‘If structural constraints are alleviated, India may grow faster’

‘If structural constraints are alleviated, India may grow faster’
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First Published: Mon, Jul 30 2007. 12 13 AM IST

A world view: IMF representative in India Joshua Felman.
A world view: IMF representative in India Joshua Felman.
Updated: Mon, Jul 30 2007. 12 13 AM IST
Mumbai: The International Monetary Fund (IMF) last week revised the growth rate for India for calendar year 2007 upwards by 0.6 percentage points to 9%. The world economy is now expected to grow by 5.2%, one quarter percentage point lower than last year even though growth in the advanced economies is forecast to slow by half a percentage point.
In an email interview, Joshua Felman, senior resident representative of IMF in India, explains the rationale behind the upward revision in the fund’s forecast.
What has driven India’s growth?
The drivers of growth have changed over the past few years. When the boom started in 2003-04, it was driven by consumption and exports. Now, it is being driven mainly by investment. This is not surprising. In fact, India is following a classic pattern. As booms proceed, existing capacity gets used up and the firms then start investing so that they can add to their capacity. This investment creates more jobs and more consumption, thereby prolonging the boom.
What could derail the pace of India’s economic growth?
It would be very hard to derail this completely because India now has an economic framework that is conducive to growth. So, it has become a very attractive place to invest—not just for domestic firms, but also for foreign ones. Last fiscal, foreign direct investment (FDI) nearly tripled to $20 billion (Rs81,000 crore).
A world view: IMF representative in India Joshua Felman.
Still, there are a few factors that could affect growth. For one, growth could ease somewhat if the world economy starts to slow down. If the IMF projections are correct, this will be the fourth consecutive year in which world growth exceeds 5%. We have not seen such a global boom for a long time for at least three decades. What is rarer is that this global boom is being accompanied by low inflation and low interest rates. So, we truly have an ideal international economic environment. This is something that will not last forever, and when global growth turns down and interest rates rise, India will certainly be affected.
What other factors can affect the India story?
Apart from these cyclical factors, there are other more structural factors that will affect the growth of India’s economy. As growth proceeds, the economy will need more infrastructure and more skilled labour. The corporate sectorwill also need more sophisticated financial services to help it raise capital and manage its risks.
Finally, it is always worth remembering that inflation is an enemy of growth. It’s worth recalling that when India’s inflation was in double digits, growth performance was poor. But once inflation was brought down to around current levels, in the early 2000s, that set the stage for the current boom.
What’s your outlook for 2008?
So far, the outlook remains good. The IMF projects that global growth will remain above 5% even in 2008. Also, progress is being made in developing the infrastructure, skilled labour, and financial services that the economy needs. If these structural constraints are alleviated, India could grow even faster than it is currently doing.
Since the 1990s, India has been transformed from one of the most closed economies in the world into an open economy. Balance of payments flows (both in and out of the country), which traditionally were quite small, have grown so rapidly that last year they were as large as India’s GDP! That means that the rest of the world now has a large impact on India, on exports, on interest rates, and even on domestic prices. That is why global economic conditions will have a significant influence on India’s future growth.
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First Published: Mon, Jul 30 2007. 12 13 AM IST