Another good report on Indian economy

I had posted sometime back about some very useful reports on Indian Economy from RBI. I had also summarised the report on real economy here.

However, I found another very interesting analysis from Economic Advisory Council to the Prime Minister headed by Dr. Rangarajan.This is perhaps more analytical as it actually looks at reasons behind growth rather than a plain summary of facts as RBI does. It is natural as RBI leaves the analysis to people like us where as EAC is actually doing the analysis for the Prime Minister as the Terms of Reference for EAC suggest:

  1. Analyzing any issue, economic or otherwise, referred to it by the Prime Minister and advising him thereon;
  2. Addressing issues of macroeconomic importance and presenting views thereon to the Prime Minister. This could be either be suo-moto or on a reference from the Prime Minister or anyone else;
  3. Submitting periodic reports to the Prime Minister on macroeconomic developments and issues with implications for economic policy;
  4. Attending to any other task as may be desired by the Prime Minister from time to time.

Well, now to the analysis bit of the report. It is basically an old report and most of the analysis is for 2006-07. However, it has some interesting points:

  • Has our growth (from 2003 onwards) been consumption driven? (page 18) The report comprehensively argues that yes, it has been so far. The idea is that growth in personal credit given by banks has increased by nearly 50% CAGR between 2003-06 and the growth for industry is just about 24%. And the share of personal credit in outstanding credit has increased from 15% in 2002-03 to 25% in 2005-06. Whereas for industry it has reduced from 41% to 39%. So a large part of credit has gone for personal use and hence we can say that growth has been consumption driven. The growth in credit happened as we had low inflation, low rates etc and as both rise, consumption would slow and so would the  growth.

Here, the report makes a good point that Indian policymakers need to shift the growth momentum from consumption to investment, exports etc. It also makes a comparison with China and rightly says Indian and China are mirror images to each other. Where in China the growth is more export and investment driven and has to make it more consumption driven, in India we have a completely opposite case. Very interesting indeed!

And how do we make growth more investment driven? By easing supply-side measures. One it has to provide better infrastructure and two it would have to lower its deficit so that interest rate for raising capital for infrastructure projects goes down. So the government has to do a tight-rope walk of balancing the deficit on one hand and spending on infrastructure on the other hand.To be honest, the argument that deficit needs to be lowered so that cost of capital comes down is a point I had not really thought.

  • The Problem with Agriculture Sector (Page 24): This is also explained very well in this report. As per the report, except oilseeds, in all the foodgrains both our production and yields have slowed down. In 2005-06, all the foodgrains show lower levels than highs achieved in previous years. The yields, which showed improvement in 1970s and 1980s, have slowed down.  

The problem is acute in wheat and pulses and in most of the years the actual production has been lower than targeted.If I add my previous analysis on economic conditions in India, which also talked about poor growth in agriculture, the problem looks quite serious.A good report and it is pretty concise as well (just 46 pages of easy reading). Happy reading.

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6 Responses to “Another good report on Indian economy”

  1. Agriculture sector is a problem area « Mostly Economics Says:

    […] Discussion, Agriculture, Policy, speech I had posted about the slowdown in Agriculture sector here and […]

  2. I was not quite right « Mostly Economics Says:

    […] was not quite right I had mentioned sometime back that RBI presents us with facts on different aspects of the economy and leaves the […]

  3. Assorted Links « Mostly Economics Says:

    […] 4. Mythili Bhushnurmath says we are moving to investment driven growth. I think we need more data.  It is exactly what Economic Advisory Council suggested. […]

  4. IIP numbers continue to surprise « Mostly Economics Says:

    […] In 2006-07 the trend so far has been that two sectors namely intermediate goods and consumer non-durables sector have shown a huge jump from the growth seen in 2005-06 (Intermed goods in 05-06 – just 2.6% and in 2006-07 – 11.9%, Non-durables igrowth increased from 7.1% to 14.7%)  . So companies making auto parts, cholcolates, biscuits etc have higher production numbers this year. The growth in non-durables is consistent with the consumption led growth theory which I had mentioned about previously. […]

  5. Assorted Links « Mostly Economics Says:

    […] As usual we do not have the report on EAC’s website till now. So I can’t post my review. The review for previous year’s is available here. […]

  6. EAC’s Indian economy outlook 2007-08 « Mostly Economics Says:

    […] report EAC had said India’s growth has largely been consumption driven ( I have summarised it here) and there is a need to shift it to more investment driven. This time they say it is happening (I […]

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