Brookings Institution, March, 13 Laura Papi and IMF India Team The views expressed in this presentation are those of the authors and should not be attributed to the International Monetary Fund, its Executive Board, or its management.
6-Jun 6-Oct 7-Feb 7-Jun 7-Oct 8-Feb 8-Jun 8-Oct 9-Feb 9-Jun 9-Oct 1-Feb 1-Jun 1-Oct 11-Feb 11-Jun 11-Oct 1-Feb 1-Jun An investment slowdown has now generalized GDP Growth (In percent, yoy) GDP Growth (In percent, yoy) 15 1 5 Brazil Russia India Indonesia China South Africa 3 Investment GDP Private consumption Exports -5-1 1-15 -6 -. Sources: CEIC and IMF Staff calculations. -16 5 6 7 8 9 1 11 1H1
5 6 7 8 9 1 11 1 Unexpected Growth The current slowdown has an important structural component The economy has slowed by more than external factors can explain......and structural factors are behind weak investment. The 1 Slowdown: More than External Spillover (In percent) 3 35 India: Actual and Predicted Investment (In percent of GDP, mma) 3 Predicted Actual 1 33 3-1 31 - -3 IND 3 9 - -1. -1 -.8 -.6 -. -.. Unexpected Partners Growth 8 7 Sources: IMF, World Economic Outlook; and IMF staff calculations. Note: Unexpected growth denotes real GDP growth in 1 (Sept 1 WEO) minus the forecast (Sept 11 WEO). Partners growth is export weighted average. 3
Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-1 May-1 Sep-1 Jan-13 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-1 May-1 Sep-1 Jan-13 Inflation remains high, especially compared to other EMs Inflation (In percent, year-on-year) Inflation (In percent, year-on-year) 16 1 1 1 8 6 - - Brazil Russia India 1/ China South Africa Indonesia 18 16 1 1 1 8 6 - CPI CPI-IW WPI Source: Haver Analytics. 1/ Wholesale price inflation. Source: CEIC
/3 3/ /5 5/6 6/7 7/8 8/9 9/1 1/11 11/1 1/13 Corporates and banks balance sheets have weakened Outstanding Restructured Advances (In percent of gross advances) Corporate Risks (in percent) 7 6 5 Public Sector Banks Private Sector Banks Foreign Banks System NPAs.1.1.1 Annual Default Rate Downgrade Rate Upgrade Rate 8% 6%.8 % 3.6. % 1. % 8/9 9/1 1/11 11/1 Source: RBI, CRISIL 5
5Q1 5Q 5Q3 5Q 6Q1 6Q 6Q3 6Q 7Q1 7Q 7Q3 7Q 8Q1 8Q 8Q3 8Q 9Q1 9Q 9Q3 9Q 1Q1 1Q 1Q3 1Q 11Q1 11Q 11Q3 11Q 1Q1 1Q 5Q1 5Q 5Q3 5Q 6Q1 6Q 6Q3 6Q 7Q1 7Q 7Q3 7Q 8Q1 8Q 8Q3 8Q 9Q1 9Q 9Q3 9Q 1Q1 1Q 1Q3 1Q 11Q1 11Q 11Q3 11Q 1Q1 1Q And external pressures have become more of a concern Current Account Balance (In percent of GDP) Financial Account (In percent of GDP) 15 1 5 Income & transfer balance Services balance Trade balance 1 1 1 8 6 Bank capital FII Financial account Loans FDI Average -5-1 -15 CAD - - -6 Sources: CEIC and IMF Staff calculations. 6
5Q1 5Q 5Q3 5Q 6Q1 6Q 6Q3 6Q 7Q1 7Q 7Q3 7Q 8Q1 8Q 8Q3 8Q 9Q1 9Q 9Q3 9Q 1Q1 1Q 1Q3 1Q 11Q1 11Q 11Q3 11Q 1Q1 1Q The recovery is likely to be slow Investment has slowed dramatically..and the pipeline remains thin India GDP and Investment Growth Trends 16 Investment (In billions of Rupees) 1 1 5 Stalled and shelved New (RHS) 9 8 7 1 15 6 5 8 1 3 6 5 1 GDP growth trend Investment growth trend Q Q Q 6Q 8Q 1Q Sources: CAPEX database and IMF Staff calculations. 7
Risks External risks: protracted slow growth in Europe, EM capital flow reversal, oil prices Domestic risks: Insufficient follow-through on reforms Failure to ease supply constraints (esp. energy) Fiscal expansion Upside: acceleration of reform momentum 8
Policy Recommendations Structural Reform: especially in energy, but also infrastructure more broadly, land acquisition, and labor laws. Sustainable Fiscal Consolidation: subsidy reform and expenditure reorientation are key, but also taxation Stay the Course on Monetary Policy: inflation is still a risk. Flexible exchange rate is important buffer Address Financial Risks: Stricter classification and higher provisions for NPAs, address concentration risk. 9
1999/ /1 1/ /3 3/ /5 5/6 6/7 7/8 8/9 9/1 1/11 11/1 (Est.) 1/13 (Proj.) 13/1 (Budg.) /1 1/ /3 3/ /5 5/6 6/7 7/8 8/9 9/1 1/11 11/1 (Est.) 1/13 (Proj.) 13/1 (Budg.) Bringing down the budget deficit sustainably will be challenging Government Balance (In percent of GDP) 1/ - - -6 Composition of Expenditure (In percent of GDP) 15 1 Current expenditure Capital expenditure & net lending -8-1 5-1 Central government State government 1/ Includes subsidy-related bond issuance. 1
Policies for Fiscal Consolidation Benefits from Fuel Subsidies (By income decile, in rupees per capita per month) Effects of Fiscal Consolidation on Growth (GDP growth rates, deviation from steady state) 16 1 1 Indirect benefit Kerosene LPG 3.5 3.5 Baseline Growth-friendly Social-friendly 1 Petrol 1.5 8 Diesel 1.5 6 -.5 1st nd 3rd th 5th 6th 7th 8th 9th 1th -1-1.5 1 3 5 6 7 8 9 1 Years Source: Coady et al., 13. Source: Tapsoba, 13. 11
GGR/GDP (%) Taxation reform also needed General Government Revenue and GDP per capita, 1 (excluding oil exporters and microstates) 7 6 5 3 1 India 5 6 7 8 9 1 11 1 GDP per capita (USD, in logs) Source: IMF, World Economic Outlook. 1
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