Letting the Future In: India's Continuing Reform Agenda, Address by Anne O. Krueger, Acting Managing Director, IMF
IMF News, June 4, 2004
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- Published: June 4, 2004
Overview and central message
- The 1991 reform program set India on a sustainable growth path through trade, financial and economy-wide liberalization.
- Official growth target of 7-8 percent is "attainable" and "more can be achieved"; with appropriate commitment, "growth of 10 percent a year is both necessary and feasible."
- The IMF's role is to support governments in delivering sustained and rapid growth to raise living standards and reduce poverty; the Fund does not dictate policy priorities.
Achievements to date and empirical findings
- Growth acceleration began in the 1980s due to: removal of some controls on private sector activity; relaxation of quantitative restrictions on imports; and expansionary fiscal policy.
- The 1991 balance of payments crisis led to radical reforms that restored stability and sustainability.
- Post-1991 performance:
- India averaged around six percent a year over the period since 1991.
- National poverty rate estimate: dropped from just under 41 percent of the population in 1992-93 to less than 29 percent at the turn of the century.
- Rural poverty: "a tad over 30 percent in 2000."
- Urban poverty: 24.7 percent.
- Recent growth exceeded 7 percent ("growth in excess of 7 percent achieved last year").
- Sectoral successes: software industry growth, outsourced services (call-centers), rise in middle-class consumption.
International comparison: Korea as an example
- Korea reforms and outcomes:
- In 1960, exports equaled 3 percent of GDP, nearly 90 percent primary commodities.
- By 1964, exports rose from $30 million in 1960 to more than $100 million.
- Imports rose from 13 percent to around 40 percent of GDP; exports from 3 percent to 37 percent of GDP during reform progression.
- In the first decade after 1963, real GDP growth averaged 13 percent a year.
- By 1988, exports were 46 percent of GDP.
- Between 1962 and 1992, per capita income rose almost sevenfold.
- Lesson: opening the economy and export-led policies, plus infrastructure investment, supported sustained growth and relatively equal income distribution.
Major reform priorities and policy recommendations
- Fiscal policy and deficit:
- The large deficit is "now in excess of 10 percent of GDP" and "simply not sustainable."
- Support for Fiscal Responsibility and Budget Management Act; concern over proposed delay to budget balance target date to 2009.
- Fiscal reform emphasis: make public sector more efficient; improve revenue collection and tax administration; widen tax base; streamline civil service; better-targeted transfer payments; reduce subsidies that benefit the middle class.
- Reducing government's reliance on borrowing will free up resources for the private sector and help raise productive investment.
- Empirical examples: Turkey ran a primary surplus of more than 6 percent while achieving almost 6 percent growth; Brazil had a primary surplus of 4.5 percent with growth picking up.
- Infrastructure:
- Rapid improvements in transport, power and communications are "vital" for private sector productivity and poverty reduction.
- Government should focus on core responsibilities and leverage private sector where appropriate.
- Social provision and service delivery:
- Better targeting of education and health can increase benefits for the poor at the same or lower cost.
- Public sector efficiency is critical to improving delivery of education, health and infrastructure.
- Center-state relations:
- Many delivery and infrastructure problems lie with states; resolving center-state issues and giving states the right incentives is key.
- States can learn from one another to address regional disparities.
- Labor market reform:
- Around 40 million people are already looking for a job in India, and another 35 million are likely to join them within three years.
- Labor regulation prevents large-scale private-sector job creation; deregulation would enable labor-intensive manufacturing to create unskilled jobs.
- High-tech and services sectors are successful in part because they are exempt from restrictive labor regulations; similar freedoms across the economy would expand job creation.
- Foreign direct investment (FDI):
- FDI in India is "still less than three quarters of one per cent of GDP."
- Comparative figures: more than 3 percent in Brazil, and more than 4 percent in China.
- India accounts for "less than one half of one per cent of global foreign investment."
- Recommendation: reduce regulation and red tape to attract more foreign investors.
Implementation challenges and micro-level bottlenecks
- Bureaucratic hurdles and lack of local incentives impede exporters; streamlining procedures at local levels could yield significant gains.
- Public sector shortcomings are not always due to funding shortages: corruption and mismanagement matter.
- Education sector absenteeism findings: across India 25 percent of teachers are absent on any given day; in Bihar 38 percent and in Jharkhand 42 percent. Absence in private schools is nearly as bad—"around two percentage points less than in public schools."
- Center-state coordination, local implementation incentives, and reduction of corruption/mismanagement are essential to translate reforms into better services and infrastructure.
Scenarios and potential outcomes
- With sustained and bolder reform momentum post-election:
- India could move to a path of sustained and rapid growth, enabling much greater poverty reduction and faster rises in living standards.
- Growth, combined with improved public service delivery and labor market liberalization, would generate more and better jobs.
- Without fiscal consolidation and structural reforms:
- The unsustainable large deficit could constrain long-term growth prospects and crowd out private investment.
Conclusion
- India has achieved significant reform-driven gains since 1991; these gains can be expanded by pursuing:
- Fiscal consolidation combined with public-sector efficiency,
- Rapid infrastructure modernization,
- Improved center-state cooperation,
- Labor market deregulation to enable large-scale job creation,
- Greater encouragement of foreign investment.
- "Bigger steps, taken more boldly, would bring correspondingly greater rewards."
Source: Letting the Future In: India's Continuing Reform Agenda, Address by Anne O. Krueger, Acting Managing Director, International Monetary Fund, June 4, 2004.