India
The Indian economy, Asia’s third-largest, has grown at an average 8.6 per cent in the past four years but reforms such as further opening the economy to foreign investment and the privatisation of state firms have stalled due to opposition from supporters of the ruling coalition. The economy is expected to grow by 8.5 per cent in the financial year ending in March 2008, according to the central bank, slowing from 9.4 per cent in the previous fiscal year.
While the Indian economy has moved to a higher growth trajectory, a major challenge for policymakers is to find ways to expand the market-based reforms so that the benefits flow to all sections of the population. Accelerating growth and the capacity bottlenecks have piled pressure on prices that are also feeling the heat from fast rising prices for imported foodstuffs. Indian consumers are still being shielded from the costs of oil in the international market.
The Reserve Bank of India, while ensuring that the credit and interest rate environment supports exports and investment demand, is successfully containing inflation pressures. Higher interest rates have not dampened business investment as a very buoyant long-term economic outlook has outstripped a cyclical rise in borrowing costs. Interest rate rises, however, will encourage consumers to put off spending, leading to moderation of demand for consumer durables and a slowdown in the pace of construction activities.
India’s economy could achieve growth of 10 percent in 2011 if the government persists with reforms, including privatisation of state firms. According to the OECD, India needed to relax its labour laws, remove a cap on foreign investment in the insurance sector and undertake wide-ranging reforms to boost growth and reduce poverty. The impressive response of the Indian economy to past reforms should give policymakers confidence that further liberalisation will deliver additional growth dividends.
The OECD said India was on track to meet its fiscal deficit target of 3 percent of GDP by 2008/09, but there was a need to raise the savings rate further and improve the quality of spending. It called for the insurance and retail sectors to be opened up further. The government has expressed its intention to raise the cap on foreign direct investment (FDI) in the insurance sector to 49 percent from 26 percent but this has also been blocked by the left. Lifting the ban on FDI in retail trading would help to improve productivity, supply chain management, reduce the exceptionally high rate of waste of agriculture produce and so lower retail prices and raise producer prices.
While India remains relatively immune to US credit woes, the oil prices, if sustain the current high levels, may impact the ability of Indian economy to grow under its own steam. A record surge in foreign investment has resulted in a sharp appreciation of the rupee, which is already hurting exports, especially earnings of the highly profitable outsourcing industry. The Reserve Bank of India estimates the economy to grow at 8.5 per cent in the financial year ending March 2008. This is lower than the 9.2 per cent expected for financial year ending March 2008.
After several decades of sluggish growth the Indian economy is now amongst the fastest growing economy in the world. Economic growth is currently second only to China. India will become the 3rd largest economy by 2035, despite having a GDP of $1.09 trillion (2007). This works out as an average GDP per capita of $964. Despite the rapid growth, poverty remains a real problem, especially in rural India. In 2008 and beyond India faces the real challenge of making sure that all sections of the population continue to benefit. Current estimates suggest that 27 per cent of the Indian population live below the poverty line.
Bangladesh
According to the Asian Development Bank’s latest economic update, GDP growth remained robust at an estimated 6.5 per cent in FY2007, propelled by rising domestic and external demand. A strong expansion in industry and continued buoyancy in services largely offset agriculture’s moderation following its post flood bounce back of the preceding year. Industry was sustained by strength in manufacturing, driven by continued growth in external demand for garments. The manufacturing and trade performance sustained steady expansion in services.
Inflation continued to creep up, to 9.2 per cent on a year-on-year basis, with increases in both food and nonfood prices. Rising domestic demand pressures, stemming from a steady expansion of income, a large increase in workers’ remittances from abroad, and high monetary growth heightened inflationary pressures, as did a further rise in international food and commodity prices. Imported fuel has only a limited impact given its small weight (four per cent) in the index and low energy intensity of production.
The 12-month average CPI inflation stood 7.20 percent in June 2007, which is slightly higher than 7.16 percent in June 2006. The June 2007 inflation was a little below the upper of the ceiling of 6.80-7.30 per cent forecasted in the Monetary Policy Review (MPR) of April 2007. Both the external pressure on prices and demand side inflationary expectations in the domestic economy appear to persist. In a rapidly globalizing world, it would be important for the policy makers to monitor future development of food prices in major trading partners, particularly neighboring India.
The government’s recent administrative measures to counter inflation, such as investigations of certain businesses suspected of hoarding supplies; measures to regulate stock levels and prices; as well as its encouragement to new importers to enter the market and so induce greater competition, appear to have had no discernible impact on inflation. They have, rather, created uncertainty in the business environment, contributing to price pressures.
Exports grew by 15.8 per cent in FY2007, essentially reflecting robust performance in the garments industry. Concurrently, imports rose by 16.6 per cent. The rise in the trade deficit was more than offset by a 25 per cent surge in officially recorded overseas workers’ remittances, owing to an increased number of workers abroad. The current account surplus rose to an estimated $952 million, or 1.4 per cent of GDP, for the year. The capital account, including a large errors and omissions item, shifted to a $541 million surplus from a $486 million deficit a year earlier, mainly reflecting a swing in the short-term borrowing item from large net repayments to large borrowing.
Bangladesh’s economic growth will slow to 6.5 per cent in the current fiscal year to June 2008 from 6.7 per cent a year earlier due to floods and inflation remains a challenge. Despite the floods, agriculture is expected to show growth of 2.8 per cent, slightly less than last year, the ADB said in its latest economic outlook for Asia. The ADB raised its inflation projection for the fiscal year to seven from six per cent. The floods helped drive inflation to 10.10 per cent in July, the highest in 13 years. The floods have killed 916 people since late July and damaged rice and other crops on millions of hectares.
Monetary policy: Maintaining a cautious monetary policy stance would be a challenge since the flooding came at a time of fast monetary growth and rising inflation. The strength of the external sector is likely to be sustained in fiscal 2008, with growth in overseas workers’ remittances offsetting the rising trade deficit. Although the ending of quota arrangements in garments and textiles has so far had a positive impact on Bangladesh, the country will face tough competition in its two largest markets, the European Union and the United States, when “safeguard quota” provisions on China expire at end-2008.
The thrust of the FY2008 budget is to create a stable environment for accelerated economic growth. Although revenue is projected to rise to 10.8 per cent of GDP, higher expenditure, caused by a rise in development spending, is forecast to widen the fiscal deficit to 4.2 per cent of GDP. Strong efforts to meet the revenue target will be needed because any greater bank borrowing to finance planned expenditure would push reliance on banking system finance to a level that would undermine monetary control and accelerate inflation.
Between the introduction of a flexible exchange rate regime at end- May 2003 and end-June 2006, the taka depreciated: by 17 per cent against the dollar and by 11.5 per cent in terms of the real effective exchange rate. This has supported growth in exports and remittances. But in FY2007, because of higher foreign exchange inflows from a notable improvement in the current and capital accounts, the taka appreciated slightly against the dollar and by 2.5 per cent in real effective terms. Given comfortable reserves, the central bank is in a position to allow some greater flexibility in the exchange rate in line with market trends, intervening only to correct disorderly movements. Bangladesh faces various risks that could derail these projections.
The strength of the external sector in FY2008 is likely to be sustained, with strong growth in overseas workers’ remittances offsetting the rising trade deficit. Although the ending of the quota arrangements in garments and textiles has so far had a positive impact on Bangladesh, the country still runs the risk of facing tough competition in its two largest markets— the European Union and the United States as the “safeguard quota” provisions on the People’s Republic of China expire at end-2008. To retain competitiveness, Bangladesh needs to cut lead-times for delivering garments, upgrade labor skills, and improve its infrastructure.