In the most optimistic assessment so far, the United Nations Economic and Social Commission for Asia and the Pacific (Escap) expects India to grow at 9% in 2007. Though this is marginally down from 9.2% in 2006, it is still pretty good going, given a less favourable external environment caused by the slowdown in the US economy.
It has, however, sounded a note of caution by saying that managing exchange rates will be the biggest challenge in the current year.
The report also finds that India is among the worst 25 countries in the gender gap index, 2006. It is among the worst seven in health and survival, economic participation as well as educational attainment, but manages a decent sixth position among 26 countries thanks to its high rank in political empowerment.
If India were to reach the standards prevailing in the US, which has the highest female labour force participation rate (86%) among rich countries, its gross domestic product (GDP) would increase by an additional 4.2% a year, a gain of $19 billion (Rs79,800 crore). The share of women in jobs outside of agriculture is 17.5% in India, reflecting limited autonomy and opportunities for women.
Looking at the year ahead, the rate of inflation in India will moderate from 6% in 2006 to 5%, says Escap’s annual development outlook for 2007, titled ‘Surging Ahead in Uncertain Times’.
The Reserve Bank of India is likely to continue to nudge interest rates up over the next 12 months, with fiscal consolidation taking place alongside, because of which most analysts, including multilateral institutions, have forecast growth to drop below 9% and maybe even lower than 8.5% for fiscal 2007.
On the other hand, China will slow down more noticeably to 9.9% from 10.7% in 2006, with a stronger yuan and weaker electronics demand reducing exports, even as the country will continue to experience low inflation.
Overall, the Escap region will slow only marginally from 7.9% growth in 2006, the fastest in the world, to 7.4% this year, while inflation, a serious problem in many countries last year, will also decelerate to 3.8% from 4.3%.
With continued flow of capital into the region and the US current account deficit remaining quite large, countries in the region will have to fight to manage their currencies. In some economies, the report said, “The central bank will have to forego the practice of sterilized intervention and allow the real exchange rate to appreciate through increases in the price level.” Greater exchange rate flexibility is another solution, as markets will then realize that the currency could move in either direction.
As a result, current account on the balance of payments would also deteriorate slightly. For the 12 emerging economies of the region as a whole, the current account deficit is seen to deteriorate from 5.1% of GDP last year to 4.5%. In the case of India, the current account deficit of 1.6% is expected to widen further.
However, inflation will be less of a problem, with tighter monetary policies becoming the norm in many countries.
Escap has also developed a composite vulnerability index which monitors three aspects of vulnerability: inadequacy of foreign currency reserves to cover short-term debts, excessive expansion in private domestic credit, and real exchange rate appreciation. Some of the 1997 crisis affected countries, except for Malaysia, are displaying renewed vulnerability. Although the indices for India and China have worsened because of the rise in private domestic credit, and overheating remains a possibility, the report finds economic fundamentals to be strong.
In India, especially, domestic demand remains very important, with private consumption contributing most of the growth.
In contrast to East Asian economies, private investment in India has edged up from 14% of GDP in 1990-96 to 18% in 2005.
India, next only to China in growth (Graphic)