The Indian economy stood relatively robust during the recession(2008)
when compared to the developed economies.The V-Shaped recovery of the
economy after recession and the sharp resurgence of WPI inflation by
the third quarter of 2009 gave a misleading impression of overheating of
economy.The state of post recession Indian economy and the lessons to
be learnt can be understood by analyzing the macro structure under the
following heads:
A) Determinants of growth
B) Deriving the potential of growth
C)Structure and Shocks
DETERMINANTS OF GROWTH:
1) labour: Youthful entrants to the labour force are expected to be 12 million per year over the next five years.absorbing these alone would require a 10 % growth rate with employment elasticity of 0.25.In addition some of the below poverty line population of around 300 million has to be transferred to higher productivity employment. The Economist estimates India's unemployment to be 10.8% while the national Sample Survey(NSS)round 2009-10 shows it to be over 20%.Average income is still around $1000. growth can facilitate if jobs as well wages rise.This requires creating a large number of higher productivity jobs.Inclusive growth which is present policy objective, should be understood not as a redistribution from a productive section to the rest,but as creating conditions for the masses to contribute to and participate in growth.
2) Finance: Infrastructure spending is expected to rise from 6 to 9-12%. $250 billion comes from foreign savings but still the bulk has to come from domestic resources.So, better financial inter-mediation of domestic savings is also required.
3) Productivity and Demand: The potential ability of labour, Finance, Productivity implies aggregate supply is elastic in longer run.Since resources are available,increasing output level doesn't raise marginal cost.Diversity in sources of growth,a demographical advantage,network effects having crossed a threshold,cautious liberalization and strengthening of institutions all suggest India has entered a robust catch-up growth phase.
DERIVING POTENTIAL GROWTH:
Inflation persistently high since 2007 also suggests we are at potential output.But poor systems and governance can also be source of such an upward creep.If markets are perfectly clearing and prices and wages are flexible, then a fall in one price balances arise in another with no effect on aggregate price level.But prices and wages rise more easily than they fall.So, a rise in critical price raises wages and therefore other prices,generating inflation.Some relative prices, among them food prices and exchange rate, have more of such impact.
STRUCTURE AND SHOCKS:
Multiple supply shocks aggravated inflation -a poor monsoon n 2009, protracted rains n 2010 ,firming oil prices in 2011.A booming Economy does add the pricing power,but multiple supply shocks can explain the manufacturing inflation.
CONCLUSION:
What is worrying is that the growth indicators in capital goods - The segment of industry that is clear pointer to ongoing investment activity are pointing downward. This indicates that companies are slowing down their investments in fresh capacity creation.This is but a natural response to a falling demand.Industry has been demanding a roll back of hard money policy pursued by RBI while the latter has stopped the trend of raising rates since the second quarter of 2011-12,it has yet to commence the process of rolling back rates which can give a leap up to demand in the economy. At the world economic forum held in Devos, Switzerland, a couple of years ago almost all top corporate honchos were of the view that in the next decade it would be "DESTINATION INDIA" rather than "DESTINATION CHINA."Even though many top foreign corporates and investors are still interested in India,there is a view that pace of reforms has not kept pace to attract FDI.
A) Determinants of growth
B) Deriving the potential of growth
C)Structure and Shocks
DETERMINANTS OF GROWTH:
1) labour: Youthful entrants to the labour force are expected to be 12 million per year over the next five years.absorbing these alone would require a 10 % growth rate with employment elasticity of 0.25.In addition some of the below poverty line population of around 300 million has to be transferred to higher productivity employment. The Economist estimates India's unemployment to be 10.8% while the national Sample Survey(NSS)round 2009-10 shows it to be over 20%.Average income is still around $1000. growth can facilitate if jobs as well wages rise.This requires creating a large number of higher productivity jobs.Inclusive growth which is present policy objective, should be understood not as a redistribution from a productive section to the rest,but as creating conditions for the masses to contribute to and participate in growth.
2) Finance: Infrastructure spending is expected to rise from 6 to 9-12%. $250 billion comes from foreign savings but still the bulk has to come from domestic resources.So, better financial inter-mediation of domestic savings is also required.
3) Productivity and Demand: The potential ability of labour, Finance, Productivity implies aggregate supply is elastic in longer run.Since resources are available,increasing output level doesn't raise marginal cost.Diversity in sources of growth,a demographical advantage,network effects having crossed a threshold,cautious liberalization and strengthening of institutions all suggest India has entered a robust catch-up growth phase.
DERIVING POTENTIAL GROWTH:
Inflation persistently high since 2007 also suggests we are at potential output.But poor systems and governance can also be source of such an upward creep.If markets are perfectly clearing and prices and wages are flexible, then a fall in one price balances arise in another with no effect on aggregate price level.But prices and wages rise more easily than they fall.So, a rise in critical price raises wages and therefore other prices,generating inflation.Some relative prices, among them food prices and exchange rate, have more of such impact.
STRUCTURE AND SHOCKS:
Multiple supply shocks aggravated inflation -a poor monsoon n 2009, protracted rains n 2010 ,firming oil prices in 2011.A booming Economy does add the pricing power,but multiple supply shocks can explain the manufacturing inflation.
CONCLUSION:
What is worrying is that the growth indicators in capital goods - The segment of industry that is clear pointer to ongoing investment activity are pointing downward. This indicates that companies are slowing down their investments in fresh capacity creation.This is but a natural response to a falling demand.Industry has been demanding a roll back of hard money policy pursued by RBI while the latter has stopped the trend of raising rates since the second quarter of 2011-12,it has yet to commence the process of rolling back rates which can give a leap up to demand in the economy. At the world economic forum held in Devos, Switzerland, a couple of years ago almost all top corporate honchos were of the view that in the next decade it would be "DESTINATION INDIA" rather than "DESTINATION CHINA."Even though many top foreign corporates and investors are still interested in India,there is a view that pace of reforms has not kept pace to attract FDI.
No comments:
Post a Comment