India’s growth model

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					                                                                              January 30, 2012 – No 80

                      India’s growth model (and its limitations)

                      This report explores the idea that India’s economic slowdown is primarily
                      explained by the limitations of its growth model and less by the problems
                      caused by the global situation.

                      Focusing too much on services in urban areas, India’s economic growth is
                      “creating” the current deficit (since only a small share of services is
                      exported) and inflation (since the rise in agricultural productivity is low and
                      demand for foodstuffs is high) is intensifying income inequalities (absorption
                      of excess labor in rural areas is very slow) and is nurturing public deficits (the
                      State is trying to offset increased income inequality by establishing aid

                      The domestic financial system also devotes too many resources to finance
                      the public deficit, such that funding for heavy investments (not associated
                      with urban services) is partly limited by the availability of external savings.

                      India’s growth and enormous economic development potential will clearly
                      continue to draw interest from foreign investors over the coming years.

                      It is worth noting the presence of macroeconomic imbalances that could
                      increasingly expose the growth path and performance of financial variables to
                      “stop & go” type movements.

  An economy with high               In recent years, India’s economy has had one of the highest growth rates in the
       growth potential              world, caused by heavy investment by the dynamic private sector. The lengthy
                                     growth cycle that started in the 1990s is the strongest and longest experienced by
                                     the Indian economy (Chart 1).

                                                                              C ha rt 1. India : R e a l G D P gro wt h
                                                                                    (%, 5-year mo ving average)
                                                      10                                                                                      10

                                                      8                                                                                       8

                                                      6                                                                                       6

                                                      4                                                                                       4

                                                      2                                                                                       2

                                                      0                                                                                       0
                                                                                                              Real GDP
                                                                     Source: IM F
                                                                                                              Real GDP per capita
                                                      -2                                                                                      -2
                                                           60   65      70       75      80      85      90       95      00   05        10

                                     More liberal minds put India's success down to the reforms for financial
                                     deregulation and gradual liberalization of foreign investment and trade, introduced
                                     in 1992 as part of a structural program under the supervision of the IMF and World
                                     Bank, which came to the country’s aid during a balance of payments crisis 1 .

                                     The most noteworthy outcome of these reforms was the positive impact of
                                     dismantling the advance authorizations system for investment in industry (“license
                                     Raj”), which protected small industry from risks linked to concentrations of capital
                                     but, which also limited the scope of achieving economies of scale. As the country
                                     opened up trade (joining the WTO in 1995), it entered the global economy,
                                     specializing in IT and business services in the world of international outsourcing.

       “The demographic              Yet a key factor of India’s dynamic economy is its demographics. Since the 1990s,
               dividend”             the ratio of the country’s working-age population has experienced a period of
                                     growth (Chart 2), opening up a window of opportunity that explains the upward
                                     trend in the nation’s savings rate, and hence the availability resources for funding
                                     investment (Table 1).

                                                      90                       C ha rt 2 . D e pe nde nc y ra t io ( %)                       90

                                                                                                                               B razil
                                                      80                                                                                      80
                                                      70                                                                       Russia         70

                                                      60                                                                                      60

                                                      50                                                                                      50

                                                      40                                                                                      40

                                                                     Source: Unit ed Nat ions
                                                      30                                                                                      30
                                                           50   60       70         80    90      00      10      20      30    40       50

    The country was suffering the consequences of the collapse of the USSR (its main trading partner at the time) and the Gulf War, which
  resulted in an oil crisis and a serious loss in earnings from cash transfers by the diaspora of Indians working in the Middle East.

Flash 2012 –80- 2
                                                       Table 1. Savings & investment (% GDP)

                                               1960              1970                   1980                   1990                   2000                2010

Net savings - households                        5,4              8,0                    10,8                    14,9                  20,7                 21,4
Net savings - corporate                         0,6              0,5                     0,8                     0,9                   2,0                 4,8
Net savings - public sector                     0,7              1,1                     1,7                    -2,3                  -4,8                 -0,8

GFCF - total                                    12,9             14,8                   19,7                    25,0                  26,2                 32,9
GFCF - public sector                            6,7              6,1                    10,1                    11,5                   7,5                 9,0
GFCF - households (*)                           1,6              1,2                     1,8                     3,7                   6,7                 11,6
GFCF - corporate                                4,6              7,6                     7,8                     9,7                  12,0                 12,3

Source: Central Statistical Organization
(*) Mainly residential construction

                                           India offers the most promising prospects of all emerging economies in terms of its
                                           "demographic dividend" in the future. Its working-age population (potential savers)
                                           should grow substantially over the coming years (Chart 3).

                                                                          C ha rt 3 . F o re c a s t gro wt h o f la bo r f o rc e
                                                                              (between 201 & 2020, millio ns o f peo ple)




                                                                       B razil
                                                                                                         Source: United Nations forecast s

                                                           -50                   0                  50                    100                150

                                                                                                                                                   Flash 2012 – 80- 3
         A dynamic domestic                                 India’s economy is reliant on the growth of its enormous domestic market.
                                                            Although India abandoned its growth model based on self-sufficiency for one that
                                                            opens up the country to the outside world, its production is still mainly directed at
                                                            the domestic market. In spite of a spectacular leap in its exports to GDP ratio
                                                            (Chart 4), it is still one of Asia’s lowest (Chart 5).

   25                                                                                                25                              250
                                             C ha rt 4 , E xpo rt s                                                                                   Chart 5. Economic growth volatility & openness

                                                                                                          Exports to GDP ratio (%
                                                   (% GDP )
                                                                                                                                     200           CH=China,IN=India,ID=Indo nesia,M Y=M alaisia,
   20                                                                                                20
                                                                                                                                                   P H=P hilippines,SP =Singapo re, TH=Thailand,
    15                                                                                               15

                                                                                                                                     100                                           MY              TH
    10                                                                                               10

    5                                                                                                5                                                                                            PH
                                                                                                                                                          IN                                       Sources: CEIC, IM F
                                                                                Source: CSO                                              0
                                                                                                                                              4                 6             8              10              12           14
    0                                                                                                0
                                                                                                                    Vo latility o f industrial pro d. (stand. dev. o f gro wth o ver a yr., p.p.)
         51   56    61        66        71      76     81    86       91   96      01   06      11

                                                            This characteristic has protected the real economy from the contagious effects of
                                                            global financial and trade shocks following the subprime crisis at end-2008 and
                                                            tensions over European debt in 2011.

                                                            And although the markets have not been spared financial turmoil (Charts 6 & 7)
                                                            with economic activity slowing, India’s economy has still managed to generate one
                                                            of the highest leaps in income per capita over the last three years (Chart 8).

25000              C ha rt 6 a . M um ba i S t o c k E xc ha nge                         25000                    30                                      C ha rt 6 b. M um ba i S t o c k E xc ha nge                    30
                              (Sto ck index - Sensex)                                                                                                                (P rice Earning Ratio )

20000                                                                                    20000
                                                                                                                  25                                                                                                      25

15000                                                                                    15000

                                                                                                                  20                                                                                                      20

10000                                                                                    10000

                                                                                                                     15                                                                                                   15
5000                                                                                     5000

               Source: BSE                                                                                                                          Source: BSE
    0                                                                                    0                           10                                                                                                   10
        00    01   02    03        04    05      06    07    08       09   10     11                                                00        01     02        03   04   05       06    07    08       09    10   11

  Flash 2012 –80- 4
               54                                   C ha rt 7 . E xc ha nge ra t e                                  54
               52                                                                                                   52

               50                                                                                                   50

               48                                                                                                   48

               46                                                                                                   46

               44                                                                                                   44

               42                                                                                                   42

               40                                                                                                   40
                                  Source: BIS
               38                                                                                                   38
                    00     01       02     03        04    05     06    07      08      09       10      11

                         C ha rt 8 . C ha nge in G D P pe r c a pit a , c o ns t a nt pric e s ,
                                        be t we e n Q 4 - 2 0 0 7 & Q 4 - 2 0 11, %



                                     Indo nesia

                                     A rgentina

                                          B razil

                                  So uth Ko rea

                                  Saudi A rabia


                                  So uth A frica


                                      A ustralia

                                         M exico





                                United States

                                          EU 27

                            United Kingdo m
                                                                             Sources: off icial stat istics, Nat ixis
                                            Italy                                          forecast for Q4 2011

              -30           -20             -10             0           10             20             30                40

India’s growth and enormous development potential will clearly continue to draw
interest from foreign investors over the coming years. It is still worth noting the
presence of several macroeconomic imbalances that are not without their risks and
which may put growth (and the performance of financial variables) on a more erratic
path than in the recent past.

                                                                                                                        Flash 2012 – 80- 5
     A service-based growth                         In spite of the uncertainty that continues to burden the global economy, growth has
                   model…                           remained dynamic in India, up 6.9% in a year in the second quarter 2011/12 (July-
                                                    September). This increase, one of the most rapid in emerging Asia, is still the
                                                    country’s lowest for the past eight quarters, accompanied by a marked slowdown in
                                                    manufacturing activity (Charts 9 & 10).

14                    C ha rt 9 . R e a l G D P & c o nt ribut io ns by s e c t o r                               C ha rt 10 . Indus t ria l pro duc t io n inde x ( Y o Y , %)
13                                                                                               20                                                                                    20
                                                (%, Yo Y)
11              GDP - A griculture       GDP - Industry        GDP - Services                    15                                                                                    15
                                                                      Source: CSO                10                                                                                    10
                                                                                                  5                                                                                    5
                                                                                                  0                                                                                    0
2                                                                                                -5                                                                                    -5

                                                                                                                   Source: M OSPI
0                                                                                                -10                                                                                   -10
               2010                                 2011                                               06            07         08         09          10          11             12

                                                    The stagnation in manufacturing activity has raised questions about the “structural”
                                                    constraints on the expansion of India’s industry.

                                                    It first reminds us that India’s economy is primarily a services one, with the sector
                                                    being mostly responsible for the country’s dynamic performance since the 1980s
                                                    (Chart 11).

                                                                              5              C ha rt 11. C o nt ribut io n t o G D P gro wt h                            5
                                                                                                  (5-year mo ving average, GDP po ints)

                                                                                                            A griculture
                                                                              4                             Industry                                                     4

                                                                              3                                                                                          3

                                                                              2                                                                                          2

                                                                              1                                                                                          1

                                                                                                                                                     Source: CSO
                                                                              0                                                                                          0
                                                                                  56   61   66         71       76         81   86    91     96      01     06      11

                                                    India’s industry clearly saw great expansion in the 2000s with some Indian
                                                    companies starting to gain international renown, such as the legendary Tata,
                                                    alongside Mittal, Reliance, Mukesh, Anil and Mahindra. Yet the overall size of
                                                    Indian industry, regardless of the huge domestic market, is still on a par with smaller
                                                    countries (Chart 12).

     Flash 2012 –80- 6
                                                          600                                                                          IT=It aly
                                                                                      C ha rt 12 . Indus t ry, G D P
                                                                                              (USD bn., 201 0)                      BR=Brazil
                                                          550                                                                      RU=Russia
                                                          500      Source: IHS GI
                                                                                                                                  FR = France
                                                          450                                                                  KO=South Korea
                                                                                                                                  M X=M exico
                                                          400                                                                        SP=Spain
                                                          350                                                                      TK=Turkey





                                                                   IT     BR        RU    UK       FR     KO      MX      SP     IN       TK

                                       Indian industry is suffering from underdeveloped heavy infrastructure. Such
                                       problems are illustrated by the state of the country’s roads, continued power
                                       outages and limited access to drinking water, which cause bottlenecks and low
                                       elasticity of supply for industrial goods. While improvements are under way,
                                       infrastructure development in India is still a very long process.

                                       The levels of capital accumulated during the 2000s primarily favored the expansion
                                       of businesses in the urban services sector (commerce, finance, Table 2). There
                                       was comparatively less investment in infrastructure in urban areas (inter-city
                                       connectivity, modernization of airports, telecommunications) than in rural areas
                                       (irrigation, electrification, storage), and in infrastructure necessary for industrial
                                       development (energy, access to water, road network).

                                                 Table 2. Progress in investment & infrastructures

                         Heavy & basic                     Rural                           Urban                           Financial                      Human capital

                   Insufficient due to lack of
                                                                                                                                                    Two-tier growth - strong
                     funds, weaknesses in
Overall progress                                   Partial improvement              Gradual improvement                Reasonably strong             in urban segments; but
                     long-term planning &
                                                                                                                                                           weak overall
                      poor implementation

                                                 Improvement in standard
                                                                                                       Banking system in good
                          Telecoms,               of living (e.g. telecoms), Rail links, modernization                                                 Urban institutions -
Strengths                                                                                              health / strong Central
                        petrochemicals            moderate progress with of airports in progress                                                        education, health
                                                   drinking water, health

                                                 Main rural infrastructures
                                                                             No widespread, forward-                                                Sub-optimal mechanism
                     Electricity, highways,         - irrigation, storage,
Weaknesses                                                                    looking urban planning                   Cooperative banks               for implementing
                         mining sector           electrification, education,
                                                                                     program                                                         government programs

                                         Sector dependence on different categories of infrastructures

Agriculture                Average                         High                             Low                          Low/average                            Low
Industry                    High                           Low                              Low                             High                              Average
Services                 Low/average                       Low                              High                            High                               High

                                                                                                                                                   Flash 2012 – 80- 7
                               India’s rural sector is also still underdeveloped (Chart 13). The country has been
                               food self-sufficient since 2000, but around 237 million people (21% of the
                               population) are still undernourished according to FAO data. Some progress has
                               been made under the “Bharat Nirman” program, aimed at developing rural
                               infrastructures (including irrigation and access to drinking water) and providing
                               financial aid to farmers that are heavily in debt.

                                                                   C ha rt 13 . A gric ult ure , G D P pe r c a pit a ( US D )


                                                      Argent ina




                                                  United Stat es


                                                   South Africa                                                              World Bank


                                                                   0              5000             10000             15000                 20000

                               Boosting agricultural productivity is a crucial issue for the country, made even more
                               critical since the population is growing at a rapid pace. But intensive farming using
                               fertilizers is causing environmental problems (soil erosion, water pollution, falling
                               water tables, etc.), casting doubt over the sustainability of Indian agriculture.

            …that creates      From a macroeconomic standpoint, this primarily service-driven growth together
           macroeconomic       with only moderate expansion in the agricultural and manufacturing sectors, poses
             imabalances       numerous challenges which are examined below.

      i) Income inequality     First of all, this growth imbalance produces income disparities between the rural
           and “structural”    and urban sectors (Chart 14). While poverty has certainly declined (from 45% in the
                   inflation   1990s to 38% in 2010, based on official figures), serious inequalities remain and are
                               even intensifying, as confirmed by the Gini Index which shifted from 0.32 in 2000 to
                               0.36 in 2006 (based on World Bank data).

                                                                        C ha rt 14 . Urba n & rura l wa ge s
                                                                              (average, rupees per day)

                                                               in co untryside
                                                               in cities
                                           250       Sources: NSSO Survey, BIS





                                                          2000/01               2004/05              2008/09                 0/1
                                                                                                                          201 1

Flash 2012 –80- 8
                                                       The pro-urban and pro-services bias of India’s growth produces a problem of
                                                       “structural” inflation, i.e. separate from the policy mix (whether expansionary or
                                                       restrictive in nature). The surge of the middle classes (2.7% of households in 1995
                                                       compared to 12.8% in 2010) in cities is substantially boosting demand for foodstuffs
                                                       that were previously reserved for a select few (milk, meat, eggs), while agricultural
                                                       output is only growing very slowly. And considering the country’s food distribution
                                                       system, whose level of efficiency is questionable, this dynamic is a key cause of
                                                       highly inflated and very volatile food prices (Charts 15a/b), especially when
                                                       harvests are not blessed with a generous monsoon. Lastly, food inflation tends to
                                                       be self-perpetuating. When high, inflation spreads to manufactured products and
                                                       services, with wage-related second-round effects, while around 40% of consumer
                                                       spending is on foodstuffs.

25                                                                                            25
                              C ha rt 15 a . Inf la t io n ( Y o Y , %)                                                   C ha rt 15 b. F o o d inf la t io n ( Y o Y , %)
                         WP I -To tal                                                              50                                                                                             50
                                                                                                                            M ilk                                    Eggs
20                       Fuel & po wer                                                        20                            Chicken                                  Rice
                         M anufactured pro ds.
                                                                                                   40                       Fruit & vegetables                                                    40
                         Fo o d
15                       Fo o d (pro cessed)                                                  15
                                                                                                   30                                                                                             30

10                                                                                            10
                                                                                                   20                                                                                             20

 5                                                                                            5
                                                                                                   10                                                                                             10

 0                                                                                            0     0                                                                                             0
                Source: M inist ry of Commerce and Industry                                                        Source: M inist ry of Commerce and Industry
-5                                                                                            -5   -10                                                                                            -10
     06             07              08            09            10             11                        06          07             08            09                10            11

 ii) A perpetual budget                                Such growth imbalances cause a deterioration in public finances and, although the
                  deficit                              2003 Law on budgetary management and responsibility has helped to streamline
                                                       public finances considerably, the deficit deepened in 2008/09 and in 2011/12 (Chart

3000                                                                                      3000
                    C ha rt 16 a . C e nt ra l G o v t . budge t ba la nc e                                                C ha rt 16 b. P ublic f ina nc e s (% GDP )
                                                                                                    2                                                                                             2
                                (rupees billio ns, cumulative)
2000                                                                                      2000

                                                                                                    0                                                                                             0
 1000                                                                                     1000
                                                                                                                       B udget balance (Centr. Go vt.)
                                                                                                                       Co nso lidated budget balance
      0                                                                                   0        -2                                                                                             -2

-1000                                                                                     -1000
                                                                                                   -4                                                                                             -4

-2000                                                                                     -2000
                                                                                                   -6                                                                                             -6
                              B udget balance
-3000                                                                                     -3000
                              P rimary balance
                                                                                                   -8                                                                                             -8
-4000                                                                                     -4000
                Source: qdsf qsdf                                                                                               Sources: IM F, Indian Budget
-5000                                                                                     -5000    -10                                                                                            -10
          01   02        03    04     05     06     07     08     09      10    11   12                  01   02      03       04     05     06        07      08        09     10     11    12

                                                                                                                                                                              Flash 2012 – 80- 9
                     Effective tax collection is being widely addressed via measures such as tax relief for
                     major special economic zones (manufacturing production destined for export (Box
                     1)), but India’s public finances are suffering from a rising need for government aid in
                     less-privileged areas. The Government has embarked on programs such as the
                     National Rural Employment Guarantee Scheme (Box 2). It has also introduced a
                     debt relief program for small-scale farmers. And to tackle the surge in oil prices in
                     2008 and 2010, the Government decided to cushion the impact on domestic prices
                     by raising subsidies, amounting to 2.2% of GDP in 2011/12 versus 1.3% in 2005/06.
                     Lastly, in 2009, the Commission entrusted with reviewing public service wages
                     every ten years recommended increases of around 40% with sizable adjustments.
                     All of these factors (particularly rural aid) continue to burden public spending, while
                     capital expenditure, which could raise elasticity of supply, is limited by the
                     Government’s low revenue performance.

                     At a time when public funds needed to develop infrastructures are inadequate
                     (central Government revenues account for just 9% of GDP), reforms still seem
                     necessary to sustain investment.

                     The problem for the public deficit is less its financing (bank regulations require
                     banks to invest 24% of their assets in treasury bonds) and more the fact that it
                     causes a “crowding-out effect” which reduces the funds available to invest in
                     infrastructure development.

                                               Box 1. Special economic zones

                     One of the factors of the expansion of India’s industry has been the take-off of
                     special economic zones (SEZ) since 2006, the year the Law on ZES entered into
                     force. The objective is essentially to create free-trade zones for the export industry
                     to help overcome India’s many traditional obstacles to growth. ZES are exempt from
                     all customs duties and they also enjoy some tax relief measures for the first ten
                     years. A one-stop shop system allows companies to avoid costly administrative
                     formalities. Over the space of five years, exports from ZES have multiplied 15-fold
                     and today account for almost a quarter of all goods and services exported,
                     according to statistics from the Ministry of Commerce and Industry.

                                Box 2. The National Rural Employment Guarantee Scheme

                     The aim of the National Rural Employment Guarantee Scheme (NREGS)
                     introduced in 2006 is to provide a safety net for people in rural areas and to
                     promote development via funding for small-scale farming and infrastructure
                     projects. This plan guarantees a minimum of one hundred days of employment per
                     year for any member of a rural household wishing to participate, in return for a fixed
                     wage paid by the central Government. Participants can join or leave the scheme
                     depending on their current situation and most opportunities are for unskilled manual
                     labor. Most of the projects involve work on local infrastructures, such as roads and
                     irrigation, and the prevention of flooding and soil erosion.

                     Public funds, mainly from the central Government, cover wages and materials
                     costs. In 2010, the total cost of the program was 0.6% of GDP, with wages
                     accounting for two-thirds. According to official sources, more than 52 million
                     households took part in the program in 2010, compared to 45 million in 2009.

                     In 2011, the Government announced its intention to index the pay of agricultural
                     workers to the CPI, which implies a 22% hike in the NREGS wage, taking it above
                     the legal minimum wage offered in a number of States.

Flash 2012 –80- 10
iii) the structural deficit of   Lastly, India’s pro-services growth path is also at the root of a persistent current-
        the current account      account deficit.
                                 India is clearly a major exporter of IT services and services for business that are at
                                 the root of the surplus of services and it receives a substantial amount of money
                                 transfers from migrant workers. However, these flows are not sufficient to offset the
                                 goods trade deficit (Chart 17).

                                                        C ha rt 17 . C urre nt - a c c o unt ba la nc e
                                  20                          ( US D bn., qua rt e rly da t a )                              20

                                   10                                                                                        10

                                   0                                                                                         0

                                  -10                                                                                        -10
                                                                Current balance
                                  -20                           B alance o f go o ds                                         -20
                                                                B alance - IT services
                                  -30                           B alance - transfers                                         -30
                                                                B alance - revenues

                                  -40                                                                                        -40
                                          Source: BIS

                                  -50                                                                                        -50
                                                                                                     0 1
                                        90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1 1

                                 The root cause of the current-account deficit (around 3% of GDP) is justifiably linked to
                                 the performance of goods imports and exports: rising demand leads to a sharp
                                 increase in imports (particularly energy imports) while exports, which are very dynamic,
                                 are growing at a slower pace (Chart 18).
                                                          50                             C ha rt 18 . F o re ign t ra de                          50
                                                                                       (go o ds, mo nthly data, USD bn.)

                                                                                       Expo rts
                                                          40                                                                                      40
                                                                                       Impo rts
                                                                                       Impo rts - o il

                                                          30                                                                                      30

                                                          20                                                                                      20

                                                           10                                                                                     10

                                                                                                       Source: M inistry of Commerce & Industry
                                                           0                                                                                      0
                                                                07            08                  09                10              11

   India’s macroeconomy          We believe that the current slowdown in India’s economy is primarily explained by
         adjusts to reality      the limitations of its growth model and less so by the global economic downturn
                                 which still accompanies this trend.

                                                                                                                                                  Flash 2012 – 80- 11
                                                          The second half of 2011 was actually the period in which the main economic and
                                                          financial variables began to balance themselves out (still only partially).

                                                                   The monetary tightening policy recommended in early 2011 by the BIS due
                                                                    to the surge of inflation (Chart 15 above and Chart 19 below), is reducing
                                                                    demand for durable goods financed by credit (such as automobiles, Chart
                                                                    20) and explains the economic slowdown.

                                                                   Periods of heightened risk aversion worldwide are reflected by fewer
                                                                    resources available to fund the external deficit, causing a sharp
                                                                    depreciation in the Indian rupee and the recent decline in currency reserves
                                                                    (Chart 7 above and Chart 21 below). Depreciation will eventually weaken
                                                                    the performance of imports and help to reabsorb the current account

                                                                   The Mumbai stock exchange (see Chart 7, Asia’s biggest loss-maker in
                                                                    2011) shows an adjustment in growth forecasts.

20                                                                                         20              80                                                                               80
                          C ha rt 19 . Int e re s t ra t e s ( %)                                                                            C ha rt 2 0 . A ut o s a le s
                                                                                                                                               ( v o lum e , Y o Y , %)
18                                                                                         18
                                                                                                           60                                                                               60
16                                   Reverse repo                                          16
14                                   O/N interbank        MSF rate                         14                         Source: Societ y of
                                     M SF                                                                  40         Indian Aut omobile                                                    40
12                                                                                         12                         Producers

10                                                                                         10              20                                                                               20

8                                                                        Target            8
6                                                                                          6                 0                                                                              0

4                                                                                          4
      Source : RBI
                                                                                                           -20                                                                              -20
2                                                                                          2
     08              09            10                11             12                                           06             07           08              09             10         11

                                                                              350                                                                                                350
                                                                                                    C ha rt 2 1. Int e rna t io na l re s e rv e s ( US D bn.)

                                                                              300                                                                                                300

                                                                              250                                                                                                250

                                                                              200                                                                                                200

                                                                              150                                                                                                150
                                                                                           Source: BIS
                                                                              100                                                                                                100

                                                                                                                           Currency reserves (incl. go ld & SDR)
                                                                              50                                                                                                 50
                                                                                                                           Fo reign currency reserves

                                                                                  0                                                                                              0
                                                                                      00       01   02    03      04      05    06    07    08    09    10        11   12

          Flash 2012 –80- 12
With no new wave of reforms that encourage investment in heavy infrastructure
(including reforms on tax collection, and with a view to improving efficiency in public
spending, providing administrations with more resources), the current growth model
could be stretched to its limits.

As things are, there is a growing risk that India’s growth will be increasingly
exposed to stop-and-go movements: phases of high growth and high global liquidity
leading to overheating and accelerated inflation, followed by periods of slowdown
(as is the case now) with a depreciating exchange rate and re-absorption of the
current deficit, necessary to re-establish the conditions that will allow growth to start
up again.

                                                                          Flash 2012 – 80- 13
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