growth Vs GDP per head

• Growth tends to slow when GDP per head reaches a certain threshold. China is getting close.The economic crisis may have been debilitating for the rich world but for emerging markets it has been closer to a triumph. In 2010 China overtook a limping Japan as the world’s second-largest economy. It looks sets to catch America within a decade or two. India and Brazil are growing rapidly. The past few years have reinforced the suspicion of many that the story of the century will be the inexorable rise of emerging economies. If projections of future growth look rosy for emerging markets, however, history counsels caution. The post-war period is rich in examples of blistering catch-up growth. But at some point growth starts to disappoint. Gaining ground on the leaders is far easier than overtaking them.
• Rapid growth is initially easy because the leader has already trodden a clear path. Developing countries can borrow existing technologies from countries that have already become rich. Advanced economies may be stuck with obsolete infrastructure; laggards can skip right to the shiniest and best. Labour productivity soars as poor economies shift workers from agriculture to a growing manufacturing sector. And rapid income growth among young workers boosts savings and fuels investment.
• But the more an emerging economy resembles the leaders, the harder it is to sustain the pace. As the stock of borrowable ideas runs low, the developing economy must begin innovating for itself. The supply of cheap agricultural labour dries up and a rising number of workers take jobs in the service sector, where productivity improvements are more difficult to achieve. The moment of convergence with the leaders, which once seemed within easy reach, retreats into the future. Growth rates may slow, as they did in the case of western Europe and the Asian tigers, or they may falter, as in Latin America in the 1990s.
• The world’s reliance on emerging markets as engines of growth lends urgency to the question of just when this “middle-income trap” is sprung. In a new paper* Barry Eichengreen of the University of California, Berkeley, Donghyun Park of the Asian Development Bank and Kwanho Shin of Korea University examine the economic record since 1957 in an attempt to identify potential warning-signs. The authors focus on countries whose GDP per head on a purchasing-power-parity (PPP) basis grew by more than 3.5% a year for seven years, and then suffered a sharp slowdown in which growth dipped by two percentage points or more. They ignore slowdowns that occur when GDP per head is still below $10,000 on a PPP basis, limiting the sample to countries enjoying sustained catch-up growth. What emerges is an estimate of a critical threshold: on average, growth slowdowns occur when per-head GDP reaches around $16,740 at PPP. The average growth rate then drops from 5.6% a year to 2.1%.
• This estimate passes the smell test of history. In the 1970s growth rates in western Europe and Japan cooled off at approximately the $16,740 threshold. Singapore’s early-1980s slowdown matches the model, as does the experience of South Korea and Taiwan in the late 1990s. As these examples indicate, a deceleration need not precipitate disaster. Growth often continues and may accelerate again; the authors identify a number of cases in which a slowdown proceeds in steps. Japan’s initial boom lost steam in the early 1970s, but its economy continued to grow faster than other rich nations until its 1990s blow-up.
• In the right circumstances the good times may be prolonged, allowing an economy to reach a higher income level before the inevitable slowdown. When America passed the threshold it was the world leader and was able to keep growing rapidly so long as its own innovative prowess allowed. Britain’s experience indicates economic liberalisation or a fortunate turn of the business cycle may also prevent the threshold from binding at once.
• Openness to trade appears to be a potent stimulant: the authors attribute the outperformance of Hong Kong and Singapore to this effect. Lifting consumption to just over 60% of GDP is useful, as is a low and stable rate of inflation. Neither financial openness nor changes of political regime seem to matter much, but a large ratio of workers to dependents reduces the odds of a slowdown. An undervalued exchange rate, on the other hand, appears to contribute to a higher probability of a slowdown. The reason for this is not clear but the authors suggest that undervaluation could lead countries to neglect their innovative capacity, or may contribute to imbalances that choke off a boom.
• The authors are careful to say that there is no iron law of slowdowns. Even so, their analysis is unlikely to cheer the leadership in Beijing. China’s torrid growth puts it on course to hit the $16,740 GDP-per-head threshold by 2015, well ahead of the likes of Brazil and India. Given the Chinese economy’s long list of risk factors—including an older population, low levels of consumption and a substantially undervalued currency—the authors suggest that the odds of a slowdown are over 70%.
• It is hazardous to extend any analysis to a country as unique as China. The authors acknowledge that rapid development could shift inland, where millions of workers have yet to move into manufacturing, while the coastal cities nurture an ability to innovate. The IMF forecasts real GDP growth rates above 9% through to 2016; a slowdown to 7-8% does not sound that scary. But past experience indicates that slowdowns are frequently accompanied by crises. In East Asia in the late 1990s it became clear that investments which made sense at growth rates of 7%, say, did not at expansion rates of 5%. Political systems may prove similarly vulnerable: it has been many years since China has to deal with an annual growth rate below 7%. Structural reforms can help to cushion the effects of a slowdown. It would be wise for China to pursue such reforms during fat years rather than the leaner ones that will, eventually, come

sensex rose 623 points, measures proposed in the Union Budget 2011-12 would attract foreign inflows

• The Sensex closed at 18475 (provisional), up 651 points from its previous close, and Nifty closed at 5532 (provisional), up 199 points.
• The markets registered robust growth today with all sectoral indices closing in the green. Auto was the biggest gainer of today’s trade followed by capital goods, banking and realty.
• Indian shares provisionally rose 0.7 percent on Monday, after the annual budget announced incentives for private investment in infrastructure.
• Indian shares were up more than 1 percent in early trade on Tuesday tracking firm Asian equities, and after the finance minister said he expects the economy to grow by nearly 9 percent in the next fiscal year.

• Finance Minister Pranab Mukherjee on Monday presented to parliament the budget for the coming financial year beginning in April.

Following are the highlights of the budget:
BORROWING
* Gross market borrowing for 2011-12 seen at 4.17 trillion rupees.
* Net market borrowing for 2011-12 seen at 3.43 trillion rupees.
* Revised gross market borrowing for 2010-11 at 4.47 trillion rupees.
FISCAL DEFICIT
* Fiscal deficit seen at 5.1 percent of GDP in 2010-11
* Fiscal deficit seen at 4.6 percent of GDP in 2011-12
* Fiscal deficit seen at 3.5 percent of GDP in 2013-14
SPENDING
* Total expenditure in 2011-12 seen at 12.58 trillion rupees.
* Plan expenditure seen at 4.41 trillion rupees in 2011-12, up 18.3 percent.
REVENUE
* Gross tax receipts seen at 9.32 trillion rupees in 2011-12.
* Corporate tax receipts seen at 3.6 trillion rupees in 2011-12.
* Tax-to-GDP ratio seen at 10.4 percent in 2011-12; seen at 10.8 percent in 2012-13.
* Customs revenue seen at 1.52 trillion rupees in 2011-12.
* Factory gate duties seen at 1.64 trillion rupees in 2011-12.
* Non-tax revenue seen at 1.25 trillion rupees in 2011-12.
* Service tax receipts seen at 820 billion rupees in 2011-12.
* Revenue gain from indirect tax proposals seen at 113 billion rupees in 2011-12.
* Service tax proposals to result in net revenue gain of 40 billion rupees in 2011-12.
SUBSIDIES
* Subsidy bill in 2011-12 seen at 1.44 trillion rupees.
* Food subsidy bill in 2011-12 seen at 605.7 billion rupees.
* Revised food subsidy bill for 2010-11 at 606 billion rupees.
* Fertiliser subsidy bill in 2011-12 seen at 500 billion rupees.
* Revised fertiliser subsidy bill for 2010-11 at 550 billion rupees.
* Petroleum subsidy bill in 2011-12 seen at 236.4 billion rupees.
* Revised petroleum subsidy bill in 2010-11 at 384 billion rupees.
* State-run oil retailers to be provided with 200 billion rupee cash subsidy in 2011-12.
GROWTH, INFLATION EXPECTATIONS
* Inflation seen at 5 percent in 2011-12.
* Economy expected to grow at 9 percent in 2012, plus or minus 0.25 percent.
TAXES
* Standard rate of excise duty held at 10 percent.
* Service tax rate kept at 10 percent.
* To widen scope of service tax.
* To raise minimum alternate tax to 18.5 percent from 18 percent.
* Iron ore export duty raised to 20 percent.
* Personal income tax exemption limit raised to 180,000 rupees.
* To reduce surcharge on domestic companies to 5 percent.
DISINVESTMENT
* Disinvestment in 2011-12 seen at 400 billion rupees.
POLICY REFORMS
* Foreign direct investment policy to be liberalised further in 2011-12.
* To create infrastructure debt funds.
* To boost infrastructure growth with tax-free bonds of 300 billion rupees.
* Raised foreign institutional investor limit in 5-year corporate bonds for investment in infrastructure by $20 billion.
* Food security bill to be introduced this year.
* To permit Securities and Exchange Board of India (SEBI) registered mutual funds to access subscriptions from foreign investments.
* Public debt bill to be introduced in parliament soon.
SECTOR SPENDING
* To allocate more than 1.64 trillion rupees to defence sector in 2011-12.
* Corpus of rural infrastructure development fund raised to 180 billion rupees in 2011-12.
* To provide 201.5 billion rupees capital infusion in state-run banks in 2011-12.
* To allocate 520.5 billion rupees for the education sector.
* To raise health sector allocation to 267.6 billion rupees.
AGRICULTURE
* To focus on removal of supply bottlenecks in the food sector in 2011-12.
* To raise target of credit flow to agriculture sector to 4.75 trillion rupees.
* Gives 3 percent interest subsidy to farmers in 2011-12.
* Cold storage chains to be given infrastructure status.
* Capitalisation of National Bank for Agriculture and Rural Development (NABARD) of 30 billion rupees in a phased manner.
* To provide 3 billion rupees for 60,000 hectares under palm oil plantation.
* Actively considering new fertiliser policy for urea.
FINANCE MINISTER ON THE STATE OF THE ECONOMY
* “Fiscal consolidation has been impressive. This year has also seen significant progress in those critical institutional reforms that will pave the way for double digit growth in the near future.”
* “At times the biggest reforms are not the ones that make headlines, but the ones concerned with details of governance which affect the everyday life of aam aadmi (common man). In preparing this year’s budget, I have been deeply conscious of this fact.”
* Food inflation remains a concern.
* Current account deficit situation poses some concern.
* Must ensure that private investment is sustained.
* “The economy has shown remarkable resilience.”
FINANCE MINISTER ON GOVERNANCE
* “Certain events in the past few months may have created an impression of drift in governance and a gap in public accountability … such an impression is misplaced.”
* Corruption is a problem, must fight it collectively.

• ASSOCHAM cheers budget proposals aimed at reducing fiscal deficit. Apex chamber ASSOCHAM described the proposals of Union Budget for 2011-12 as positive and encouraging which attempt at reducing the fiscal deficit down to 5.1 per cent from the earlier estimate of 5.6 per cent for the current fiscal year and 4.6 per cent for the next.

• NASSCOM today expressed its disappointment on the Union Budget Proposals 2011-12 that chartered a roadmap on sustaining a high growth trajectory for the country, but missed the relevant thrust for business to enable this growth.MAT imposed on SEZ; 10A/10B tax incentives withdrawn.Policies announced for service tax refunds; transfer pricing – need to ensure implementation.
• The three key macroeconomic concerns before Union Budget 2011-12 were high inflation, high current account deficit (CAD), and fiscal consolidation. Additionally, there was an expectation that the government would restart the reform process. The Budget has made an attempt to address all these issues, albeit through small steps. Despite the strong performance of the economy in 2010-11, the outlook for 2011-12 is clouded by stubborn and persistently high inflation, and rising external risks. The Budget factors in a GDP growth target of 9 per cent, which is on the optimistic side. CRISIL expects GDP growth to moderate to 8.3 per cent in 2011-12.