ESCAP 2011 INDIA REPORT

Strong growth further improves in 2010
The economy of India maintained a strong and steady growth momentum throughout the current global economic crisis, unlike many other emerging market economies where growth decelerated sharply and, in some cases, turned negative. GDP growth of 8.0% in 2009 is estimated to have strengthened to 8.6% in 2010. The economy is projected to grow at 8.7% in fiscal year 2011, with private consumption and investment demand being the two major drivers of growth.

High inflation is a major challenge as food prices rise rapidly
A sharp increase in inflation in India in 2010 has been a particular cause for concern following a major surge in food prices in 2009. Average inflation in 2009 was in the double digits. Consumer price inflation (for industrial workers) is estimated at 11.0% for the first nine months of fiscal year 2010 and food prices, which are heavily weighted in the consumer price basket, remained elevated in 2010.

Budget deficit remains high but fiscal consolidation is taking place
Although budget deficits in South Asia were already high prior to the global crisis, governments had little choice but to run up yet higher deficits as a means of countercyclical stabilization. It is important that governments prepare and implement fiscal consolidation plans to contain their budget deficits and growing public debt. India has already devised such a plan, within which a budget deficit of 5.1% of GDP in 2010 was well within the target of 5.5% of GDP. The deficit is expected to come down further to 4.6% of GDP in 2011.

Exports revive but imports grow more rapidly
In India, exports and imports began to expand from October/November 2009 after a continuous decline for nearly a year as a result of global economic crisis. In fiscal year 2010, export growth exceeded import growth. Due to the significantly larger size of imports, however, the trade deficit widened. The net invisible surplus also shrank. As a result, the current account deficit could increase in 2010 from 2.8% of GDP in the previous year.
Capital inflows in the initial months of fiscal year 2010 moderated somewhat. Given the strong growth outlook of India, capital inflows are expected to accelerate in 2011. To deal with the adverse ramifications of capital flows, India has, in the past, used a mix of a flexible exchange rate, sterilization of the impact of inflows on domestic liquidity, a cautious approach to the liberalization of the capital account and the cushion of its large foreign exchange reserves. This approach is expected to continue in 2011.

Some major policy challenges
High inflation rate can compromise the achievement of sustained high growth rate. Containing inflationary pressures should therefore be a priority in the policy agendas of governments. Both demand- and supply-side factors have contributed to inflationary pressures. A combination of monetary, fiscal and other measures is needed to reduce price pressures. Repeated supply shocks pose a constant challenge to sustaining a low inflation regime. A more medium-term approach is needed in order to augment the supply of items of mass consumption by addressing structural supply constraints.
Strong and sustained growth momentum is needed in South Asia to tackle the long-term problem of widespread poverty. Over the past few years, most countries have made progress in reducing poverty. Even today, however, at least one in every three persons in South Asia is classified as poor. The fight against poverty therefore must continue. Countries need to continue pursuing economic reforms to improve productivity, strengthen public institutions, improve economic governance, and build social safety nets to protect the more vulnerable segments of the population. To promote more inclusive growth, the provision of basic services such as health and education and the generation of ample employment opportunities should remain the principal priority in the policy agendas of all governments. Growth cannot be sustained in the long run if it is not inclusive.
On the physical infrastructure side, one of the biggest challenges being faced by several countries in South Asia is improving the electricity supply. Both short-term and long-term measures are needed to tackle the electricity problem. In the subregion, transmission and distribution losses vary from 20% to 40% in different countries and theft of electricity is a major problem. There is therefore a need for greater efficiency on both the generation and distribution sides. The promotion of regional cooperation in the energy sector can benefit the participating countries enormously.
Concerning electricity pricing, some countries have been providing substantial subsidies, but they are being withdrawn. This process has been raising the cost of living, though, and there is a need to provide some form of protection to the poor. Tariff rates somehow need to be kept affordable for small consumers. It is also worth considering a more targeted approach to providing subsidies following the pattern of food stamps, where electricity stamps or coupons can be given to the poor to pay their electricity bills.