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Managing India to take Dreams to Reality S L Rao February 24 2010 Outline 1. India’s Potential-Slides 1-6 2. Recent economic developmentsSlides 7-11 3. Risks to Growth- Slides 12-19 4. Issues in Making Dreams into Reality-Slide 20 India’s Potential 1. World’s Largest Pool of Trained Manpower: 200 million college graduates (~16%) 500 million trained, skilled workforce (~40%) Universal Literacy 2. World’s Leaders in Industry and Commerce 30 of Fortune 100 from India 3. India Accounts for 10 % of World Trade A broad scope of products and services 4. India as a Source of Global Innovations New Businesses, New Forms of Organization, New Technologies India’s Potential 5. Source of Innovations for the World Leaders in Health, Education, Energy, Recycling, Transportation, Sustainable Development for all) Markets-rural, small town 6. A Flowering of Art, Literature, Films and Science 10 Nobel Prize Winners from India 7. A New Moral Voice for People Around the World India as a country where Universality and Inclusiveness is widely practiced. India becomes the most Benchmarked country for its capacity to accept and benefit from its diversity • India’s Potential – By 2010 medical tourism will earn $10 bn – Rs 53982 crores raised by mutual funds in January-November 2008; steep fall now – Rs 61000 crores 10 year National Maritime Development Programme thru public private partnership to boost major ports – New international airports in Bombay. Delhi, Bangalore, Hyderabad; Slowed expansion – Road toll collections fall 6% Feb 08 to 09 – Rail container traffic falls Demographic Dividend 2004-Population =1080 million of which – Age between 15 and 64 = 672 million – Below 15 and over 64, non-working or dependent population=408 million – Dependency ratio of 0.6; 2030-0.4 – 2020 Average Age: India-29; China-37; Japan-48: youngest working age population in world – Less children=more women at work; more saving; greater growth over the next 15-20 years. By 2020, India will have 270mn people (more than today’s total US population) between the ages of 15 and 35. Savings rates and productive potential will be at their highest. Demographic Dividednd India’s Population(million): Above 60 = 65 (6.3%) (2001); 113 (8.9%)(2016) Age 15-59 = 598 (2001); 811 (2016) Urbanization: 27.8% (2001); 50%? (2030) Issues: Livelihoods, health, education, housing, water, roads, sanitation, social security, law and order The Past Ten Years And Now – – – – – – – – – GDP growth: From 1998-99-6.5, 6.1, 4.4, 5.8, 4.0, 8.5, 7.5, 9.5, 9.7, 9.0; 2008-09 - 6.7%; 2009-10 ; 7.2% ?; 2010-8%? Industrial production negative growth Dec 08, Jan 09.and now growing High and Rising Savings rate Rise in Capital formation Esp. Private Sector Deepening Export Inflation at single digit for a decade; 7.5% 2008-09, 4.2 in Dec 2005; despite fuel, power, light & lubricants at 7.5; Declining from 2004-05; in 2008 negative and Nov 2009; -0.9%; now rising; Export growth trends; 01-02 onwards: 2.7, 22.1, 15.0, 27.9, 21.6 , 25.3, 14.7 & in 2008-09 - 16.9 and now + 15% Rapid growth of I.T. and B.P.O. Exports of software services increased from 79.40 thousand crore in 2004-05 to 215.88 Thousand crore in 2008-09 Resilience: Survived face-off with USA and sanctions after nuclear explosions Signs of Improvement Modest signs of Growth in global economy Developed Economies in Jan 2009 grew at 0.5% and Oct 2010 at 3.1 Emerging and Developing Economies grew from 3.3. to 5.1% India from 5.1 to 6.4 % India-Recent economic developments Growth: Sectoral Contributions Reverting to “Normal” (Q1- 07-08 Industry and Agriculture wwere 29% of GDP, fell in Q3 of 98-09 to < 2%, now at 29%) Growth: Govt. Expenditure dominates (8 to 25 % in 15 mths), but slight pickup in private spending ((10 to 5 now 7%) Industrial Production: Driven by Durables; growth only in some Inflation: Food-driven but signs of spread Credit Growth: Recovering, but slowly Liquidity: Comfortable, at an aggregate level and interest rates sticky Drivers of Recovery: Fiscal Policy %to GDP Item 2008-09 Tax reductions 0.2 Investment 0.8 Pay Commission Impact 0.5 Other Expenditure 0.9 Total 2.4 Debt waiver 0.3 - 2009-10 0.4 0.1 0.3 1.0 1.8 Drivers for 2010 Global economy showing signs of modest recovery in 2010 Domestic recovery appears to be gaining momentum Contribution of manufacturing sector increasing Govt. borrowing requirements not likely to exceed estimates Ample liquidity in the system despite 2nd quarter surge in growth Current account deficit likely to remain moderate Risks Growth pattern is skewed Recovery still driven by a few sectors Public spending contributing significantly Food inflation racing ahead As capacity constraints emerge, dangers of an expectations-induced spiral High interest rates – restraining credit flows? Potential surge in capital inflows Global liquidity and domestic recovery Weak part is Agriculture-1 Supports 60% of population – Agriculture was 32% of GDP in 92-93; 17% in 2008-09 (AE) – Agriculture growth or decline has direct effect on GDP; 97 GDP + 7.8% Agriculture +8.8; 04- 8.5 & A-9,3 – Erratic rice & wheat production: – 08 07 06 05 00 91 81 (mn t) – R 96 93 92 83 85 74 54 – W 78 76 69 69 70 55 36 – Land availability limited: Since 1980 crop area for food grains static at around 124mn hectares – Total Investment falling in 1990s as % to GDP from 1.92 in 90-91; 1.83 in 99-00; 2006-07- 2.3 % Weak Agriculture Fall is in public investment; private keeps rising; funds for public investment diverted to poorly targeted subsidies(water, power, fertilizer) – Productivity levels are low: Yield @ 100kg/HA; India and China in 2006: paddy 31.24 & 62.65; wheat 26.19 & 44.55; cotton 6.0 & 33.3; g.nut 8.6 & 31.2, s.cane 669.4 &825.25 – Poor policies encouraging unsuitable crops: free electricity; minimum support and procurement prices same; annual price increases; no ground water policy; free power to agriculture60% population lives on agriculture – In downturn, companies turning to rural markets, with new Marketing methods – Huge potential as diversification progresses Weak Infrastructure Non-implementation of integrated energy policy; no coordination between electricity, coal and gas – Government ownership of Electricity distribution, coal Government implementation poor on Roads – Infrastructure regulation/implementation awaiting overhaul – State ownership- high inefficiency in infrastructure – Slow decision-making under government ownership; corruption – Federal Constitution; states at loggerheads with Centre HDI Rank out of 174: Sri Lanka 89; China 96; Indonesia 110; India 124; Pakistan 148 Erratic growth performance Economy-4 to 6 year cycles – Weak “real” economy, especially agriculture; manufacturing low share; services high! – Poor HDI; High poverty & rising inequalities – High unemployment and “disguised” unemployment – Pressure of population on Agriculture – High deficits; – Weak infrastructure Context of weak fundamentals – Rising deficits-not shown by Centre in Budgets-Oil Bonds, FCI bonds, Fertilizer bonds, Farmer Loan write-offs, etc – Putting Growth over inflation control – Desperation to add to Foreign Exchange Reserves – Exemption from short-term capital gains tax; Mauritius as largest foreign investor; Very volatile FII funds-stock market like yo-yo as funds ebbed and flowed – Participatory Notes and round-tripping of Indian funds Poor Implementationadministrative reform Government has been very inefficient in its expenditures; more subsidies than asset building – Similarly Public Distribution System-e.g. food grains, sugar, edible oils, cheap kerosene; – Other subsidies poorly targeted, physical handling and inefficiencies-fertilizers, free or cheap power to agriculture; – Social Programmes- NHRM, SSA-not efficient in spending honestly. NREG should have added to purchasing power but with estimates ranging from 40 % to 60% wasted and leakage, its effect has been reduced. – Unspent funds in most programmes – Infrastructure spending is also slow, eg., NHAI. – Many projects delayed due too many Ministries, lack of coordination, non-accountability of bureaucracy Issues to be dealt with if spending is to be efficient Administrative Reforms-specialization, performance orientation, accountability, Poor coordination between Ministries Labour Laws Administrative Reform Reduce Red Tape State Owned Enterprises: Distance government from management Enterprise vs. administrative culture Management autonomy Foreign investment-insurance, retail, other areas Private Sector: Improve Corporate Governance Expenditures: Target subsidies; efficient delivery; eliminate undeserving Agriculture: Correct decades of Neglect Social programmes & infrastructure: Targeting; Decentralize to Local Authorities THANK YOU