Breaking Out of the Third World: India's Economic Imperative — Address by Stanley Fischer

IMF News, January 22, 2002

Source details

Canonical URL

Breaking Out of the Third World: India's Economic Imperative — Address by Stanley Fischer

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Published: January 22, 2002

Introduction

• Context: Speech delivered at the India Today Conclave, New Delhi; as prepared for delivery, January 22, 2002.
• Global backdrop: world economy subdued after unexpected weakness and the events of September 11; cautious optimism as industrial production and financial markets show signs of stabilization.
• Core message: India must take decisive steps now to boost long-term growth and fulfill its economic potential; complacency must be avoided.

Achievements and Key Statistics

• Economic growth averaged 6 percent a year in the 1990s, led by services and a dynamic IT industry.
• Poverty:
  • Fell from 55 percent of the population in 1974 to an estimated 26 percent in 2000.
  • During the nineties, the poverty rate is estimated to have fallen from 34 percent to 26 percent.
  • About 260 million Indians still live below the official poverty line.
• Social indicators (roughly last two decades):
  • Life expectancy: from 55 to 63 years.
  • Infant mortality rate: from 108 to 70 per thousand live births.
  • Literacy: rose from 45 to 68 percent for men and from 29 to 45 percent for women.
  • Current literacy levels: 68 percent for men and 45 percent for women; China: 91 percent for men and 76 percent for women.
• External position:
  • Official reserves now stand in excess of six months of goods and services imports.
  • Reserves are more than four times the level of short-term external debt.
  • External debt has declined to around 22 percent of GDP.
  • Current account deficit has been held to less than 1 percent of GDP in recent years.
• Investment and FDI:
  • FDI in India averaged ½% of GDP during the last decade; in China it was 5% of GDP.
  • Private investment in India around 15% of GDP; greater FDI could permit a nearly one-third increase in private investment relative to GDP.
• Fiscal position:
  • General government deficit nearly 10 percent of GDP.
  • General government debt risen to almost 65 percent of GDP.
• Growth objective:
  • Planning Commission estimate: it will take growth rates of 8-9 percent over the next decade to reduce the poverty rate to around 11 percent.
• Returns to education (World Bank (1995) review for Asia, cited):
  • Private and social returns: 39% for primary, 19% for secondary, and 20% for higher education.

Achievements and Challenges — Analysis

• Driving force: ambitious reform program after the 1991 balance of payments crisis — industrial and trade liberalization, financial deregulation, improved supervision, privatization and FDI-friendly policies.
• Recent slowdown: growth has been slowing since 1997; attributed fundamentally to a slackening in the pace of reform (droughts, high energy prices, Gujarat earthquake noted as exogenous factors).
• Distribution of growth: services-led growth but industrial growth has slowed sharply; industrial growth needed to provide high-wage employment for the 70 percent of the labor force still working in agriculture.
• Policy slippages: weaker growth and policy slippages undermined fiscal position and prompted credit rating downgrades.

Sustaining Stronger Growth — Policy Priorities and Recommendations

• Overview: Focus on five key areas — embracing globalization, structural reform in product and labor markets, education, strengthening the financial sector, and fiscal consolidation.

• Embracing Globalization
  • View: globalization should be embraced purposefully and cautiously; India should position itself to compete internationally.
  • Trade:
  • India has cut tariffs and removed quantitative restrictions, but tariffs remain very high by international standards and anti-dumping measures are frequently used.
  • Advisory Council suggestion: move average industrial tariff level from 34 percent then to the East Asian average of 12 per cent by 2005; the average tariff level in India had not fallen since the report but the 12 percent target remains sensible.
  • Capital account liberalization:
  • India's cautious approach limited contagion during the Asian crisis by containing short-term debt.
  • Benefits to greater openness, especially FDI, are emphasized: FDI transfers skills and technologies and has spillover benefits.
  • Capital account liberalization should proceed gradually but steadily as the financial system and fiscal policy are strengthened.

• Structural Reform (factor and product markets)
  • Industrial deregulation priorities:
  • Eliminate preferences for small-scale producers.
  • Further ease constraints on foreign direct investment.
  • Streamline regulatory procedures.
  • Revamp bankruptcy legislation.
  • Labor market reform:
  • Repeal legislation blocking layoffs in medium- and large-sized firms (as announced in Minister Sinha's last Budget speech).
  • Legislation to ease constraints on hiring contract labor.
  • Agricultural reform:
  • Abolish controls on prices, trade and movement of agricultural commodities.
  • Sharply reduce role of government procurement agencies and dereserve agricultural processing.
  • Current government food stocks represent a significant fiscal drain and exceed what is needed for food security.
  • Power sector reform:
  • Primarily state responsibility; central government can condition funding on reforms such as metering, energy audits, commercialization of distribution, and raising tariffs to economically sensible levels.

• Education
  • Emphasis: investment in education, training, and talent development is critical.
  • Literacy shortfalls highlighted relative to China.
  • The Prime Minister's Economic Advisory Council report details necessary measures; universal primary education is an effective anti-poverty measure.

• Financial Sector Strengthening
  • Lesson from Asian crises: importance of a strong, well-regulated financial sector with prudential and supervisory systems, strong governance, and mechanisms to resolve weak institutions.
  • Progress and remaining weaknesses:
  • Prudential norms tightened, bank capital bolstered, supervisory systems strengthened.
  • India undertook a Financial Sector Stability Assessment.
  • Remaining issues: stock market scandal (governance), problems with UTI, development finance institutions, urban cooperatives, weak banks, and high non-performing loans.
  • Privatization and ownership:
  • Government commitment to reduce ownership in financial sector is welcome and should be pursued.
  • Concern that private investors may avoid entry while government retains controlling shares; government control historically leads to deterioration of institutions.
  • Goal: strengthen supervision, governance, and resolution mechanisms to enable the financial system to finance investment.

• Fiscal Consolidation
  • Current situation:
  • General government deficit nearly 10 percent of GDP.
  • General government debt almost 65 percent of GDP.
  • Consolidation since 1991 crisis has been erased.
  • Consequences:
  • Unsustainable deficit risks disorderly stop with serious growth consequences.
  • Borrowing at current levels crowds out private investment and imposes a heavy interest burden, diverting resources from development needs.
  • Recommended actions:
  • Passage and implementation of the Fiscal Responsibility and Budget Management Bill (seeks to eliminate the revenue deficit over the medium term) is welcome but insufficient alone.
  • Harder budget constraints at the state government level.
  • Tax reform.
  • Reductions in subsidies.
  • More rapid progress with privatization.
  • Focus on overall deficit rather than adherence to the golden rule of balancing current expenditures.
  • Urgency: gradual improvement plans in the 1990s failed; a more determined rate of deficit reduction is economically and politically preferable.

Conclusion

• The reform agenda is formidable, politically and technically challenging; many reforms will confront privileged interests and entail painful adjustments.
• Long-term benefits far outweigh short-term costs; delay raises costs.
• If India implements these measures and increases growth to the 8-9 percent range, it can move out of the third world and inspire other countries.
• Closing exhortation to policymakers: "Just do it."

Source: Breaking Out of the Third World: India's Economic Imperative — Address by Stanley Fischer, Special Advisor to the Managing Director, International Monetary Fund; as prepared for delivery, January 22, 2002.

References

• India and the IMF
• Singapore and the IMF
• People's Republic of China and the IMF
• Speeches
• Stanley Fischer
• PRESS CENTER
• https://www.imf.org/en/home