth rate was adversely affected due to drought conditions in some parts of the country. More recently, the wholesale price inflation after reaching a peak 6.7 per cent at end-January 2007, mainly due to food price shocks, has edged downwards to 3.3 per cent during the week ended September 29, 2007.
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The high growth in GDP has been accompanied in more recent years by increase in the rate of growth of money supply and non-food credit, mainly reflecting the surge in capital flows into the country. These developments led to a lively debate on the evidence of signs of overheating in the economy, but subsequent moderation in inflation has been helpful. The Reserve Bank contributed to the moderation through timely and appropriate monetary measures and also certain prudential measures such as enhancing the provisioning requirements and risk weights for select categories of banking assets, namely consumer finance, real estate, housing and capital market exposures. These measures were needed to specifically address the issues of rapid credit growth and the possible impact of asset price movements on banks
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