What are unique features of Indian economy that distinguish it from other EMEs ?
First, our growth is driven by domestic demand – both consumption and investment. Consumption and saving are well balanced. In India, the share of private final consumption expenditure in GDP is around 55 per cent. Our savings rate is 37.7 per cent and investment rate is 39.1 per cent.
Second, we have twin deficits – fiscal as well as current account deficit. We were on a path of fiscal consolidation before the crisis, but got off track because of the counter cyclical spending necessitated by the crisis. Unlike major EMEs , which are running current account surpluses, we have recorded deficits on the current account. Although current account deficits have been modest, the deficit reached a high of 2.6 per cent of GDP in 2008-09 but is expected to moderate during 2009-10.
Third, given the right balance between domestic consumption and saving on the one hand, and infrastructural bottlenecks in major areas (such as power, roads, urban infrastructure as also social infrastructure) on the other, India is essentially a supply-constrained economy. Just before the crisis, such supply concerns led to a view that there might be overheating in the economy. Generally, weak external demand has led to some externally induced cyclical slowdown. However, as the global economy recovers, supply constraints are again expected to be binding.
[ RBI Governor Subba Rao]