A Loose Fit: India and the BRIICS Ulrich Bartsch

Themes Not an optimal currency area: economic cycles in India and the BRIICS. Monetary policy through the rear-view mirror. India’s medium- to long-term prospects: no-one pays the debt. Work hard to make a living: reforms are needed to tackle structural barriers to growth.

BRIICS: Divergence in Economic Cycles

Divergence: India’s monetary policy Flexible exchange rate as a shock absorber Capital controls enhance monetary policy independence Foreign reserves to create confidence

Monetary Policy through the Rearview Mirror

Something for Nothing: India’s Debt Dynamics

Unfavorable Debt Dynamics: Aging Populations in the OECD Countries Example: Germany Rising welfare costs, falling labor supply, low growth

The Developed Countries are Bankrupt! Surce: IMF, Fiscal Monitor April 2011,

Source: The Economist,

Demographic Transition in India The Indian population is among the youngest in the world; only now (2010s) can we see the beginning of the demographic transition to lower dependency ratios. The transition comes not only from demographic changes: increasing numbers of women enter the (paid) labor force. India will reap the maximum benefit of the transition around 2040 – far later than most other big countries, China included. This also means large additions to the labor force: 1 million people per month over the next 20 years. Job and skill creation are the biggest challenges.

Constraints to Growth of Industry Land – Archaic rules, eminent domain use leads to discontent (the increase in the value of land from conversion to industrial, commercial, and residential uses is often not captured by the original owners, who feel cheated), poor land use planning. Power – Most surveys of entrepreneurs indicate availability of reliable power as a major constraint. – The constraint is more binding for medium and small firms, as most large firms have captive generators (which also raises costs). – Large increase in power generation required to sustain high growth – fuel availability constraints. Use of natural resources – Hydropower expansion is hampered by conflicts over water and forests. – Conflicts over mining impede exploitation of minerals. Environmental regulation – Years of loose enforcement and corruption have created a legacy of destruction, change in enforcement has stopped projects in late stages of execution, created regulatory uncertainty.

US and Europe Slowing, India and China Catching Up From the middle of the last century, Western Europe started diverging from the rest of the world. In the 1800s, the US and Western Europe both experienced accelerated per capita GDP growth because of the industrial revolution. Growth in India and China continued to be very slow until the 1970s, when it started accelerating in China, and less so in India. China and India had the same per capita income in 1973, but then China pulled ahead. Since the 1990s, growth in the US and Western Europe is slowing, giving India and China room to catch up.

India and China Regaining their Place in the World Economy? Throughout much of recorded history, India and China held a dominant position in world production and income. Only in the 1600s, Western Europe started its rise as a global economic force, complemented by the US from the 1800s. From 1700s to the turn of the millennium, the global share of China and India fell from 50 to 15 percent. Since the 1970s, a turnaround has become visible, and China in particular is increasing its share in the global economy.

Final Remarks Continued fast growth in India critically depends on removing structural constraints. The government is tackling some of them including with new laws and regulation. Political leadership required to address politically sensitive issues, such as losses in the electricity sector. If structural constraints can be loosened, India could benefit from a strong rise in the economically active population – the demographic dividend – well into the 21 st century. India could reclaim the place in the world economy it held up to the 17 th century, when it accounted for 25% of world GDP.