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LONG-TERM DRIVERS AND RISKS IN THE INDIAN ECONOMY: A POST-CRISIS PERSPECTIVE SUBIR GOKARN Deputy Governor Reserve Bank of India KAIST COLLEGE OF BUSINESS, KOREA ADVANCED INSTITUTE OF SCIENCE AND TECHNOLOGY (KAIST) Seoul September 2, 2010. Structure of Presentation .

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  1. LONG-TERM DRIVERS AND RISKS IN THE INDIAN ECONOMY: A POST-CRISIS PERSPECTIVE SUBIR GOKARN Deputy GovernorReserve Bank of IndiaKAIST COLLEGE OF BUSINESS,KOREA ADVANCED INSTITUTE OF SCIENCE AND TECHNOLOGY (KAIST)Seoul September 2, 2010

  2. Structure of Presentation • Global financial crisis and India • Impact, policy response and recovery • State of the Economy • Getting back to ‘Normal’ • Opportunities • Challenges • Summing Up • Growth Scenarios • Key Messages

  3. Global financial crisis and India

  4. Global economy: Deep recession, modest recovery

  5. Why were we impacted? • Indian economy yet hit by the global financial crisis • Although banking system had no exposure to tainted assets or stressed institutions. • Indian financial sector had only limited off-balance sheet activities or securitised assets. • The adverse impact reflected growing integration – both trade and financial - with the rest of the world

  6. Domestic monetary policy responses (1)

  7. Domestic monetary policy responses (2)

  8. Domestic fiscal policy responses

  9. State of the Economy

  10. Demand Side Aggregates : Contribution to Growth

  11. Sectoral Contributions Reverting to “Normal”

  12. Growth Drivers: Sharp rebound in Industry

  13. Manufacturing leads: Consumer durables and Capital goods

  14. Inflation: Getting Generalized

  15. Returning to Normal • Global situation is stabilizing, even though recovery may be modest • Domestic momentum is gaining, with surges in capital goods and durables • Overall, industry and service sectors appear to be rapidly returning to trend

  16. Policy objectives • To sustain the ongoing recovery so that economy returns quickly to its trend rate of growth • To keep inflation in check by reining in expectations • To mitigate risks of overheating • Exit/Normalization • To ensure that liquidity is adequate to sustain the recovery and the subsequent growth on trend

  17. Getting back to ‘Normal’ Opportunities

  18. Demographic Transitions

  19. Factory to the World • Even without reference to China, India’s employment challenge is on an unprecedented scale • China’s rapid aging presents a huge opportunity to become “factory to the world” • The right policies can create conditions for the relocation of labour-intensive manufacturing from China to India

  20. Income Dynamics: “Sweet Spot”

  21. Getting back to ‘Normal’ Challenges

  22. Slow Employment Transition Percentage of Indian Workforce Source: 55th (1999-2000) and 61st (2004-05) rounds of National Sample Surveys, NSSO.

  23. Mirror Image in Economic Activity Percentage of Sectoral GDP

  24. Productivity Differentials

  25. Simple Principles & Arithmetic • Every worker who moves from agriculture to industry or services can add a net of 4 units of GDP • This has been the basis of rapid and inclusive growth in every country that has preceded us down this path • Creating conditions to facilitate this transition is the key to achieving these objectives

  26. Three Pillars of an Employment Strategy • Flexibility: Beyond Wages to Employment • India’s services • China and France: Grandfathering contracts • Skill Matching • The limits of basic education • Job-oriented training: the role of business and industry • Effective Safety Nets • A tripartite model: State, Employer and Employee

  27. Infrastructure – Large Gaps (1) Also, large gaps in urban infrastructure, and social infrastructure (public health, education, drinking water, sanitation, etc.)

  28. Infrastructure – Large Gaps (2)

  29. Infrastructure – Funding Requirements • Large gaps in infrastructure availability • Total infrastructure requirement during 11th Plan: • US $ 514 bn (2.4 times of 10th Plan) • power sector(32% of total), roads (15%), telecom, railways and irrigation (13% each). • Need to increase substantially from 5.4% (06-07) to 9.3% (terminal year of Plan) • Public sector will remain the dominant player • Financing issues • Appropriate user charges

  30. Infrastructure and FDI

  31. Public services • Need significant improvement in delivery of public services • Public health • Drinking water • Sanitation • Education • Governance issues

  32. Inflation Dynamics

  33. Key Food Items: Price DynamicsStructural Components

  34. Fiscal Prospects • Direct taxes buoyancy averaged 2 during the earlier high growth period (2003-08). • Strong revenue buoyancy, coupled with high growth, should facilitate fiscal correction.

  35. Growth and Fiscal Correction

  36. Summing Up

  37. Growth Scenarios

  38. Key Messages • The Indian economy recovered relatively quickly from the crisis • Domestic forces contributed • The future lies in strengthening these domestic forces • Particularly when the global environment is unlikely to turn favourable • Sustaining the reform momentum is critical • Jobs • Infrastructure • Food • Fiscal

  39. Thank You

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