Managing India to take Dreams to Reality S

Managing India to take Dreams to Reality S L Rao February 24 2010

Outline 1. India’s Potential-Slides 1 -6 n 2. Recent economic developments. Slides 7 -11 n 3. Risks to Growth- Slides 12 -19 n 4. Issues in Making Dreams into Reality-Slide 20 n

India’s Potential n 1. World’s Largest Pool of Trained Manpower: n n n n n 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 n 5. Source of Innovations for the World n n n 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 n 2004 -Population =1080 million of which n over the next 15 -20 years. By 2020, India will have 270 mn 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. – 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

Demographic Dividednd n 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. 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 n Developed Economies in Jan 2009 grew at 0. 5% and Oct 2010 at 3. 1 n Emerging and Developing Economies grew from 3. 3. to 5. 1% n India from 5. 1 to 6. 4 % n

n n n India-Recent economic developments Growth: Sectoral Contributions Reverting to “Normal” (Q 1 - 07 -08 Industry and Agriculture wwere 29% of GDP, fell in Q 3 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 n n n n %to GDP Item 2008 -09 2009 -10 Tax reductions 0. 2 0. 4 Investment 0. 8 0. 1 Pay Commission Impact 0. 5 0. 3 Other Expenditure 0. 9 1. 0 Total 2. 4 1. 8 Debt waiver 0. 3 -

Drivers for 2010 Global economy showing signs of modest n recovery in 2010 n Domestic recovery appears to be gaining n momentum n Contribution of manufacturing sector increasing n Govt. borrowing requirements not likely to exceed estimates n Ample liquidity in the system despite 2 nd quarter n surge in growth n Current account deficit likely to remain n moderate n

Risks n n n n n 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 n 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 124 mn hectares – Total Investment falling in 1990 s 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 @ 100 kg/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 agriculture 60% population lives on agriculture – In downturn, companies turning to rural markets, with new Marketing methods – Huge potential as diversification progresses

Weak Infrastructure n 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: n Sri Lanka 89; China 96; Indonesia 110; India 124; Pakistan 148

Erratic growth performance n 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 n 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 n n n n 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

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