In 2010, India’s GDP in PPP terms was $3.92 trillion. By this reckoning, India was the fourth-largest economy in the world after the US, China and Japan.

Citi Investment Research and Analysis estimates that in a decade India will be the third-largest economy. Between 2000–01 and 2007–08, India’s real GDP growth averaged 7.3 per cent per annum. Growth rates have recently been around 9 per cent and sometimes in excess of 9 per cent, except for the period since 2008–09. In that year, GDP growth fell to 6.7 per cent in the face of the global financial crisis. GDP growth rate picked up the following year to 8 per cent.

In 2010–11, real GDP growth is estimated to be 8.6 per cent and in 2011–12, to return to 9 per cent. With a population growth rate of about 1.7 per cent per annum (according to the latest Census of India), real GDP growth per capita has been in excess of 7 per cent per annum for several years. At this rate, real GDP per capita will double in about 10 years. Since the 1970s, average decadal growth rates of real GPD have gone up, even as the standard deviation of year-to-year growth has gone down (Table 1).

Source: Computed from Reserve Bank of India: Handbook of Statistics on the Indian Economy.

Structure of economic growth in India

The structure of India’s GDP has undergone immense transformation in the face of such rapid economic growth and has, in turn, contributed to it. During the 1960s, agricultural value added, as a percentage of GDP, was 42.5 per cent. Corresponding magnitudes for industry, manufacturing and services were, respectively, 20.3 per cent, 14.3 per cent and 37.2 per cent. In 2008, agriculture contributed 17.6 per cent of GDP, whereas the contributions of industry, manufacturing, and services were 29 per cent, 16 per cent and 53.4 per cent, respectively.

This is an indicator both of India’s potential for further economic growth as well as that of a fundamental problem facing the economy — how does one sector (agriculture), which contributes less than 18 per cent of GDP, support more than 60 per cent of India’s population? Within manufacturing, India has increasingly specialised in higher value added manufacturing.

Contributors to India’s higher economic growth

In a growth accounting sense, capital, labour and productivity growth have all contributed to enhanced rates of economic growth in India. Savings rates have gone up to about 34 per cent and investment to about 36 per cent, particularly since the 1990s. There is a very strong ‘demographic dividend’ as the median age of the Indian population is around 25, indicating that the country is home to more than 600 million people below the age of 25. Further, this labour force is getting better trained (literacy rates are up to 74 per cent in the 2011 census).

There is evidence that Total Factor Productivity in the production of aggregate GDP and in the manufacturing and services sectors has gone up, particularly since 1994. Agricultural productivity has not grown very quickly. Openness to trade and investment went up sharply, particularly during the period 2002–07. Even after the global financial crisis, India continued its policy of trade liberalisation, with average manufacturing sector tariffs now down to 12 per cent or less.

All these factors imply that economic growth rates in India will stay high and, given the increasing demographic dividend, may even accelerate.

Short-term issues with economic growth

Drought in 2008–09, following the sharp global rise in food prices in 2007, led to high food inflation, which has now been passed on to the general price level, particularly in light of recurrent commodity price shocks. Anti-inflation policy in the form of higher lending rates has tended to dampen investor sentiments.

Economic growth and poverty alleviation in India

High rates of economic growth in India imply that there has been a substantial reduction in levels of poverty. But the elasticity of poverty reduction with respect to economic growth is lower in India than in many Asian countries, essentially because of the structure of economic growth. This implies that inequality (both personal as well as spatial) has increased, particularly of incomes (as opposed to consumption where inequality is lower), but is still well below that of many emerging economies.

Prospects for Australia

Australia-India trade and investment relations are strong but fall well below their potential. Bi-directional trade is heavily in favour of Australia. Australian exports to India are mainly in the resource area and there are some service exports. Indian exports to Australia are largely in the areas of Information Technology, pearls and gems, some electronic equipment and some service imports.

There is substantial room for expansion of both trade and investment. India is expected to invest more than US$1 trillion in infrastructure in the near future. There is substantial room for Australian investment and expertise in this area. Other areas of possible economic collaboration include food processing, educational institutions in India and the use of service sector expertise to enhance manufacturing sector growth, an area in which India has done very well. Australia could benefit from India’s expertise in this area.

The Indian economy is likely to be a very strong engine for economic growth, not just in the region, but globally as well. Greater Australia-India collaboration can only enhance favourable economic outcomes for both countries.

Raghbendra Jha is Professor of Economics and Executive Director of the Australia South Asia Research Centre at The Australian National University.

1. India: sustaining high growth needs new reform momentum
2. The global financial crisis and short-run prospects for India
3. China’s and India’s growing investment and trade with Africa

Inflation has been in the news for some time. Recent media reports have stated that the Reserve Bank of India (RBI) deems current inflation to be a scourge. This inflation has also been relentless.

There seems to be broad consensus among analysts that the current spate of inflation had its roots in food price inflation. Last year’s drought led to steep rises in retail food prices followed by hikes in procurement prices for farmers. With the effects of the drought, foodgrains had to be imported on a large scale, at prices higher than what was paid to Indian farmers. This led to a further increase in the prices paid to farmers and an inflationary spiral set in.

More recently, clear signs have emerged that inflation in the non-food sector has picked up. This is because, even as food sector inflation has moderated (although still in the double digits), capacity constraints have been hit and inflationary expectations have become entrenched.

It is against this background that anti-inflation policy must operate. What issues are important in the current debate?

First, supply shocks are still reverberating through the economy. The initial supply shock came from the food sector, followed by the rise in prices of petroleum products, whereas the recurring supply side shock now emanates from the expected rise in inflation. The higher the rate of expected inflation, the lower will be the gap between actual and expected inflation and the smaller the resulting (positive) deviation of output from the trend.

It is in this context that combating supply side shocks becomes an essential element of anti-inflation policy. A good kharif harvest from a good monsoon might translate into a positive supply shock and lower inflationary expectations. However, such a positive outcome might be limited to being a seasonal phenomenon if food supply chains are not well managed.

Accordingly, one reads with dismay reports of the waste of existing foodgrain stocks in Food Corporation of India godowns. Putting an end to this waste will not come a day too soon. More coordinated and timely distribution of the existing grain would also be welcome. This applies also to other perishable items like vegetables and milk, large quantities of which are wasted because of the paucity of effective storage. These reforms are necessary because merely reducing demand against the background of recurring adverse supply shocks will, other things remaining unchanged, only lower output growth without having a substantial impact on inflation. The bottom line is that without tackling supply side constraints, there can be no easy victory in the fight against inflation.

Second, while wholesale price (WPI) and consumer price (CPI) inflation are statistically linked, there are enough (mutually independent) factors affecting the two that causal links can become tenuous. In this context one has to be clear about the quantitative impact and time profile of the impact of policy rates on various measures of inflation. The empirical evidence of such impacts, particularly on the CPI, is not encouraging. Jha’s recent paper ‘Inflation targeting in India: Issues and prospects’ in the International Review of Applied Economics, has demonstrated that the mean impact of the call money rate on CPI is uncertain, subject to long lags and the overall impact has a wide 95 per cent confidence interval. The extant literature has accepted that there are several reasons why interest rates may not have a straightforward relation with CPI in the context of a country like India. These reasons include: limited independence of the RBI, substantial fiscal overhang, the frequent need by the RBI to resort to other nominal anchors, and the predominance of supply as opposed to demand shocks.

Even in developed market economies, inflation targeting is facing opposition for excluding asset prices from CPI and because of the need to monitor other nominal magnitudes such as exchange rates. Thus, there is an urgent need to understand more fully the impact of policy rates in particular and macroeconomic policy in general on inflation.

In the current milieu, anti-inflation policy will work only if it is cognisant of the forces that initiate and sustain such inflation, that is, it will only work by tackling supply side issues.  Further, demand expansion from rising fiscal expenditures must be restrained. Merely raising interest rates will not help.

The current round of inflation in India is certainly a scourge.  The longer it is allowed to run its course the more devastating and deep will be its impact on the economy and society. Stabilising prices will not only have positive macroeconomic impacts, but also enhance human nutrition outcomes, thereby positively impacting productivity, resulting in a favourable supply shock.

Raghbendra Jha is Professor of Economics at the Australian National University; Raghav Gaiha is a Visiting Scholar at the Department of Urban Studies and Planning, MIT, and a Professor of Public Policy, faculty of Management Studies, University of Delhi.

1. India: Controlling inflation without hurting growth
2. Food inflation in India
3. India’s need for a counter-inflation subsidy

Recent studies on food intake and incomes in India are puzzling. Despite rising incomes, there has been a sustained decline in the per capita calorie intake. In an important contribution, A Deaton and J Dreze offer a detailed analysis of the decline in calorie intake in 1983-2004.

Average calorie consumption was about 10 per cent lower in rural areas in 2004-05 than it was in 1983. The proportionate decline was larger among the more affluent sections of the population. In urban areas, there was a slight change in average calorie intake over this period.

The decline of per capita consumption is not confined to calories. It also applies to proteins and other nutrients, with the exception of fats where the consumption increased. As incomes rose over this period (1983-2004), these declines are puzzling.

Essentially, per capita calorie consumption is lower at a given level of per capita household expenditure. In other words, there is a steady downward shift of the calorie Engel curve (in which calories are plotted against per capita expenditure).

Deaton and Dreze are emphatic that the downward shift of this curve is due to lower calorie requirements; better health and lower activity levels. As the evidence offered is fragmentary and patchy, this explanation is largely conjectural.

Our study provides further insight on the decline of calorie intake and the reasons but it is conducted over a shorter period (i.e. 1993-2004).

Our explanation is embedded in a standard demand theory framework, with food prices and monthly per capita expenditure (in 2004 prices) cast in a pivotal role. A presumption is that people make informed food choices based on flavour, packaging, variety and nutritional content.

Given this, it is meaningful to talk about calorie, protein and other nutrient demand functions. Food prices influence choice of commodities directly through own-price effects as well as through substitutions induced by cross-price effects.

Controlling for these effects, expenditure (as a proxy for income) generally has a positive effect on the demand for a food commodity unless it is an inferior good. Our analysis allows for changes in food demand elasticities with respect to prices and expenditure (proportionate change in food demand/proportionate change in its price) over time.

Finally, we are able to capture the combined effect of changes such as health improvements and less strenuous activity patterns over time. When we refer to changes in calorie demand, these include changes in consumption of food commodities due to changes in their prices, expenditure and other factors.

Our analysis shows the significant negative price effect on cereals (such as rice and wheat) has on calorie demand. Prices of vegetables also affected calorie demand negatively but the effect was larger (in absolute value) over time. So the important point is that the higher the food prices, the lower the calorie demand.

Expenditure had a large positive effect on calorie demand — a 1 per cent increase in per capita expenditure results in a 0.39 per cent increase in calorie demand. According to Deaton and Dreze, other factors (health improvements, and less strenuous activity patterns) contributed substantially to reduction in calorie demand.

While this conjecture is not rejected, it is complementary to our demand-based explanation. During 1993-2004 per capita expenditure stagnated while food prices rose sharply (cereal prices by about 58 per cent and vegetable prices by close to 100 per cent).

Juxtaposing these facts with the food price and expenditure elasticities, it follows that while stagnation of expenditure left calorie demand unchanged, higher food prices reduced it. Lower calorie requirements also contributed to a lower intake but in combination with a lower demand.

But does it really matter why calorie intake fell?

In our view it does, as the policy implications differ vastly. The case for interventions designed to stabilise food prices and expand livelihood opportunities in rural areas is reinforced despite a deafening but misguided chorus that nutritional deprivation is exaggerated or does not matter much.

Raghav Gaiha, Raghbendra Jha and Vani S Kulkarni are working on a joint paper: ‘Demand for Nutrients in India, 1993-2004’ at the Australia South Asia Research Centre at Australian National University.

1. Reducing Indian poverty: Income transfers through social safety nets
2. Indian monetary policy and the RBI – Let’s focus upon inflation
3. Japan’s rising yen and the decline of the US dollar

One of the paradoxes of modern India is the coexistence of high rates of economic growth and widespread malnutrition. Thus, between 2000 and 2005, real GDP per head and real per capita consumption grew at impressive rates of 5.4 per cent and 3.9 per cent per annum respectively. Yet more than 75 per cent of the population has a daily per capita calorie consumption below the minimum requirements for Indians. Concurrently, the food subsidy bill has been rising rapidly and was a staggering Rs 370 billion for households beneath the poverty line (BPL) in 2009-10.

Now, the government is seeking to enact a National Food Security bill (NFSB) which purports to provide 25 kilograms of rice or wheat per month to each BPL family at Rs 3 per kilogram, failing which, a poor person can seek redress. Undoubtedly, the logistical and administrative implications of such a sweeping legislation and the subsidy involved would be staggering and it needs to be implemented with some hard realities in mind.

To anticipate the likely performance of NFSB, it is necessary to quantify the extent of income transfer, particularly to BPL groups, through existing nationwide social safety nets as well as some of the opportunity costs to households. This can only be done through household surveys that focus on these issues. This article reports on the results of our investigation into two of the most important social safety nets in operation: the National Rural Employment Guarantee Scheme (NREGS) and the Public Distribution System (PDS), on the basis of a representative sample, collected in 2007-08, of households in Rajasthan, Andhra Pradesh and Maharashtra. The state level rural poverty cut-off points for Rajasthan, Andhra Pradesh and Maharashtra were Rs 450.58, Rs 352.40 and Rs 435.76 per month, per person, respectively.

In Rajasthan, more than one-third of the participating households had to wait for more than 45 minutes to make purchases from fair price shops, whereas nearly 90 per cent of PDS participants in Andhra Pradesh and Maharashtra had to wait 45 minutes or less. The mean waiting time for a PDS participating household was highest in Rajasthan (more than 54 minutes), followed by Andhra Pradesh (about 30 minutes) and Maharashtra (about 24 minutes). In Rajasthan, BPL card holders had the highest mean waiting time while above the poverty line (APL) card holders had the lowest. In Andhra Pradesh, APL card holders had the lowest mean waiting time followed by BPL and Antodaya card holders. In Maharashtra, BPL cardholders had the highest mean waiting time followed by APL and Antodaya cardholders.

For wheat, real mean income transferred per household per month (RIT) was the highest for Rajasthan (Rs 9.44), followed by Maharashtra (Rs 4.59). Mean RIT for acutely poor participants in wheat consumption was nearly the same in both states; however, it was significantly higher in Rajasthan for moderately poor, moderately non-poor and affluent participants. In Rajasthan, mean RIT was highest for affluent and lowest for acutely poor households. In the case of rice, Andhra Pradesh had the highest mean RIT (Rs. 7.38), followed by Maharashtra (Rs. 4.21) and Rajasthan (Rs. 3.24). While the Rajasthan and Maharashtra mean RIT was lower for poor households, it was the opposite in Andhra Pradesh, where moderately non-poor and affluent had a slightly higher mean RIT. For food grains, Maharashtra had the highest mean RIT (Rs. 12.45), followed by Rajasthan (Rs. 10.14) and Andhra Pradesh (Rs. 7.38). Whereas the mean RIT was highest for acutely poor households in Rajasthan and Andhra Pradesh, it was highest for the affluent in Maharashtra.

In the case of NREGS, the maximum distance participating households needed to travel to a worksite in Rajasthan was eight kilometres or more. In Maharashtra and Andhra Pradesh, the maximum distance of NREGS worksites for participating households were four kilometres and six kilometres, respectively. In Andhra Pradesh and Maharashtra, respectively, about 10 per cent and 6 per cent of the participating households lived within one kilometre or less from the NREGS worksites. However, less than 3 per cent of the participating households in Rajasthan lived within this distance. The majority of the participating households (71 per cent in Rajasthan, 77 per cent in Andhra Pradesh and 87 per cent in Maharashtra) lived within one to three kilometres of the worksite.

In the three states, the poor depended considerably on NREGS as a supplementary source of income, with NREGS share in income the highest in Andhra Pradesh (about 17 per cent), followed by Rajasthan (10 per cent) and Maharashtra (about 7 per cent). In Rajasthan, this share declined from acutely poor households to affluent. In contrast, in Andhra Pradesh, this share increased from acutely poor to moderately poor and then fell. In Maharashtra, this share increased from acutely poor to moderately poor and then declined.

Thus the opportunity costs are sometimes quite high and the benefits modest. These ground realities need to be taken into account in the design and implementation of the NFSB.

Raghbendra Jha is Professor of Economics and Executive Director at the Australia South Asia Research Centre, Australian National University. Raghav Gaiha is Professor of Public Policy at the Faculty of Management Studies, Delhi University. Manoj Pandey is Research Associate at the Australia South Asia Research Centre.

1. Targeting by social background vs. economic status in anti-poverty programs in rural India
2. Accelerating growth, reducing poverty and using regional cooperation in Bangladesh
3. Poverty and growth in the Philippines

Indian policymakers pride themselves on the fact that the Indian economy was able to pull out of the Global Financial Crisis (GFC) relatively unscathed, with real GDP growth rate falling to 6.7 per cent in 2008-09 as compared to the 9 per cent in 2007-08 and expected to rise above 7 per cent in 2009-10. At the onset of the GFC, many commentators had expected a collapse of growth, with some even predicting a return to the sluggish growth of the mid to late 1990s.

Thankfully, the Indian economy proved the predictors of doom wrong. A number of factors have been ascribed to explain this performance: high consumption in India, as compared with China, and lower exposure to the global economy, again as compared with China. High home consumption is desirable as it gives support to the domestic economy in the face of a collapse of international trade, as happened during the GFC. Additionally, lower exposure to international trade reduces the impact of external shocks. The existence of substantial controls on the banking sector is said to explain the fact that no Indian bank had to be ‘rescued’. In addition, credit also is sometimes given to ‘good policy design’ by the government.

The first two factors are certainly true. Indians save just over a third of their income and invest a bit more whereas the Chinese save and invest well over half of their income. India’s trade exposure, as measured by the percentage of exports plus imports to GDP, is a fraction of China’s as is India’s exposure to global financial flows. But as the Reserve Bank of India (RBI) has reminded us, India’s exposure to global financial flows is growing very rapidly although at the margin, particularly as a consequence of significant liberalisation of the capital account as it applies to corporations.

For both these reasons, then, Indian growth rates should have been higher than China’s. Why then, is China’s growth rate substantially higher than India’s and why is the gap only expected to rise in 2010? Should the difference be ascribed to differences in policy in the two countries?

In particular, attention has focused on the much larger stimulus package in China than in India – something that was not possible in India because India has a much larger fiscal deficit and much smaller fiscal room to manoeuvre. We could accept this argument only if we control for the much larger shock that the Chinese economy, with its lower consumption rate and higher exposure to external shocks, was subject to as compared with the Indian economy. This has not been demonstrated so no claim of this sort can be made.

What can be commented on is the course of Indian economic policy during and after the GFC (assuming we are out of it). Even before growth rates had picked up sufficiently (and there remain question marks on the pace and extent of global recovery), monetary policy has tightened. A crescendo of voices raises hackneyed arguments about the need to control the fiscal deficit even though the greatest debtor of all, the United States, is approaching this issue with greater equanimity and may yet use deficit reduction strategically.

Some have argued that high inflation in India necessitates the tightening of monetary policy. But inflation in India is not homogeneous. Even at the height of the GFC, with wholesale price index (WPI) inflation reaching alarmingly low levels, consumer price index (CPI) inflation was high in India. As of November 2009, the latest period for which the Ministry of Finance has made data available, year-on-year inflation in terms of WPI was 4.78 per cent for as compared to 8.48 per cent in November 2008 whereas CPI inflation was in the double digits.

This is not an argument for monetary tightening. A key contributor to the recent dynamics of CPI inflation has been the rise, just before the Lok Sabha elections of 2009, in procurement prices of food-grains. Prior to that, food prices had been rising and, under pressure, the government imported food grains, at substantially higher prices than was being paid to Indian farmers. The rise in procurement prices was inevitable, particularly given that 2009 was an election year. That rise in procurement prices is now filtering to higher wholesale and retail prices, leading to further imports. These imports would again be higher than the prices being paid to Indian farmers whence there will be pressures for the procurement prices to be raised.

In this context, restrictive monetary and fiscal policy will certainly lower growth and perhaps, WPI inflation. Higher food imports will hit the balance of trade. Thus, CPI inflation has a dynamic all its own.

1. Indian monetary policy and the RBI – Let’s focus upon inflation
2. The free-falling rupee: a blow to the Indian economy
3. Indian economy hardly misses a beat

Many agencies including national governments and the World Bank have cited public works programs as a crucial tool for poverty alleviation, particularly in the rural sector. When properly designed and implemented, rural public works (RPW) have the dual advantage of providing employment to the unemployed (hence reducing poverty) and building much needed rural infrastructure.

Besides, as RPW are designed to peak in seasonally slack periods, they help stabilise incomes. By stabilising and stimulating rural incomes and, therefore demand, RPW have the potential of stimulating the rural economy and, therefore, act as a counterfoil to contracting demand during recessions. RPW have been used in many countries, including India.

However, public policy towards poverty alleviation, of which RPW are one special case, is often subject to the phenomenon of ‘capture’ whereby the benefits of programs, ostensibly meant to target the poor, are garnered by non-poor. An important question in this context is the following. If the non-poor manage to garner the bulk of the benefits from an anti-poverty program, do they get satiated over time, i.e., do the poor become better aware of the potential advantages of RPW and seek to overcome the barriers to participation?

In the ASARC Working Paper [pdf] (No. 2009/16) ‘Timing of Capture of Anti-poverty Programs: Rural Public Works and Food for Work Programs in Rural India’ Raghbendra Jha, Sambit Bhattacharyya and Raghav Gaiha compute average odds of participation (AOP) given by the ratio of the quintile-specific average participation rate to the overall average for various quintiles of per capita expenditure for Scheduled Castes (SC), Scheduled Tribes (ST), Landowners and the rural population as a whole. They also compute marginal odds of participation (MOP) defined as the increment to participation in that program for various quintiles of per capita household expenditure. The computations are for RPW in 1993-94 and Food for Work (FFW) programs in 2004-05 using large scale National Sample Survey Household Survey for the 50th and 61st rounds respectively. Differences between AOP and MOP reflect differences in the incidence of infra-marginal spending. If the MOP is greater than the AOP for the poorest quintile within a particular social group, then the population in the poorest quintile will benefit more than the others from an increase in overall spending, indicating lower capture from the extra spending.

In 1993-94 among SC AOP were highest for the richest quintile in this group, indicating substantial program capture. Capture was also high for ST and the overall population. Among landowners AOP were highest for the 2nd and 4thquintiles.

In 2004-05 for the SC, there is evidence of capture as the AOPs are the highest for the 3rd and 4th quintiles. In contrast, the situation improved for the ST with the poorest quintile reporting the highest AOP and falling steadily across expenditure quintiles. Landowners had a similar experience.

If the MOP for a group is higher than the AOP then its chances of getting into the program are higher. In 1993-94 the RPW was reasonably well targeted toward the poorest quintile among the ST and the landowners but not among the SC and the rural population as a whole. The second poorest quintile among every section of the population had MOP higher than AOP indicating that this expenditure class was better targeted. Among the third poorest expenditure class the MOP was lower than the AOP for all caste and asset groupings except ST. Therefore only the ST experience program capture by the third quintile. MOP was uniformly higher than AOP across all caste and asset groups in the fourth expenditure class, indicating substantial capture.

AOP and MOP rankings for 2004-05 were broadly similar except that in the latter time period in the case of SC MOP is lower than AOP for the second quintile. AOP is higher than MOP for the third and fourth quintiles indicating better targeting but MOP is higher for the richest quintile indicating a substantial deterioration in targeting. In 2004-05, only the richest quintile among the SC had higher MOP than AOP indicating substantial capture. In contrast, targeting improved amongst the ST and the landowners.

Formal econometric testing reveals that in the case of the SC capture has increased for the fourth quintile, for the fourth quintile of the ST and for the fourth quintile of landowners over time. Thus, in these cases, there has been a clear deterioration of targeting. Against this, however, capture by the richest among the ST and the richest among the landowners dropped. On balance then, capture worsened over the time period 1993-94 to 2004-05.

Our results point to the necessity of income based targeting of anti-poverty programs. Social group based targeting seems unable to prevent the growth of program capture by high income elites within these groups.

This article originally appeared here in the South Asia Masala.

1. Reducing Indian poverty: Income transfers through social safety nets
2. Liberalisation strategies and poverty reduction in India
3. Under SBY, Indonesia grapples with the issue of poverty

As the world moves inexorably towards the Climate Summit in Copenhagen at the end of 2009, immense pressure has been brought to bear on India to accept legally binding carbon emissions targets. The latest attempt to pressure India came from US Secretary of State Hillary Clinton during her recent visit to India.

Such pressures on India and some other countries (particularly China) are occurring against the backdrop of a new wave of environmental activism among western commentators over the climate change debate. For example, Al Gore has called on all countries to place an immediate moratorium on coal-fired power plants. This would simply be a no go for India. More than half of the 800,000 megawatts of power India plans to produce by 2030 are to come from coal-fired plants because coal is abundant in India and other energy sources are relatively scarce.

Against this backdrop, it is instructive to recap the factual position concerning carbon emissions. In 2005, the total CO2 emissions for India, China, the US and the world were: 1.1, 5.1, 5.8 and 27.1 billion tonnes respectively, whereas their per capita emissions in the same order are 1, 3.8, 19.6 and 4.2 tonnes. It has been estimated that China’s emissions could reach 9 billion tonnes soon – although the figure of 6.5 billion tonnes has been mentioned.

It follows from this that it is wrong to club India and China in the same group of carbon emitters. China’s total emission is comparable to that of the US (and may indeed have surpassed this level), whereas India’s is only about a fifth of China’s. In terms of per capita emissions, China is close to the world average whereas India’s per capita emissions are less than a quarter of the world average.

In terms of outcomes for humans, the picture is even bleaker. For instance, India’s per capita annual electricity consumption is only 500 units compared to 8,000-10,000 units per capita consumed by western societies. Nearly 550 million Indians do not have formal access to any source of electricity. In this context, Prime Minister Manmohan Singh told former US President George W. Bush in 2008 that this was like the entire US population and half of the European Union living without any regular access to electricity.

Thus, it is quite reasonable to expect that India’s per capita electricity consumption will go up – from the present 500 units to at least 3,000 units in the next 10 years. But India will still consume less than half of the present per capita electricity consumed by the West.

India has argued that it will keep its per capita emissions below the world average, but western governments are disinclined to accept this. Their efforts, if successful, would cap emissions in such a manner that it will become difficult for India to meet the basic energy needs of the people using local resources. This is unjustifiable. Nevertheless, the global climate challenge has to be addressed. Hence compensatory mechanisms need to be put in place.

The Global Carbon Emissions Trading Scheme (ETS) being canvassed as a way out may or may not control carbon emissions, but it’s developmental and policy implications are eminently obvious, though less advertised.

By definition, the global ETS would involve international trade in permits for carbon emissions. Typically, economically developed, high carbon (at least in per capita terms) countries would buy carbon emission permits from the economically poorer, low carbon (again at least in per capita terms) countries. This would involve a transfer of funds from the richer to the poorer countries. Furthermore, a concomitant commitment from the latter to restrict carbon emissions, whereas the former would be able to emit more carbon than would have been possible in a world with firm quantitative restrictions on emissions but no global ETS.

The inflow of foreign exchange into economies such as India would not be an unmixed blessing, as this would lead to an appreciation of their real exchange rates vis a vis the rich countries, thus lowering their export competitiveness. Concurrently, the relative export competitiveness of the richer countries would be enhanced. The impact of the global ETS on countries such as India would thus be like ‘Dutch disease’. The carbon emission permits they would be allotted, and a good fraction of which they would sell to the rich countries, would lower the pace of their industrialisation, hurt their growth prospects, and hamper their efforts at reducing mass poverty.

Concurrently, the less developed countries, by selling their carbon permits to richer countries, would have signed away their opportunity to emit carbon. This would lower the pace of industrialisation and therefore, countries such as India would be doubly disadvantaged.

Hence, the global ETS has an anti-development content. Whereas the quantitative impact of the global ETS on countries such as India can be tempered by staggering their carbon reduction requirements over a longer time horizon and giving them a more generous initial allocation of carbon permits, these efforts need to be supplemented with a qualitative change in efforts to address the carbon issue. In particular, countries like India need to get accelerated access to new technology for carbon reduction and for generation of energy from non-traditional sources. The global ETS needs to be supplemented with a well thought out technology transfer policy to which even the emerging economies can be expected to make contributions in cash and human resources. Without such efforts, the global ETS is likely to have an adverse impact on developing economies.

This article originally appeared here on South Asia Masala.

1. Bush wrong on India and China and climate change
2. What China really delivered at Copenhagen
3. The politically possible: How to achieve success in Copenhagen

The on-going global financial crisis (GFC) has cast a shadow over the global economy with world output and trade forecasted (by the IMF) to shrink in 2009.

In the Australia South Asia Research Centre Working Paper, ‘The Global Financial Crisis and Short run Prospects for India’, [pdf] I outline the major contours of the GFC, its evolution since the subprime mortgage crisis in 2007, its implications for India and India’s response to the crisis.

Exhibiting a strong dynamism, economic growth in India in 2007–08 was a high 9 per cent despite the fact that the sub-prime crisis had already started to impact the US and other major economies. However, growth rates dropped steadily during the first three quarters of 2008–09. Government forecasts economic growth to be 7.1 per cent during 2008–09 but the fourth quarter growth figures may be overestimates so that growth in 2008–09 may be lower.

Several other indicators, e.g. industrial production and trade, have also pointed toward a slowdown in the economy. Traditional wisdom has it that the GFC should have had minimal impact on India because i) Indian banking had no direct exposure to the sub-prime mortgage crisis, and ii) India’s growth is largely based on domestic consumption and domestic investment. External demand as measured by merchandise exports account for less than 15 per cent of India’s GDP.

However, the Indian economy has globalized rapidly during the past few years. The ratio of exports plus imports to GDP increased by more than 50 per cent between 1997–98 and 2007–08 (from 21.2 per cent to 34.7). The growth of financial integration has been even more rapid. During the same 10 year period the ratio of total external transactions more than doubled from 46.8 percent to 117.4 percent. Corporate borrowing from external sources has also increased significantly. In 2007–08 India received capital inflows to the extent of 9 per cent of GDP as against a current account deficit of 1.5 per cent of GDP.

Three different channels of the GFC’s impact on India can be identified: i) The financial channel, i.e., the growing integration of India’s financial markets with global financial markets; ii) The growing trade links between India and the rest of the world indicate that exports would decline quite sharply, and; iii) A final avenue is the confidence channel. The tightened global liquidity situation following from the failure of Lehman brothers in September 2008 increased the risk-aversion of several banks and other lending institutions.

There is a slowdown in India’s growth performance — but not a collapse. India instituted three stimulus packages (amounting to a liquidity injection of about 7 per cent of GDP) in response to the slowdown in demand:

The short-run outlook for the Indian economy is unclear. Real GDP growth and major sectors have shown strong signs of slipping. But, the stimulus packages announced by the government and the RBI have had their desired effect. Thus, the Indian auto industry, which was heading towards decline recorded positive growth of 0.71 per cent in total vehicle sales in fiscal 2008–09, services and manufacturing sectors are expected to record reasonable growth and investment rates are still high. The sharp fall in inflation has provided room for more aggressive interest rate cuts by the RBI, although the burden of servicing the larger debt because of the stimulus packages will not be insignificant. Although equity markets have registered steep declines the wealth impact on domestic residents is limited since only a small number of Indians participate in equity markets.

Assuming that the global economy starts picking up in 2009–10, of which there are some signs, and provided developed countries do not resort to widespread protectionism, an assumption that may be proved wrong, the Indian economy should be in a good position to register a strong comeback. However, since the stimulus packages have already imposed a significant fiscal burden, the new central government would need to eschew undue populism, failing which high fiscal deficits could again restrict India’s growth between potential as was the case in the mid to late 1990s. The chances of this happening are lower now. The Indian economy has certainly grown in terms of sophistication and depth since the 1990s. On balance, there is reason to be guardedly optimistic about the Indian economy in the short run.

1. India: Confronting the Global Financial Crisis
2. The Eurozone crisis and prospects for India
3. China’s response to the global financial crisis

Satyam Computer Services, India’s fourth largest IT firm and a leading outsourcing company that counts General Electric, General Motors, Nestle, the US Government, Qantas and National Australia Bank amongst its clients, suddenly collapsed on 7th January 2009. The script for this debacle appeared to come straight from Enron. Like Enron, Satyam cooked the books and showed highly inflated assets. In his letter to the Satyam Board, CEO Ramalinga Raju admitted that of the 53.6 billion rupees in cash and bank deposits which Satyam listed as assets at the end of the second quarter of 2008-09, 50.4 billion rupees or US1.03 billion did not exist.

However, the similarity with Enron ends there. Whereas Enron was a loss-making enterprise that kept hiding its losses until they could be hidden no longer, Satyam is still a profitable company. In the past year, Satyam’s profit was not Rs. 6.49 billion as it claimed but Rs. 0.61 billion. Once Satyam’s true balance sheet is taken into account its margin last year was only 3 %, much lower than that of other IT majors.

Other Indian IT majors including Infosys and TCS continue to do well. Thus, on 13th January, Infosys posted a 33% year-on-year rise in net profit to 16.41 billion rupees (US$338 million) in the fiscal third quarter that ended on Dec. 31. This is an indicator that the problems at Satyam are nothing new. Naturally, the company’s auditors and, to a lesser extent, the regulatory agencies including SEBI and the Researve Bank of India shared the blame for Satyam’s fall.

Consequences followed. Mr. Raju was arrested for fraud. Satyam’s entire board was reconstituted with some heavyweights like Kiran Karnik, Deepak Parekh and C Achuthan becoming directors. New auditors have been appointed and the regulatory agencies are gong through Satyam’s books with a fine-toothed comb. The company asked for cash to pay its employees (who until recently numbered in excess of 50,000 worldwide) but the government has refused to bail the company out. These are all indications that Satyam may yet be resurrected, though no doubt it will be smaller and perhaps even split up into several entities.

It appears that, at least in the short run, Satyam’s travails have not had a major impact on the Indian corporate sector. Stock prices on the Bombay Stock Exchange Sensex recovered from this shock in no more than a couple of days. (The Sensex fell again following global stock market cues). Other IT majors such as Infosys could easily fill in most, if not all, of the vacuum left by Satyam. The rapid and decisive response of the regulatory agencies showed that at least one part of governance – reacting to a crisis – has been well handled.

This leaves one nagging point. Why were there not sufficiently transparent early warning systems in place? By some accounts the fudging of books by Satyam had been going on for years. It was only when Satyam tried to acquire Maytas (Satyam spelt backwards) in October 2008 and failed that it started being suspected that Satyam’s assets were inflated. As shown in a number of recent cases, the problem of inadequate early warning systems exists in many countries (including some highly developed ones like the US) and is not unique to India. So, while the Indian authorities seems to have handled the crisis quite well, they, along with regulatory agenices all over the world, need to perfect the forensic art of picking up early warning signals.

In Sanskrit, Satyam means “the truth”, a label which this company certainly failed to live up to. It is ironic that this falsehood was picked up when Satyam tried to buy a company with the name “truth spelt backwards”, and Satyam was finally exposed for what it really is.

1. The Fiji Water saga
2. India: Confronting the Global Financial Crisis
3. The mother of all bailouts: perspective from India

Recent events in the global financial system have been nothing short of seismic. Hundreds of billions, if not trillions of dollars in capital value have been lost in stock markets. Inter-bank credit has almost frozen up.

Actual costs of borrowing have gone up (even with falling central bank interest rates), unemployment has been rising in the major world economies, and home foreclosures and bankruptcies are on the rise.
This crisis is sought to be addressed by a variety of policy initiatives, the most important aspects of which are the injection of vast amounts of public funds into financial institutions and the provision of sovereign guarantees on bank accounts.

But the ability to do so is limited. The budget deficit for 2008 in the US has trebled as compared to its forecasted value and the ratio of public plus private debt to GDP is well over 300 percent. The huge injection of funds to stabilise the financial system will need to be financed. But the US treasury is already stretched and, with a recession looming, prospects for enhanced tax revenue in 2009 do not appear bright. Similar comments apply to Europe.

Further, there is the relatively unspoken fear: if failing private institutions are bailed out now, could it lead to a problem of moral hazard with these players not becoming more careful in the future, in anticipation of being bailed out again?

How is the Indian economy is expected to fare in the short-term and how has it responded to the crisis?

So far the global financial crisis has had three major impacts on the Indian economy: (i) the quantum of liquidity available during the first half of FY 2008-09 is about a third lower than during the first half of FY 2007-08; (ii) with slackening external demand, export growth is expected to slow; and (iii) Foreign Institutional Investors have withdrawn from Indian stock markets leading to sharp falls in key indices.

India’s economic growth has been rising and becoming more stable for the past 25 years, fuelled by higher savings and investment (now over 35 percent and 36 percent of GDP respectively), the demographic dividend of a younger, more educated labor force and accelerated total factor productivity growth. For the past three years, the economy has grown at 9 percent giving the Indian economy considerable momentum. Second, during the current FY trade growth has been impressive, with exports rising 35.1 percent in dollar terms and imports rising 37.7 percent during the period from April-August 2008. Investment has been buoyant and FDI during 2008-09 is expected to reach US$35 billion.

Indian banks have strong balance sheets, are well-capitalised and well regulated. The capital adequacy ratio of every Indian bank is well above Basel norms and those stipulated by the RBI. Not one Indian bank has had to be rescued in the aftermath of the crisis. India has a long history of working with public sector banks and in engineering bank rescues.

India’s growth rate will slow in 2008-09. Growth during the quarter ending June 2008 was 7.9 percent. The current consensus for the 2008-09 FY is 7.5 percent to 8 percent.

Principal reasons for this modest drop in economic growth include (i) a large and diversified consumption base for the Indian economy; (ii) India’s trade to GDP ratio is much smaller than that of, say, China; and (iii) Indian financial markets are still relatively insulated from global financial markets. India has a healthy external balance, with high foreign exchange reserves, low ratio of short term external debt to GDP and less than complete capital account convertibility.

Nevertheless, that will be a significant slowdown compared to recent experience, but it will still be robust growth. The slower growth will be accompanied by reduced employment growth and slower poverty reduction.

Indian policymakers have responded with measures to enhance liquidity – primarily by reducing the cash reserve ratio and the repo rate – and enhancing confidence. Bank guarantees, beyond those that already exist, have been deemed unnecessary.

In 2009-10, if the world economy recovers, India can grow at 9 percent or more. If the world economy remains in recession, forecasts of Indian growth rates are harder to make.

Professor Raghbendra Jha spoke at the India Update, held on the 6th and 7th of November at the ANU.

1. The global financial crisis and short-run prospects for India
2. Indonesia’s strong balance sheets—key to weathering the global financial crisis
3. India: Turning Crisis into Opportunity?