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Asean

India: sustaining high growth needs new reform momentum

India’s economic growth accelerated significantly in the latter half of 2010. The growth of real GDP during the final two quarters of 2010 averaged 8.9 per cent as compared to the 7.5 per cent recorded during the corresponding period in 2009.

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Author: M. Govinda Rao, NIPFP, New Delhi

India’s economic growth accelerated significantly in the latter half of 2010. The growth of real GDP during the final two quarters of 2010 averaged 8.9 per cent as compared to the 7.5 per cent recorded during the corresponding period in 2009.

The acceleration of growth has been broad based and is seen in all the three sectors – agriculture, industry and services. While the agricultural sector has shown a strong recovery due to the bountiful rainfall, growth in both industry and services has accelerated due to buoyant domestic demand.  The outlook for the rest of the year continues to be optimistic and it is expected that the for 2011, the economy may register a growth rate of close to 9 per cent which is higher than most forecasts, including those by the Reserve Bank of India and the Economic Advisory Council to the Prime Minister at 8.5 per cent.

On the external front, both imports and exports have recorded strong growth, and although the former has increased at a faster rate increasing the trade deficit, the current account deficit is likely to remain within manageable limits due to continued strength of invisibles and inflow of capital. On the fiscal front, the realisation of higher revenue from auctioning the broadcast (by about 1.3 per cent of GDP) spectrum is likely to offset increased outlays on subsidies,  With tax collections up, the fiscal deficit of the central government relative to GDP is likely to be lower than that budgeted by half a percentage point, at 5 per cent. The consolidated deficit of central and state governments is estimated at about 8.5 per cent of GDP, which is lower than last year’s by about 1.5 percentage points. Thus, the government has initiated measures to gradually withdraw their stimulus to provide greater space for the private sector and to render greater flexibility in monetary policy calibration.

The Indian economy has shown a much stronger recovery from the impact of global crisis than most  of the G20 countries, partly due to the fiscal expansion prior to the crisis. In fact, fiscal expansion in India started before the onset of global economic crisis. The expansion of the rural employment scheme, the farm loan waiver, significant increases in fertiliser subsidies and increases in the wages of government employees actually increased the expenditure by over 4 per cent of GDP over the budget estimates. These decisions were taken in the budget in February 2008, much before the Lehman crisis unfolded. This unplanned fiscal expansion was indeed a profligate policy but, nevertheless, helped to soft land the economy during the crisis and helped in its fast recovery.

Despite the optimistic economic environment, there are several challenges in the short and medium term and the most immediate concern for the policy makers is inflation. Despite the expectation of good agricultural production, consumer prices have continued to increase. The rising international price of crude oil will further increase fuel costs and could create a cost push inflationary situation. Combating inflation while maintaining the growth momentum will be the most immediate challenge faced by policy makers.

Like other emerging market economies, there is a significant inflow of portfolio investment and, to a lesser extent, foreign direct investment and this is likely to put pressure on the exchange rate even though the country is likely to have the trade deficit of over 9 per cent of GDP and a current account deficit of about 3 per cent of GDP. Ensuring a competitive exchange rate in the wake of surging capital flows is an important challenge. So far, the inflow has not been too large and the problem has been manageable, but if the inflow surges there will need to be intervention.

A major medium term worry is achieving fiscal consolidation. The Finance Commission recommended that the consolidated fiscal deficit of the central and state governments should be contained at 5.4 per cent (the prevailing level is about 8.5 per cent) and the central government deficit should be brought down from the budgeted level of 5.5 per cent in 2010-11 to 3 per cent by 2014-15. In addition, the government is embarking on a major program to ensure food security, universalising healthcare and expanding education facilities. Together, these programs could cost an additional 3 per cent of GDP. The government will have to generate additional revenues or re-prioritise expenditures and undertake disinvestment to the tune of 6 per cent of GDP in the medium term to achieve these objectives

Improving the competitiveness of the Indian economy in the long term requires further liberalising reforms. Although tariff levels have been significantly reduced, there are sectors such as agriculture where the government will have to liberalise. Similarly, while there is considerable room for  freeing foreign direct investment, there are sectors such as retail trade where liberalisation is called for, particularly as the employment potential in these sectors is large. Equally important is the need to liberalise India’s archaic labour laws.

Poor infrastructure continues to be a constraining factor in maintaining a high growth rate in the economy. The shortfall of electricity at peak demand is estimated at more than 12 per cent and there are problems in generation, transmission as well as distribution. The investment in roads is not taking off at the pace planned and large investments are needed for augmenting urban infrastructure and services.

The revival of high growth is heartening, but sustaining it over the medium and long term calls for immediate initiatives to revive the reform momentum. Unfortunately, even after the government emerged stronger after the last general election in mid-2009, it has been bogged down with serious issues of governance and unless it cleans up its own act quickly, the economy will continue to underperform from its potential.

Dr. M. Govinda Rao is the Director of the National Institute of Public Finance and Policy (NIPFP), New Delhi and a Member of the Economic Advisory Council to the Indian Prime Minister.

This is part of a special feature: 2010 in review and the year ahead.

  1. PNG’s bumpy road to high growth
  2. India: Controlling inflation without hurting growth
  3. India’s high points and lows: no time for backsliding

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India: sustaining high growth needs new reform momentum

Asean

ASEAN weathering the COVID-19 typhoon

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Vietnam's Prime Minister Nguyen Xuan Phuc addresses a special video conference with leaders of the Association of Southeast Asian Nations (ASEAN), on the coronavirus disease (COVID-19), in Hanoi 14 April, 2020 (Photo:Reuters/Manan Vatsyayana).

Author: Sandra Seno-Alday, Sydney University

The roughly 20 typhoons that hit Southeast Asia each year pale in comparison to the impact on the region of COVID-19 — a storm of a very different sort striking not just Southeast Asia but the world.

 

Just how badly is the COVID-19 typhoon thrashing the region? And what might the post-crisis recovery and reconstruction look like? To answer these questions, it is necessary to investigate the strengths and vulnerabilities of Southeast Asia’s pre-COVID-19 economic infrastructure.

Understanding the structure of the region’s economic house requires going back to 1967, when Southeast Asian countries decided to pledge friendship to one another under the ASEAN framework. While other integrated regions such as NAFTA and the European Union have aggressively broken down trade barriers and significantly boosted intra-regional trade, ASEAN regional economic integration has chugged along slower.

Southeast Asian countries have not viewed trade between each other as a top priority. The trade agreements in the region have been forged around suggestions for ASEAN countries to lower tariffs on intra-regional trade to within a certain range and across limited industries. This has lowered but not eliminated barriers to intra-regional trade. Consequently, a relatively significant share of Southeast Asian trade is with countries outside the region. This active extra-regional engagement has resulted in ASEAN countries’ successful integration into global value chain networks.

A historically outward-facing region, in 2010 around 75 per cent of Southeast Asian commodity imports and exports came from countries outside of ASEAN. This share of extra-regional trade nudged closer to 80 per cent in 2018. This indicates that ASEAN’s global value chain network embeddedness has deepened over time.

Around 40 per cent of ASEAN’s extra-regional trade is with the rest of Asia. From 2010 to 2018 Southeast Asian countries forged major trade relationships with four Asian countries: China, Japan, South Korea and India. Outside Asia, the United States is the region’s major trading partner. ASEAN’s trade focus on Asia’s largest markets is not surprising. Countries tend to establish trade relationships with large, geographically close, and culturally similar markets.

Fostering deep relationships with a few large markets, however, is a double-edged sword. While it has allowed ASEAN to benefit from integration in global value chains, it has also resulted in increased vulnerability to the shocks affecting its network connections.

ASEAN’s participation in global value chains has allowed it to transition from a net regional importer in 1990 to a net regional exporter in 2018. But the region’s deep embeddedness in a small and tightly-coupled network cluster of extra-regional global value chain partners has exposed it to disruption to any and all of its external partners. By contrast, ASEAN’s intra-regional trade network structure is much more loosely-coupled: a consequence of persistent intra-regional trade barriers and thus lower intra-regional trade intensity.

In the pre-COVID-19 period, ASEAN built for itself an economic house held up by just five extra-regional markets, while doing less to expand and diversify its intra-regional trade network. The data shows that ASEAN trade became increasingly concentrated in these few external markets between 2010 and 2018.

This dependence on a handful of markets does not bode well for risk and crisis management. All of the region’s major trading partners have been significantly affected by COVID-19 and this in turn is blowing the ASEAN economic house down.

What are the ways forward? The immediate task at hand is to get a better picture of the region’s position in global value chain networks and to get on top of managing its network risk exposure. Already there are red flags around the region’s food security arising from its position in food value chains. It is critical to look for ways to introduce flexibility into existing supply chains for greater agility in responding to crises.

It is also an opportune time for ASEAN to harness the technology transfer gains of global value chain participation and invest in innovation-driven diversification of products and markets. The region’s embeddedness in global value chain networks certainly places it in a strong position to readily access large export markets not just in Asia but also Europe and the Americas.

Over the longer term, ASEAN is faced with the question of whether it should seriously look…

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Asean

Can Asia maintain growth with an ever ageing population ?

To boost productivity in the future, Asian governments will have to implement well-targeted structural reforms today.

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Asia has been the world champion of economic growth for decades, and this year will be no exception. According to the latest International Monetary Fund Regional Economic Outlook(REO), the Asia-Pacific region’s GDP is projected to increase by 5.5% in 2017 and 5.4% in 2018. (more…)

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