New Delhi, Saturday, 1 November 2014: At a seminar held at the India International Centre, New Delhi, the National Council of Applied Economic Research (NCAER) presented the Mid-Year Review of the Economy, 2014-15. The Review covered the performance of the economy during first half of the current year (April – September 2014-15). It also included two special papers on ‘Financial inclusion in India: why distinguishing between access and use has become even more important’ and ‘India’s Bilateral Trade in Services: Patterns, Determinants and the Role of Trade in Goods’, both issues of critical importance to the economy.
Agriculture
- Deficient monsoon is bound to affect agricultural output, especially in rain-fed areas, which account for about 55-60% of the area sown.
- NCAER’s estimates based on regression models (incorporating the impact of rainfall as well as a trend factor) anticipate a 2% to 4% deficit in overall Kharif food grain output as compared to a higher estimate of around 7% by the Agriculture ministry.
- Lower agricultural output has implications for GDP growth and inflation. In addition, it has huge welfare implications since close to 60% of the population is still dependent on agriculture.
Industry and Services
- After welcome growth of 4.2% in 2014–15:Q1, industrial growth disappointed in July and August 2014 registering a growth of just 0.4% year-on-year in each of the two months.
- Manufacturing Industry proved the biggest disappointment, with the growth rate contracting by 1% and 1.4% in July and August respectively, even though a 3.5% growth was witnessed in the first quarter.
- Gross Fixed capital formation (GFCF) brought in some consolation with a 7% YoY growth inQ1 of FY15, the highest since Q1 FY12.
- However, it is viewed that soon the improvement in the performance of core industries will get translated to better performance in the industry overall. The combined efforts of RBI and prompt actions by government and its committed agenda for industry sector may turn around the industrial sector and give an impetus to overall economic growth.
- The services’ sector grew 6.8% in Q1 FY15, however it is well below the close-to-double digit growth recorded during 2005-06 and 2007-08. Within the services sectors there is a wide variation with trade, hotel and restaurants and construction showing a slower growth compared to community and personal services.
Monetary Conditions
- Money and credit markets have been largely stable during the first half year. Stock markets, equity as well as bond remained steady while credit markets remained subdued.
- Growth in bank credit fell to a five year low at 10.9% at the end of August 2014, the asset-quality continues to decline though at a slower pace.
- Bank deposits grew 13.6% up to the third week of August 2014 compared to 12.6% during the comparable period last fiscal suggesting that financial assets might once again become attractive.
- Equity markets touched new highs, riding on a surge in overseas inflow. After touching a record high in September 2014, the slower FII inflows in response to jitters about the fed taper led to some correction in the BSE Sensex.
External sector
- After recording a strong performance of double digit growth in May and June 2014, export growth slowed down in subsequent months with a growth rate of just 2.73% in September 2014.
- The trade balance improved in the Q1 from $33bn, down from $48bn in the comparable period in FY14. However with the slowed down exports and with the imports climbing 26% in September 2014, the trade deficit rose to an 18 month high in September 2014.
- The slow appreciation of the rupee, combined with the uncertain recovery in the rest of the world, is likely to impact export performance in the coming months.
- Overall, not everything is bleak on the export front. India has diversified its export basket and markets. The new Foreign Trade Policy for 2014-19 may bring in a number of new initiatives to promote exports.
Prices
- There has been some good news on the inflation front, with the retail inflation falling to 6.46% in September 2014, down from 8.59% in April l 2014 as the CPI inflation ruled below 8% for the fourth successive month.
- The decline in food inflation from 8.6% in April 2014 to 3.52% in September 2014 has helped the softening in inflation at large.
- Inflation based on the wholesale price index (WPI) also fell to a 59-month low of 2.38% in September 2014 , down from 5.25% in April 2014
Public Finance
- The first quarter GDP numbers suggest growth might be bottoming out with some ups and downs. At 5.7%, GDP growth during April- June 2014 is one percentage higher than in the comparable period last fiscal and highest in the previous nine quarters.
- The Budget presented in June 2014 saw the fiscal deficit to GDP ratio being retained at 4.1% for FY15 while the fiscal deficit during the period April-August 2014 has touched almost 75% of the budget estimate for the entire year.
- Non-plan expenditure has grown by little over 4% in the first five months as against 9.4% growth projected in the Budget. Food subsidies are also lower at Rs 62,000 crore during the first five months of FY15.
The Mid Year review includes two special papers on ‘Financial inclusion in India: why distinguishing between access and use has become even more important’ and ‘India’s Bilateral Trade in Services: Patterns, Determinants and the Role of Trade in Goods’, both issues of critical importance to the economy. Indira Iyer’s paper traces the development of policies that promoted financial inclusion and suggests the way forward. Seema Sangita’s paper on bilateral trade analyses the patterns and determinants of bilateral trade in services in the case of India.
Over the last decade, the Dynamic Stochastic General Equilibrium (DSGE) framework has become a workhorse for macroeconomic analysis in both academic and policy circles. Following this emerging trend, we aim to modernise our research capacity in macroeconomics at NCAER by introducing a baseline DSGE model for the Indian economy. This new generation model can serve as an analytical toolbox for studying business cycles, examining the effects of actual and hypothetical fiscal and monetary policy shifts, and projecting the likely course of macroeconomic events under various short to medium-term scenarios. NCAER recently received a short-term grant from IDRC, Canada, to launch this work, which is being led by Dr. Shesadri Banerjee.
Under the aegis of this grant, a research workshop was organised on DSGE modelling for the Emerging and Developing economies. NCAER hosted both national and international experts in this arena. It started off with keynote speech by Professor T. N. Shrinivasan and followed by the presentation of Professor Parantap Basu, Professor at Durham University, UK giving us background and evolution of DSGE modelling the work. Dr Banerjee and Professor Basu presented the preliminary DSGE model for India. Dr Sohini Sahu of IIT Kanpur used a DSGE model to analyse the transition of India from an agricultural led to a service led economy with labour market distortions serving as severe impediment to economic growth. Professor Ashima Goyal used the DSGE framework to analyse the monetary policy in a small open economy with dual labour markets. Dr Rudrani Bhattacharya of NIPFP examined food price inflation in the DSGE framework and Ms Tara Iyer, PhD student at Oxford University analysed the impact of financial inclusion on monetary policy. Professor Chetan Ghate of ISI, Delhi examined the choice between public and private human capital expenditure and its impact on growth and inequality, depending on how public human capital expenditure is financed. Overall, the research activities in the workshop emphasised the need of modern instruments for macroeconomic modelling in India to answer various policy relevant questions.
This very timely discussion held at NCAER discussed the “Regional Economic Diplomacy in Asia: Opportunities and Challenges” with scholars from EABER .
The first panel explored the state of play in regional trade and economic diplomacy, including the emergence of mega-regional trade negotiations such as the TPP and RCEP and how they affect the global trading system and the opportunities for national development among the regional economies. The second panel will reviewed the priorities for Australian leadership in the G20 process, focusing on two main aspects: Asia’s interest in elevating growth and infrastructure investment; and review of issues affecting the global trade and investment regime. This discussion also reflected on the previous week’s visit of PM Tony Abbott to India to meet PM Modi and the opportunities that the visit may have created. The third panel discussed the challenges India faces in the dynamics of rapidly changing regional economic and diplomatic equations through RCEP and TPP agreements in the backdrop of limping multilateral discipline. However, there are opportunities India has for catching up with the growth and prosperity of other Asian countries. Of course there are challenges as well. The discussion was timely since the Commerce Ministry has announced undertaking a comprehensive analysis of India’s free trade agreements. The roundtable ended with closing remarks outlining the research ideas and the way forward.
As debate and speculation rage in New Delhi about a new avatar of the Indian Planning Commission following Prime Minister Modi’s Independence Day speech, it is useful to look at institutions in other countries that started out similarly to the Indian Planning Commission but whose roles have changed over time. The most prominent among these is perhaps China’s National Development and Reform Commission (NDRC). The role of the NDRC in China’s transformation from a centrally planned to a market economy has been crucial, but is also puzzling to many outside observers. NDRC’s powers appear to have paradoxically expanded at the same time as the Chinese economy has moved rapidly towards a mixed economy in which the market plays a more decisive role in allocating resources and cities are becoming the centres of decision-making. The key to understanding the role of the NDRC may be to appreciate China’s tiao-kuai governance matrix (vertical line of central control and horizontal blocks of regional competition), in which regional autonomy and central authority interact organically to generate a dynamic process of local experiments, regional competition, central planning, and market regulation.
In this seminar held at NCAER, Professor Xiao Geng , the Vice President of Research of the Fung Global Institute (FGI) in Hong Kong discussed this Chinese governance model that has not only produced spectacular economic growth in the past three decades, but has also created many new challenges, particularly in the area of social, financial and environmental sustainability. The role of the NDRC is likely to continue to evolve given the ambitious reform blueprint outlined by China’s new leadership in last November’s Third Plenum. The presentation by Professor Geng was followed by a very interesting presentation of viewpoints by T N Srinivasan and then by Dr Amitendu Palit, Senior Research Fellow at Institute of South Asian Studies, National University of Singapore; both of whom brought their own perspective on the lessons of the NDRC experience for the reborn Indian Planning Commission. Finally, Dr Ramgopal Agarwala, NCAER lead off to a very spirited open discussion with the audience.
The deadline for ratification of the WTO’s Trade Facilitation Agreement (TFA) under the Doha Round was July 31, 2014. India under the Modi Government chose not to ratify the TFA, signed in December 2013 by the previous Manmohan Singh Government at the 9th WTO Ministerial Meeting in Bali, and widely heralded at that time as the first major decision of this century on global trade after the WTO came into being. The Government of India’s decision not to ratify was unexpected and sudden. In this seminar held at NCAER, Professor T.N. Srinivasan, Professor of Economics at Yale University and a Non-resident Senior Fellow at NCAER presented his very interesting viewpoints as he argued that India’s decision—on the grounds that discussion on finding a permanent solution to the issue of public food stocks had not started in the WTO work programme following the TFA adoption and that the developed countries were stalling meaningful discussion—was unwarranted and unwise. He shared his view that ratification now would have still left India ample time to push for a discussion on public stockholding and food security. Also, in any case, the TFA itself had set a deadline until the 11th Ministerial Conference in 2017 to find a permanent solution to the issue of public stockpiling for food security, with progress to be reviewed at the 10th Ministerial Conference in 2015. Srinivasan also spoke on the related issue of the Aggregate Measurement of Support (AMS) limits, the limits that WTO Members should not cross in their support to staple food crops, India missed an opportunity to avail of the ‘Peace Clause’ protection of the TFA. Professor Abhijit Sen of Jawaharlal Nehru University and Member, 14th Finance Commission carried on the discussions further . The seminar received an overwhelming response from a houseful attendees; representatives of researcher community, student groups and policy makers alike.
T. N. Srinivasan is the Samuel C. Park, Jr. Emeritus Professor of Economics and former Chairman of the Economics Department at Yale University, where he has taught since 1980, and a Non-resident Senior Fellow at NCAER. He was Special Adviser to the Development Research Center at the World Bank from 1977 to 1980, and has taught at numerous academic institutions, including MIT, Stanford, and the Indian Statistical Institute. He has authored a number of books and articles on economics, international trade, development economics and the Indian economy. He is a Visiting Fellow at the Stanford Center for International Development, a Distinguished Fellow of the American Economic Association, a Fellow of the Econometric Society, of the American Academy of Arts and Sciences and the American Philosophical Society, and a Foreign Associate of the US National Academy of Sciences. He received the Mahalanobis Memorial Medal of the Indian Econometric Society in 1975. He was awarded the Padma Bhushan by the President of India in 2007.
