fundamental changes rn the content and approach to econom

The lndian Economy Prospects and Constraints

by Dr, C. Rangarajan

pol cy.

There s a common thread running through a I the measures introduced since July 1991 , The objective rs s mple and that is to improve the efficiency of the system The regu atory mechan sm
involving multitudes of contro s had fragmented capacity and reduced competition even in the plvate sector. The thrust of the new economic policy is towards creating a more competittve environment in the economv as a means to rmprov ng the productvrty and eff ciency of the system, Thts is to be achieved by removing the barrlers to entrv and the restrictions on growth of firms Whi e the ndustrial poltcy seeks to bring about a greater compet tive envrronment domestical y, the trade policy seeks to improve international competitiveness subject to the protect on offered by tarffs which are coming down The private sector is being given a larger space to operate in as some of the areas earlier reserved exclusively for the publc sector aTe aso now a lowed tothe private sector, In these areas,the publ c sectorw ll have to compete with the private sector, even though the public sector may continue to play a dominant ro e What s sought to be achieved rs an mprovement rn the functioning of the various entities whethertheyare in the privateor publicsectorby nject ng an element of competition. There s, however, nothing in the new economic pol cy which takes away the ro e of the State or the public sector in the system, The New Economic Po icy of India has not necessaT ly d minished the role of state; t has only redefined it, expand ng it in some areas and reduc ng in some others, As it has been sa d, somewhat paradoxically 'more market' does not mean'less Government', but only'd fferent Government',
That the content and process of our economic reforms are on the right track is vindrcated by the performance of the economV s nce the launch ofthe reforms, Between 1981-B2and 1990-91,that is

Chairman Economic Advisory Council to the Prime M nister

t gives me great pleasure to be in your midst this evenrng and to deliver the Hormis Memor al Lecture for thts year The growth and development of Federal Bank is a test mony to the v sion and hard work of Mr Hormis. Federal Bank todav rests on the so id foundation la d by him, Mr Hormrs recogn zed even in those early days the need for bank ng to function with a social rnotrvat on, We need a banktng system that is eff cient, viable and soc a ly responsible, The conttnued success of Federal Bank will be the best tribute that you can pay to the memory of Mr, Hormis.
A rev ew of the economy in the recent period throws up several

interest ng insights Economic growth has averaged 7,3 per

cent per annum over the last decade, Our externa payments situation has remained comfortable, even though the current
account deficit has started w dening in the last two years. Foreign exchange TeseTves are robust However, one d sturbing element is the persistence of inflat on in recent years, The other concern is

the recent declining trend in ndustrial productron.

There are many cha lenges on the way forward We need to sustain

the present rate of growth, rf not acce erate it to h gher levels, We need to translate growth into povertr7 reduction. n other words, we need to generate povertr7 reduc ng growth I e. growth to which the poor contrrbute and from which the poor benefit, We need to expand employment opportun ties and improve product v ty across all sectors of the economy We need to narrow economic d sparities across and within states without compromising on efficrency. We need to improve on socia indicators too; lndia still ranks a low 119th in the UNDP's Human Development lndex in the bottom thrrd of the eague of nattons, The agenda for achieving growth and poverty reduction is formtdable requrring as it does focus not only on tdenttfying priority areas for action but also on effective and effic ent implementation of the policy agenda,
The year 199'1 is a landmark in the post-independent economic history of India. The country faced a seveTe econornic cris s, triggered in part by a seTous balance of payments srtuation.

the decade before the reforms, the economy grew at 5,6 per cent on a compound average basis, Between 1992 93 and 2010-11,
the economy grew at an average rate of 6.8 per cent per annum, a

significant improvement over the pre-reform period.

Coming to the more recent period, economic growth in the six year period from 2005-06 to 201 0-1 1, despite the cr sis-affected Vear of 2008 09, was at an average of 8,6 per cent. This clear y represented an acce eration in the pace of growth and marks a distinct break from any previous five year period. Per caprta GDP grew by an average of 7.0 per cent rn these six years, Under the severe rmpact of the global cr sis, the ndian economy registered a growth of 6,7 per cent in 2008-09 after having

The crisis was converted rnto an opportunity

to effect

some

registered over 9 per cenl rate of growth for three successlve years, By any standards, the lndian economVWas able to protect itself reasonably well in the turbulent conditjons of the financial
cris is.

lnitially the growth rate tn2011-12 was forecast by the Economic Advisory Council to be 8,2 per cent, However, subsequent events have forced us to revlse it downwards The monsoon has been good and we should expect to see agriculture grow reasonably well, The expected growth rate of 3 per cent in agriculture wrll be on lop of a strong growth of 6 6 per cent in the previous year'

in the range of B to B 5 per cent While growth has contrrbuted to reducing the poverty ratio, it has to be acknowledged that the absolute level of poverty is still high Truiy we have miies to go before eliminating poverty We need to ensure that the growth process is such as to include every section of the economy We must maintain, nevertheless, a high growth rate which will alone
enabJe the Govern meni

to raise the resou rces to meet the various

soc o-econom

obl'gations

One aspect

It is in the case of industry some slackness has been noticed The growth rate of indices of jndustrlaL productron both in July and August 2O1 t have been below 5 per cent. While growth may pick up in the second half, the overall growth rate in industry will be well below the initial expectation of 7 per cent The world economic situatron is also not verV encourag ng Under these circumstances, the growth rate during the current year may be
between 7.5 per cent and B Per cent. ln this context, a frequently asked question is whether lndia has the potential to grow at 9 per cent ln a sustained way lndla's

development.

savings rate has crossed 34 per cent of GDP The investment rate has exceeded 36 per cent of GDP, Even with an lncremental capital-output ratlo of 4, this should enable the lndian economy
to grow at
per cent, Thus the broad macro econoTn c parameters relating to savings and investment are conducive for ach evlng a

development, the per capita income of the States will show a tendency to converge. Comparing the two perrods of 199394 to 1999-OO and 1999-00 to 2OOB-09, data do not show a convergence. However, there is a strong evidence of catching up by the lower income States The medlan growth rate increased one-and-a-half times between the two periods, increasing from period 3.9 per cent in the eariler perioci to 5 7 per cent in the latter lower per caprta GSDP I ke Assam, Orlssa, UP and States with Bihar have made significant gains in growth rates in the latter period, Notwithstanding these gains, convergence was subdued jncome States like Gujarat, Kerala' because some of the higher and Haryanaalso posted high growth rates, ln otherwords,what the recent data indicates is that while most of the lower income states have shown stronger growth rates, several of the higher income states have also shown an increase in the recent period'

of the growth process is balanced reg onal lt is normally expected that wlth economic

high growth rate, However, for this to happen, we also need to remove the constraints that may come in the way

Macro-economic Concerns
There are a few areas where immediate engagement of the policy makers is needed ln the short run, manag ng inflationary pressures ls the brggest challenge lshall talk about it in some
detail later.

Distribution of lncome
Before going into the issue of constraints let me turn to the issue of distr butron of income, While growth is important, tis necessary

to remember that lt is not the only dimension for

measur ng

performance orachievement. lt is equally importantto knowwho benefits from growth, There has been constderable dispute in this countrV in estimaling the people below the povertr,l line There ls

A second conceTn relates to the balance of payments India's

currentaccountdeficrt remained lowtill 2OOB-O9 Sincethen ithas started climbing and the current account deficit was 2 B per cent of GDP in 2OO9-1 O, n the f irst half of 2O1O-1 1 the cu rrent accou nt deficit remained very high at 3,7 per cent of the GDP However, in the second half, exports picked up strongly while import growth was weaker. lt is now estimated that the current account deficit forthisyear is 2.6 percentof the GDP We have had no problems so far in financing the current account deficit Even in 2010-11, capital flows were adequate to cover the current account defrcit and add to the reserves $15 billion Efforts must be made to keep the current account deficit around the manageable level of 2 5 per cent of GDP, This is desirable to irnpart much needed stability on
I

noconsensusVetonwhatconstitutesthe povertry ine According to the methodology adopted by the PLanning Commissron unt

recently, the number of people below poverty line ln T993-94 was 36,0 per cent. According to the same methodology, it came down to 21 .5 per cent in 2OO4-05. However, the Tendulkar Committee, by adopting a slightly dlfferent methodology, came to lhe conclusion that the overall poverty ratio was 45 3 per cenl

rn 1993-94 and 31 .2 per cent in 2OO4-05 While the Tendulkar Committee estimates are higher than the earlier estimates, both methodologies show that the reduction in the poverty ratlo was

the external pavrnent front and to reduce the risk the domestic economy runs from volatility in internatjonal financial markets
Another critical challenge on the wayf orward is fiscal consolidation which is a necessarv pre-requisite for sustained growth ln the wake of the international financial crisis, lndia like many other

player rn production, transmission and distribution of power and and a high order of Government intervention in capacity creation other supportive components of electrlcity business is crucial to

countries adopted an expansionary fiscal policy in order to stimulate demand, As a consequence, the fiscal deficit of the ln Government of lndia which was coming down started rising
2OOB-09, the fiscal deficit was 6 per cent of cent jn the nextyear. Unljke othercountries

sustaining a high growth rate of 9 per cent A more aggressrve path of capacrty creation must start immediately Constraints such as the availability of coal, land acquisition and envjronmental issues need to be tackled so that the desired growth in capacity
expansion can be achieved

GDP It rose to 6 4 per inthe advanced world' where there is a continuing debate regarding when to terminate the expansronary fiscal policies, we rn lndia have taken a decision

Current lnflation
1

We have had two years of high inflation (Chart 1) 2009-10 was badly affected because of the deficient monsoon Foodgrain

toinitiatetheprocessoffiscalconsolidationln2OlO-11'thefiscal
fall deficit came down to 4 7 per cent of GDP and rt is projected to to 4.6 per cent ln the current year' There are concerns whether we will achieve this. To gain credibility, it is lmportant that fiscal we deficit remains close to this level. Over the medium term' the FRBM target of 3 per cent of GDP should aim to reach

Mediu m Term Constraints ln the medrum term, the two sectors which pose a

ma1or

first challenge are the farm econornv and the power sector' The prlmarily constrained by the relatively of these, farm economy is
low levels of yield in major cereal crops and pulses as compared to other Asian economies especially China We have large scrence But the and technology establishments for agrrcultural research much to be desired' results in terms of productivity gains leave crop Necessary steps must be taken to revitalize the traditional isvitaltofood securityandfarm income Equally' agriculturewhich taste' as shifts in demand occur reflecting changes in tncome and agricultural production must also respond to them' The last two years have clearly shown how a decljne in agricultural production can cause serious distortions in the economy lt is' therefore' imperative that we aim at GDP originating from agriculture and allied activities growing at 4 per cent per annum'
The second challenge for the country is the shortage of physical

production declined by 17 million tonnes The decline in the production of rice alone was 11 mrllion tones As a consequence' inflatjon was triggered by the increase in foodgrain prices Food inflation stood at as high as 21 per cent in February 20l0 Overall inflation as measured by the wholesale price index touched the peak of 10.9 per cent in April 2OlO lt was expected that inflation would moderate through 2orc 11 lt in fact started happening till November 2010. However, prices started rising after that As of March 201 1, year on Vear inflation had touched 1 O O per cent rise While the food price inflation of 2OO9-10 was triggered by the in foodgrain prices, rn 2O1O'11 it was triSgered by the rise in the
prices of vegetables, fruits and eggs, meat and fish The increase

in vegetable prices has been significant The late rains had

severe impact on the supplv of some vegetables including onion lnflation in vegetables rose to 34 per cent in December 2O1O and 67 per cent in January 2O1 1, Normally, vegetable prices show a

prices of seasonal decline duringwinter months During 2O1O-11' per cent The persistence raw cotton rose on an average by 43 of food inflation led to the spread of inflation to other sectors 2010 to lnf lation in manufactu res rose f rom 5 35 per cent in March 7,4 percent in March 2O11 ln

2010-ll,theweighted contribution

I
I

of the manufacturing sector to total inflation was 41 B per cent

infrastructure

electricity, Shortage of electric power leads not only to direct production losses but also results in inefficiency in a broad range Recent data of areas impacting profitability and competitiveness clearly indicate a short fall in achieving the targets for capacity creation, This is despite the fact that the achievement in capacity that creation in the first fou r years of the 1 1 th Plan is h igher than lOth Plan Government is the largest in the first four years of the

of which the single most important item

is

lnflation continues to remain an area of concern in the current year, As of September 201 1, the headline inflation in wholesale price index stood at 9.7 per cent While inflation in food articles in has eased from 106 per cent in April 201 1 to 92 per cent 201 1, inflation in manufactured products has risen September from 5,3 per cent in January 201 1 to 7 7 per cent in September level The 201 1. Prrmary food inflation still remains at a fairly high pricing of petroleum products is rationalization process rn the
price levels still to be completed and this may have an impact on

in the coming months, Factoring all these, the headline WPI inflation would remain high till December2oll One could expect

signif icant easing in the last downto 7 0 per

*iy .o*.

'ent

lation uarter of the f iscal year and inf March 2012 in

regarded the acceptable Committee (of which I was a Member) This' according to the Committee' will as 4 per cent

nr.

Monhly lnnation 2oo9-2oll

1,,."

to attract reflect changes in relative prices necessary not happen When growth takes place' it does to growtf, ,J.torr' of absnlute price uniformly in all the sectors Thus maintenance rate of increase in prices may ,,uU,L,,y meaning thereby zero "Nor certain is rt desirable Obviously' there is a noib.'porriUf . or involved in determining the acceptable urnount of judgement not only to take into account threshold level of inflation One has rmplications on output but also the distributional ifl. inrpu.t

in

prl..,

resources

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ln the early decades after lndependence' inftutlonwasendemictneconomicgrowthledtoverysteep years of

:s-l
I

the argument that

to be necessarily eased in order Supply side constraints have stability However' i"'J..,hr. with growth along with price take some time to constraints interventions to reduce supply foodgrains are concerned' ln our case, at least as far as mature. to imaginative manner can help urlor ril. official stocks in an
keep Prices under control' of inflation seen in the last two Thus the extraordinarily high level

letthat happen in the remain committed to maintain inflation ';.;"t.t high growth We must a higher level of at a low level High growth does not warrant interventions u,ion We musi use all of our policy instruments policy and. fiscal policy to "tf the foodgrains market, monetarv in inflation and re-anchor inflationary
in prices We should not

bring down the current .rpa.tutiont to the 5 per cent comfort zone

Need for High Growth

rate touching 38 per As mentioned earlier, with the investment

constraints' particularly of years is due to certain "ut" 'upply triggered primarilv :;;;iir;t products The factthat inflation is mean that monetarv polrcy has ir7 *O'r7 side shocks does not As mentioned earlier' food no role to play in such conditions gets generalrzed Thus' pn.. i.l",io. if it persists long enough' to removed' frscal policy have monetarv policy and at one step pressures' demand pi-V,f-r.il part in containing the overall
understand the series of actions It is only in this context one can At policy rate to control inflation taken by the RBI to raise the production note that industrial the same time, one has also to production August 2011' the index of industrial is slackening ln by 3 3 per cent Thus' 201'1' rt rose rose bV 4 1 per cent ln July few

centoftheGDP,theeconomyshouldbeabletogrowat9'0per problems

will run into cent, Pushing the economy beyond that investment Oe difficult to achieve the required iirst of att, rt"witt

beyond its capacity would ,ate, ,e.onO, pushing the economy re-emerging The deficlt in result in strong lnflationarv pressures of payments will also widen lt tl-,e current actunt of the balance at a growth rate of 9 per cent is, therefore, prudent to aim to question whether it is necessary at all
Some people raise a

factor in gro* u, this rate Growth is an important

generating

Obviously the composition lmployment and reducing povertl7 As I mentioned earlier' particular of growth is equally impoltant

subdued in the last r.Or"rr"f production has remained is must be taken into account' lt months. While this factor to focus monetary authorities nevertheless important for the above 9 inflation lnflation has remained Ont"t on tunr'ng months The regime of ten ;; .;;i'r7contlnuous"ly for more than shows definite signs can come to an end as inflation tightening
of decline. debate on what is an acceptable There has been a considerable term

important Growth in agrlculture focus on agriculture is extremely the point of view of ensuring food

i, n...rrulry

not only from Neverlheless' also rn making a dent on poverty security but while examining the overall growth is an impJrtant factor standards With population growth ;;;g;.rr" in terms of living will mean-a substantial rate coming down, a strJng growth per income lf we grow at 9 per cent gro*,f in t"he per captta

context used the level of inflation' I had in a different

rise sharply The which costs of inflation begin to

increase from the current annum, lndia's per capita GDP will Then we will become Lvel of $t,6oo to $B,ooo-10,ooo by 2025 countries Without a strong pun of tt.'r. middle income group of employment to the growing growth, we will not be able to provide

thresholdlevelofinflation,definingitastheIevelbeyond Chakravarty

number of Voung people who willjoin the labour force Analysrs of the prel mtnary NSSO data for 2OO9-10 suggests that, compared to 2OO4-05, there has been a reduction of about 3-4 percentage po nts in the poverty ratLo Continued strong growth will help to period' accelerate the decliningtrend rn poverty ratio ln the recent aimed at broadening the we have launched a number of schemes base of growth, These include employment guarantee scheme' universalisation of education, expansion of rural health and food
secur

this period, lndia will transit from berng a ow income countrv to a middle income country, The lndian banking system must play its role in the evolution of this process, t is important that the banking system must develop to meet the needs of a growing and diversifyrng economy. I am sure that Federal Bank will play
its role jn this challenging task

ty Allthese programmes have made a substantral demand on public expenditure. This has been made possible only because jn recent years Growth of the strong growth that we have seen Tesources by the Government has facilitated raising more
Development has many dimensions. lt has to be inclusive; it must be povertyreducrngand itmustbeenvironment-frlendly Weneed to incorporate allthese elements in the growth process However' at our present stage of development, we cannot afford to sacrjfice growth, lt is key to improving the Living standards of our people
A strong and balanced

growth will enable the economV to achieve goals including lowering inflation Equity and growth multiple should not be posed as opposing considerations They must be weaved together to produce a coherent pattern of development

Dr, C. Rangarajan, through the eyes

of Anjan,

Financial Sectsr and Grawth

ln any economy, the financiaL sector plays a major role in the
mobjlizatLon and allocatron of savings, Financial lnstitutions' instruments, markets which constitute the financial sector act as conduit for the transfer of resources from net savers to net
borrowers, The gains ofthe real sector ofthe economt7 depend on how efftciently the financial sector performs the basrc function of

financia intermediation
The financial sector expansion can occur along

two rorrtes These

are: (1) 'demand following' and (2) 'supply leading' ln the first situation, financial institutrons come into existence ln response to the demand forfinancial services ln the second srtuation,financial institutrons are set up ahead of demand The Indian financial

2O-Vearo d AnJan is a terebral palsV affected youth wlth multip e chalLenges The son of Mr. Sathees Kumar, Manager, Federal Bank, he makes the ent re Federa t=amily proud Suffering fiom complete hear ng and speech impairn.rent, he v,ias diagnosed with acute congen tal glaucoma leaving e\/esighl in his one eye only. He is tolallV crippled and his mobility is I m ted to crrilches, a stature he cou d achleve after a serles of orthopaedic surgical intervent ons

spite of aL these challenges, he had his schooling ln a normal schoo up to his lOth slandard. !e has shown h s talent in draw ng
1n

and pantlng ever

system has experienced both these types of extension of banking and other financial facilities to a large cross section of the people stands out as significant achievement As a ratio of GDP at current prices, bank deposits have increased from 1B per cent in 1969-70 to 73 per cent currently Ongoing financial sector reforms are aimed at promoting a diversified, efficient and competitive financial sector with the ultimate objectlve of phenomena The
improving the allocative efficlency of available Tesources ln many ways, the coming decade will be a defining decade for lndia During

wlth his

s nce uncontrolLab e

his eary ch ldhood hands. Lines and

dravrings were his method of commun cat on ilrth rhe vrorld he sees around He llved with ronplter and to ors He made an exhibltlon of h s palrtlngs rvhen he was;ust 10 Vears o d
Ne ls ta ented n pa nt fg, sketch ng, cartoons, car cature, 3D mode 1ng, animation, 3D Anjan Satish

arrhltectlrral presentat

on etc He is

the

VoLlngest member of Kerala Carloon AcademV Hls works are posted through var ous web pages and are ava able on YouTube/satletbT, Facebook, Orkut, Cartoon Academy pages and blogs (Anjan's gallery). He is presentlV serving ai Adarsh Char rable Trust' car ng

ior.t

ltCr.n fac ng similar cha enges, teaching them and supporting them

10-