Download India Development Policy Review:

India’s Development
Challenges
Higher School of Economics
April 1, 2008
India – Economic Indicators
Context: Achievements and
Challenges
 India’s





economic success:
sustained rapid growth rates,
expansion of exports,
emergence of new industries,
leader in some high tech fields,
Avoided macro/financial crisis
Has India poised as a global super power of the
21st century
India is now a star—but experience
shows stars generally fall to earth
Change in growth rate, decade to
decade (in percent per annum)
Top ten growth
performers of
previous decade
Growth slowdown of
previous decade’s stars
versus other countries
All others
70s vs. 60s
-3.4
-1.0
-2.4
80s vs. 70s
-3.4
-1.0
-2.4
90s vs. 80s
-1.9
+0.2
-2.1
Notes: Negative is a slowing in growth. Source:
Regional variation in poverty in India—poorest places are
at African levels, richest near upper middle income
SSA- Highest
Orissa- R
Bihar- R
Assam- R
SSA- Medium
Mahar- R
MP- R
Karnataka- R
India
Nepal
AP- R
El Salvador
Bihar- U
TN - R
Cambodia
Bangladesh
WB - R
UP- R
Gujarat- R
Mongolia
LAC- Highest
UP- U
Rajasthan- R
China- Rural
Lao PDR
Orissa- U
Indonesia- Rural
MP - U
Moldova, Rep.
SSA- Lowest
Mahar- U
Assam- U
WB - U
TN- U
Rajasthan- U
Karnataka- U
AP - U
LAC- Medium
Kerala- R
HP - R
Kerala- U
Uzbekistan
Philippines
Tajikistan
Turkmenistan
Gujarat- U
Jammu- R
Pakistan
Haryana- R
Yemen, Rep.
Haryana- U
LAC- Lowest
Punjab- U
Indonesia- Urban
Punjab- R
Sri Lanka
Indonesia
Georgia
Azerbaijan
Ukraine
Jammu- U
HP - U
Egypt, Arab Rep.
Turkey
China- Urban
0
10
20
30
40
50
60
70
The lagging states failed to
accelerate
Average Decadal Growth Rates of PCGSDP
Avg Gr Rt of PCGSDP
5.5
6.0
Main issue is that
while the middle
income states
accelerated in the
1990s over
1980s, lower
income states did
not
4.8
5.0
3.5
4.0
2.8
2.5 2.5
3.0
2.0
2.7
2.5
2.7
3.1
1.0
1.0
0.1
0.0
Low
Medium
1970s
1990s
2.5
2.4
1.8
2
1.5
1
0.5
0
-0.5
1980s
West-High
Acceleration of Growth of PCGSDP
Grow th Rates
3
2.5
North-High
2.0
0.9
0.4
0.0
Low
Medium
North-High
-1
-1.5
-1.0
80s
90s
West-High
Lagging sector: slow structural
transformation in Agricultural Sector
Pun
Ker
Har
WB
Uttn
Ass
All India
AP
Kar
Guj
UP
Mah
TN
Raj
Oris
MP
Bih
Jha
Chh
Pun
Ker
Har
WB
Uttn
Ass
All India
AP
Kar
Guj
UP
Mah
TN
Raj
Oris
MP
Bih
Jha
Chh
0% 25% 50% 75% 100%
% of labor force
Source: Census 2001, CSO
0.0
 Ag GDP has
declined to 24% in
2003/04
 …but 58% of
labor force still
employed in
agriculture, higher
in poorest states
Non Ag
 Extremely low
Ag
50.0
100.0
150.0
Labor Productivity, Rs 000/worker
labor productivity
(closely linked to
rural poverty)
Major Causes


Rising subsidies
• Distorts incentives (water intensive
foodgrains in water scarce areas)
• Leading to natural resource
degradation

Crowding out productivityenhancing investments
• direct impact on agric. growth
• indirect impact on private investments,
e.g. R&D, roads > diversification

Inadequate O&M
• Recurrent expenditures going to
salaries  deterioration of irrigations,
weak cost effectiveness of research
and extension
India Public Ag Investments
and Subsidies as % of GDP
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
80
/8
1
82
–8
3
84
–8
5
86
–8
7
88
–8
9
90
–9
1
92
–9
3
94
–9
5
96
–9
7
98
-9
9
Over-regulation of
markets continue
 Unbalanced composition
of public expenditures
Major Ag Subsidies
Public Investments in Ag
Note: Ag subsidies include GOI foodgrain and
fertilizer subsidies, state government power and
irrigation subsidies
Source: Min.of Agriculture, Acharya and Jogi 2004
Binding constraint I: Economic Infrastructure—falling
further behind China
Biases growth towards services:
“infrastructure camels”
300.00
250.00
Supply chain manufacturing—
India as an export platform
hindered the most
200.00
India
150.00
China
100.00
50.00
Not “need to invest X billion” but
“fix the institutions that fix the
pipes”
0.00
1998
Watts per
person
2003
1998
Number of
lines per
1000 hab
2003
1998 Km
of paved
roads per
100,000
hab
2003
Binding Constraint II: Fiscal Deficit
Total Public Debt (% of GDP, 2000-04 Average)
120
Debt is high
100
80
60
40
20
China
Korea
Thailand
Russian
Federation
Mexico
Malaysia
Brazil
India
Indonesia
Turkey
Philippines
Overall Balance (% of GDP, 2000-04 Average)
Turkey
India
Argentina
Philippines
Brazil
Mexico
China
Indonesia
Thailand
Malaysia
Korea
4
2
0
-2
-4
-6
-8
-10
-12
-14
-16
Russian
Federation
Interest payments are
large
Argentina
Deficit is high
0



For every one person in
organized private sector
there are four
unemployed.
The hollow middle: the
proportion of small firms
ten times as high in India
as Korea (40% vs. 4%)
Employment elasticity of
manufacturing output
growth was negative.
Millions
Sustaining and Equalizing Growth:
Labor Laws
40
35
30
25
20
15
10
5
0
2001
2002
2003
Organized private
sector
Unemployment,
Current Daily Status
India
1989-90
500+
200-499
100-199
50-99
10-49
5-9
0
10
20
30
40
% dis tr ibution of e m ploym e nt
50
Sustaining and Equalizing Growth :
Financial sector
 Reforms
have gone much further in some
sectors than others
 Access of new firms to debt finance is still
limited and limiting—but more ‘old style’
directed credit is not the solution
 Micro-finance can be part of the solution,
when integrated with more broad based
empowerment.
Conclusions

India has achieved much in a decade of
transformation
 The agenda for sustainability remains daunting:
infrastructure, fiscal consolidation, financial
system reform, labor regulation
 Combining reforms with attention to
inclusiveness will be key to find the consensus
required to carry this ambitious agenda forward