India After 20 Years

Draft January, 2007 INDIAs GROWTH other(prenominal) AND FUTURE by Shankar Acharya* * Honorary prof and Member carte du jour of G e actuallywherenors, Indian Council for question on International frugal contending (ICRIER) Paper for presentation at the 8th one-year orbicular Development meeting of the Global Development Ne devilrk, January 14-16, Beijing. 0 Indias harvest-time Past and Future By Shankar Acharya1 This paper is divided into tail fin theatrical roles. voice I briefly recapitulations Indias process surgery since 1950 and indicates a a few(prenominal) conspicuous features and turning requests.Section II discusses just ab out(p) of the major(ip) device drivers of Indias current out fruit pulse (which has ordinaryd 8 imageage in the make it 3 long time) and raised widespread antepasts (at to the lowest degree, in India) that 8 portion plus result has be ascend the late(a) norm for the Indian thrift. Section III heads to around of the r isks and vulnerabilities that could buy the utmostm the current dynamism if corrective satisfy is non taken. Section IV appraises the hoidenishs signifi mintt suit term egress prospects. The final section assesses more than or less implications of Indias trick out for the gentleman miserliness. I palingenesis of ontogeny Performance, (1950-2006) tabular array 1 summarizes Indias appendage experience since the centre of the twentieth century. For the for the first time thirty old age, sparing harvest-feast averaged a modest 3. 6 portion, with per capita exploitation of a meager 1. 4 packageage per year. Those were the heydays of allege-led, all the similart-substituting industrialization, speci every(prenominal)y after the 1957 orthogonal reciprocation crisis and the heavily industrialization bias of the Second phoebe bird Year object (1956-61). While the outline achieved more or less success in rhytidectomy the level of resource mobilizati on and enthronization in the economy, it turned out to be hugely costly in ground of stinting efficiency.The inefficiencies stemmed non honest from the adoption of a statist, inward1 The author is Member, age of G everyplacenors and Honorary Professor at Indian Council for Research on International frugalalal Relations (ICRIER). He was Chief Economic Adviser to regime of India (1993-2000). This paper draws liberally on his new-made paper, Indias crop Past Performance and Future Prospects, presented at the Tokyo Club Macro parsimoniousness Conference on India and china hike, December 6-7, 2006, Tokyo. 1 ooking indemnity military capability (at a time when put uping clientele was expanding rapidly) but besides from the extremely expound, impaired and corruption-breeding controls that were imposed on fabrication and tidy sum (see, for example, the trendic study by Bhagwati and Desai (1970)). flurry 1 Growth of take in domestic help product and major cel estial spheres (% per year) Year 1951/521980/81 (1) 1981/821990/91 (2) 1992/931996/97 (3) 1997/982001/02 (4) 2002/032005/06 (5) 1992/932005/06 (6) 1981/822005/06 (7) Agriculture and Allied exertion 2. 5 3. 5 4. 7 2. 0 1. 9 3. 0 3. 0 5. 3 7. 1 7. 6 4. 4 8. 0 6. 6 6. 5 Services 4. 5 6. 7 7. 6 8. 2 8. 9 . 2 7. 4 thoroughgoing(a) domestic product 3. 6 5. 6 6. 7 5. 5 7. 0 6. 4 5. 9 gross domestic product per capita 1. 4 3. 4 4. 6 3. 6 5. 3 4. 4 3. 8 reference augur CSO . Note Industry implys Construction. At the same time, one should not forget that the gross domestic product branch jell of 3. 6 per centumage was four measure great than the 0. 9 part fruit estimated for the previous half(a) century of British colonial rule ( delay 2). a good deal over the harvest was reasonably carry on, with no extended halts of scorn. Nor were in that location inflationary bouts of the kind which racked m whatsoever countries in Latin America. However, process was far infra inviolableial and much less than he 7-8 portion lay outs being achieved in rough countries of East Asia and Latin America. scourge of all, the proportion of the Indian commonwealth on a lower floor a (minimalist) poverty line truly change magnitude from 45 to 51 per centum ( tabularize 3). conf intent 2 Economic Growth Pre -independence (% per year) Year 1900-46 1900-29 1930-46 GDP 0. 9 0. 9 0. 8 Population 0. 8 0. 5 1. 3 Per Capita GDP 0. 1 0. 4 -0. 5 microbe Sivasubramonian (2000) 2 hold over 3 pct of mint beneath Poverty Line, 1951-52 to 1999-00 Official Estimates Year verdant Urban All India 1951-52 47. 4 35. 5 45. 3 1977-78 3. 1 45. 2 51. 3 1983 45. 7 40. 8 44. 5 1993-94 37. 3 32. 4 36. 0 1999-2000 26. 8 24. 1 26. 1 ascendent Planning Commission, Government of India G rowth accele pointd signifi plentytly in the eighties to 5. 6 portion, entailing a to a greater extent than than doubling of per capita harvesting to 3. 4 pct a year. This accele balancen was d ue to a modus operandi of factors, including the early efforts at industrial and parcel out s dropening and tax make better dur ing the mid-eighties, a step- up in habitual investiture, better agricultural carrying into action and an much than and much refinementist ( intimately profligate ) pecuniary constitution. mo elucidateary controls diminished and shortfalls mounted and spilled over to the external dissipatedament, requiring suppuration recourse to external borrowing on commercial terms. Against a background of a low export/GDP ratio, acclivity business and current broadsteadheet deficits and a deteriorating external debt profile, the 1990 Gulf War and end petroleum price spike atilt Indias proportionateness of turn outments into crisis in 1990/91. Although the policy crystalises of the 1980s were modest in parity to those undertaken in the ensuing decade, their productivity whang for the buck seems to agree been spicy (see Table 4) 2 .Perhaps this 2 Several incompatible factor productivity studies support this conclusion, including Acharya-Ahluwalia Krishna-Patnaik (2003), Bosworth and collins (2003) and Virmani (2004). 3 w as a case of modest improvements in a gamely distorted policy environs yielding significant gains. Table 4 Growth of GDP, Total fixings excitant and Total Factor productivity (% per year) 1950/511966/67 3. 8 GDP 1967/68 1981/82 1980/81 1990/91 3. 4 5. 3 1991/92 1999/2000 6. 5 Total Factor Input (TFI) 2. 4 2. 7 3. 3 3. 9 Total Factor Productivity (TFP) . 4 0. 7 2. 0 2. 6 Proportion of Growth Explained by TFP (%) 37. 6 20. 8 37. 7 39. 7 Source Acharya, Ahluwalia, Krishna and Patnaik (2003). Note For sepa accountly sub-period, GDP, TFI and TFP argon class harvesting rank. The unsanded Congress disposal of June 1991, with Manmohan Singh as finance minister, undertook emergency measures to redo external and domestic confidence in the economy and its management. 3 The rupee was devalued, th e mo last(a)ary deficit was cut and special balance of payments financing mobilized from the IMF and the adult male trust.Even more importantly, the organisation seized the opportunity offered by the crisis to launch an array of long overdue and wide-ranging stinting neatens. They encompassed external vault of heaven liberalization, deregulation of industry, reforms of tax income and the monetary field and a more commercial approach to the military man race arna (see Table 5 for a sum-up of severalise reforms in 1991-93). 4 3 in that respect has been a great deal written on Indias scotchal reforms and the consequent performance of the economy, including Acharya (2002a and 2004), Ahluwa lia (2002), Kelkar (2004), Kochhar et. l (2006), Panagariya ( 2004a and 2006) and Virmani (2004). thither is a tendency to view the post-1991 stinting performance as a iodin unified experience. I prefer the more nuanced and disaggregated view depict here. 4 As I brace pointed out elsewhere (Acharya, 2006a), these reforms be better characterized as median(a) bang than gradualist (as by Ahluwalia, 2002). 4 Table 5 master(prenominal) Economic Reforms of 1991-93 Fiscal Reduction of the fiscal deficit. Launching of reform of major tax reforms. External Sector Devaluation and transition to a Market-determined sub Rate. Phased step- pig of import licensing (qua ntitative restrictions). Phased reduction of jacket bespoke duties. Policies to encourage designate and portfolio distant coronation. monitor and controls over external borrowing, curiously before long term. Build-up of foreign give-and-take reserves. Amendment of FERA to avoid restrictions on firms. Industry Virtual abolition of industrial licensing. Abolition of separate permission mandatory by MRTP houses. Sharp reduction of industries mute for the in the common eye(predicate) empyrean. Freer access to foreign technology.Agriculture more remunerative procurement prices for ce tangibles. Reduction in protection to the manufacturing sector. Financial Sector Phasing in of Basle prudential norms. Reduction of reserve requirements for banks (CRR and SLR). slow freeing up of interest rates. legislative em conditionment of SEBI. Establishment of the National telephone circuit Exchange. Abolition of judicature control over bully issues. Public Sector Disinvestment program begun. Greater autonomy / accountability for public enterp onward motions. 5The economy responded swiftly and positively to these reforms. later on virtual stagnation in 1991/92, GDP harvest-home good deald in the attached atomic number 23some age to clock a temper 5-year average of 6. 7 percent. It is noteworthy that in this high profit Eighth Plan period all major sectors ( culture, industry, function) grew observably faster than in the pre-crisis decade. The acceleration in the growth of agricultural value added is in particular elicit in the light of oft-repe ated reproval that the stinting reforms of the early nineties omit the agricultural sector.The factors which explain this remarkable and broad-based growth surge in the period 1992-97 advance to allow Productivity gains resulting from the deregulation of peck, industry and finance, especially in the sectors of industry and some expediencys The surge in export growth at about 20 percent per year (in dollar terms) for ternion successive geezerhood beginning 1993-94, due to the substantial devaluation in real number powerful terms in the early nineties and a freer policy regime for industry, foreign trade and paymentsThe investment pan gravy of 1993-96 which exerted expansionary do on two submit and demand, especially in industry. The investment boom itself was standardisedly driven by a crew of factors including the unleashing of animal spirits by stinting reforms, the swift loosening of the foreign change bottleneck, confidence in broadly concordant poli tical policy signals and easier availability of investible silver (both by borrowing and new fairness issues)The partial success in fiscal consolidation, which kept a check on government borrowings and facilitated expansion of aggregate nest egg and investments Improvement in the terms of trade for agriculture resulting from a combination of high(prenominal) procurement prices for important crops and reduction in trade protection for manufactures Availability of efficiency in key root sectors, notably power A buoyant world economy which supported expansion of foreign trade and occult peachy influxs.The nerve impulse of growth slowed noticeably in the 9th Plan period, 1997-2002, to an average of 5. 5 percent, comp atomic number 18d to the 6. 7 percent achieved in the previous basketball team years. Among the factors which contributed to this deceleration were the significant worsenedning of the fiscal deficits (mainly due to large public pay increases following the one-fi fth Pay Commission) and the associated decline in public savings, the slackening of sparing reforms after 1995 as coalition brass instrument became the norm, a significant slow rase in 6 gricultural growth for a renewing of reasons, a marked downswing in the industrial cycle and an more and more unsupportive supranational economic environment (including the Asian financial crisis of 1997-98, uphill energy prices and the world-wide recession of 2001). Indeed, Indias economic growth in 1997-2002 might contain been horizontal weaker but for the un pass judgment and somewhat cryptical authorisation of services sector growth, which clocked an average of 8. 2 percent, despite industrial growth of only 4. 4 percent. The services sector accounted for al intimately 70 percent of all growth in this period. Economic reforms picked up pace in 2000-04, fiscal deficits trended down after 2002 and the world economy rebounded potently in 2002-06. These factors supported a broadbased ups wing in Indian industrial output and investment from the second half of 2002. Growth of industrial valued added surged to 8 percent in 2002-06. With go along strong growth of services (at tight 9 percent), GDP growth climbed to average 7 percent, despite continue sluggishness of agriculture.In the three years, 2003-06 overall economic growth has averaged over 8 percent and the outlook for 2006/7 is equally bright. This in style(p) economic surge has raised the interesting issue of whether Indias trend growth rate has accelerated to 8 percent (or higher(prenominal)(prenominal)) from its previous level of around 6 percent. The ensuing sections of this paper explore this question. II. Main drivers of mod Economic Growth What ar some of the main ingredients of the recent surge in economic growth? I would suggest the following seven major elements ) The momentum of a can of a century of strong economic growth 2) A much more pass economy (to external trade and investment) 3) A gro wing centre class fuelling domestic consumption 4) The demographic dividends of a teen population 5 Acharya (2002a and 2003) noted this preposterous phenomenon and raised questions about both the prime(a) of the entropy and the durability of much(prenominal) sharply divergent growth rates of industry and services. More recently, similar doubtfulnesss have been express by Bosworth-Collins -Virmani (2006). 7 5) grueling companies in a modernized capital trade 6) Some recent economic reforms. ) A supportive international economic environment. allow me elaborate briefly on each of these factors. The Momentum of Growth The function thirty years experience suggests that very few development countries have sustained enough per capita growth for two decades or more (Acharya, 2006b). Specifically, out of 117 developing countries with population over half a meg, only 12 countries achieved per capita growth of more than 3 percent per year in 1980-2002, with at least(prenomina l) 2 percent growth in each decade of the eighties and nineties. These cardinal countries were chinaware (8. 2), Vietnam (4. 6), South Korea (6. 1), long pepper (3. ), Mauritius (4. 4), Malaysia (3. 4), India (3. 6), Thailand (4. 6), Bhutan (4. 3), Sri Lanka (3. 1), Botswana (4. 7) and Indonesia (3. 5). (The number falls to 9 if we specify a minimum population of 3 cardinal). nightspot of these 12 countries are in Asia and, fortunately, they involve the three most populous china, India and Indonesia. (See Table 6). If we take the full 25 years (1981-2006), Indias per capita growth has averaged 3. 8 percent or just about 4 percent per year. 8 Table 6 acceptable Growth Performers of Recent Decades Average Annual Per Capita Growth (%) Country 1980-2002 mid-nineties 1980s Population in 2000 (Millions) 1. mainland chinaware . 2 8. 6 7. 7 1262 2. Vietnam 4. 6 5. 7 1. 9 78 3. South Korea 6. 1 5. 0 7. 4 47 4. Chile 3. 3 4. 3 2. 1 15 5. Mauritius 4. 4 4. 1 4. 9 1 6. Malaysia 3. 4 3 . 7 3. 1 23 7. India 3. 6 3. 6 3. 6 1016 8. Thailand 4. 6 3. 4 6. 0 61 9. Bhutan 4. 3 3. 4 5. 4 1 10. Sri Lanka 3. 1 3. 1 3. 1 18 11. Botswana 4. 7 2. 7 7. 2 2 12. Indonesia 3. 5 2. 6 4. 4 206 Source ball coast (2005) Sustained improvements in standards of liveness of this order embody their own growthreinforcing elements. masses come to venture more positively about the future and base their savings, investment and production decisions on an conveyation of continued growth.Electorates in Indias democracy come to expect development and hold government performance to higher standards, despite disappointments. Companies think big when they invest. And so on. A More Open Economy The Indian economy in 2006 is far more disseminate to external trade, investment and technology than it was 15 years ago. 6 Table 7 presents some key comparative 6 The story of Indias external liberalization whitethorn be found in several places, including Acharya (2002b) and Panagariya ( 2004b). 9 indi cators. Peak import duties on manufactures have come down from over 200% to 12. 5%, a remarkable reduction by any standards.The regime of tight, detailed and discretionary import controls has been almost completely dismantled. The exchange rate was devalued and made market-responsive (1991-3). The policies towards foreign portfolio and direct investment have been greatly liberalized. As a result, the ratio of traded goods to GDP has more than doubled from less than 15 percent to nearly 33 percent. Because of the sustained boom in software exports and worker remittances, the ratio of current receipts (goods exports plus gross invisibles) has more than tripled from 8 percent to over 24 percent of GDP.Foreign investment has up pilfer from negligible levels to US $ 20 one yard thousand in 2005/6. Table 7 Towards A More Open Economy 1990/91 2005/06 200% plus 12. 5% Tight, detailed Almost gone Trade (goods) / GDP Ratio (%) 14. 6 32. 7 rate of flow Receipts / GDP (%) 8. 0 24. 5 Softwar e Exports ($ one million million) Nil 23. 6 worker Remittances ($ billion) 2. 1 24. 6 Foreign enthronization ($ billion) Negligible 20. 2 2. 2 145. 1 35. 3 10. 2 Peak substance Duties (manufacturers) I mport Controls Foreign Currency reserves ($ billion, March 31) Debt Service Ratio (%) Source RBI, Annual Report, 2005 /06, except for first two rows.After initial periods of some measure painful alteration in the 1990s, Indian industry has thrived in the more open and competitive environment. The magnification in software ITenabled service exports is well-known, having come up from nil in 1991 to $ 24 billion in 2005/6. Anecdotal evidence suggests that low units have benefited greatly from 10 the much freer access to traded raw materials, components and designs. Perhaps most important, the old mindset of foreign exchange scarcity (and the welter of bad economic policies it spawned) has been transactionively banished.Interestingly, the opening up has in any case susceptibili tyenceed the prudential yardsticks of foreign exchange reserves and debt service ratios. Rise of strong companies in a modernized capital market The 1990s ushered in far-reaching reforms in Indias capital markets. The Securities and Exchange Board of India was statutorily empowered in 1992 and readily moved to improve standards of disclosure and transparency. The new electronic-tradebased National tenor Exchange was open in 1993 and set high practiced and governance standards, which soon had to be emulated by the much older (and, some propagation scam-hit) Bombay straining Exchange.Depositories legislation was enacted and soon paperless trading became the norm. Brokers were support to corporatize. Futures markets were nurtured. These and other reforms transformed Indian capital markets into one of the best in the developing world. The combination of a modernizing capital market, an more and more liberal and competitive environment for investment, trade and production, a wealt h of entrepreneurial gift and sustained economic growth has helped the rise of strong new companies and supported the expansion of the more agile and aggressive among the completed firms.By way of example, Airtel, the take snobbish telecom, went from nobody to a multi-billion dollar company in a decade. The same was true for the leading domestic airline, Jet and the IT icons like Infosys, Wipro, TCSand HCL. nonagenarian pharma companies, like Ranbaxy, transformed themselves. invigorated media companies like Zee and NDTV bloomed. Established corporates houses restructured and flourished ( such as some Tata companies, Reliance, Bajaj, Mahindra and Hero Honda) or maxim their market get bys decline.In recent years sooner a few Indian companies have grow through overseas investments and acquisitions, facilitated by direct investments abroad averaging $1. 5 to $ 2 billion in the past phoebe bird years. The recent bid for Corus by Tata nerve is a well-publicized example. 11 Ag gregate financial data withal point to the energy and expansion of Indias corporate sector in recent years. The market capitalization of companies listed on the Bombay Stock Exchange travel nearly 14-fold from $ 50 billion in 1990/91 to $ 680 billion in 2005/6 (Table 8).In the remnant five years, the growth of meshwork has outpaced the growth of sales of private corporates, indicating rising profit margins. With falling interest rates and growing recourse to internal funding, the share of interest outgo in gross profits dropped sharply from above 50 percent in the late 1990s to 15 percent in 2005/6 (Reserve Bank, 2006, Box 1. 7). Unsurprisingly, data for the top cubic yard listed companies showed net profits as percent of net sales rising from 4. 5 % in 2001/2 to 8. 9 % in 2004/5 ( business sector Standard, 2006). Table 8 procession Middle Class 1990/91 Cars + UVs sell deuce Wheelers sold Telephone emailprotected (million) 15 million 100 million $50 billion $680 billion 205 thousand People in households with income (Rs. 2,00,000 10,00,000 OR PPP $20,000- $1,00,000 approximately)a Bombay Stock Exchange Market Capitalisation* 2005/06 1319 thousand 1800 thousand 7570 thousand 5 cxxv$ a Based on data from NCAER (2005) * RBI, Handbook of Statistics on the Indian Economy, 2005-06 stemma Beacon, CMIE and Monthly Review of the Indian Economy, CMIE, October 2006 Business Beacon CMIE and Economic Survey, 2005-06 $ December 2005 A Growing Middle Class In the mid-1990s, shortly after the major economic reforms of 1991-4, in that respect as premature exuberance about Indias rising put class and their acquisitive aspirations. Today there is a much firmer basis for accenting the importance of the growing middle class in transforming consumption, production and investment in the Indian economy. Table 8 provides a few indicators. Based on surveys by the NCAER, about 100 million wad now live in households with yearly incomes surrounded by Rs. 200,000 and Rs 1 12 million (approximately PPP$ 20,000 to 100,000), compared to about 15 million in 1990/91. With a lower delineate threshold, the size of the middle class would be greater.For example, if the middle class cut-off is defined as the non-poor by standards of developed economies, then Bhalla (2007) estimates that 34 percent of India s population was middle class in 2005 compared to about 10 percent in 1990. Purchases of iconic middle class consumption items have for certain soared in the last 15 years (Table 8). Annual sales of cars (including multi- utility vehicles) have risen more than six times to 1. 3 million in 2005/6. Two wheeler sales have increased mo re than four times to 7. 6 million in 2005/6. In 1990/91 India had just 5 million telephone connections (all fixed).By the end of 2005 the number was cxxv million (about two-thirds were mobile connections). Indeed, in October 2006 the new mobile connections were close to 7 million, more than the kernel of phone connections fi fteen years ago The Demographic Dividend It has go away old-hat to emphasize the growth potential of Indias young population and declining dependency ratio. tally to most population gibbousnesss the share of functional age population in broad(a) population leave alone continue to rise for the future(a) 30 years or so, long after the decline has set in other major countries like China, USA, atomic number 74ern Europe and Japan (Table 9).These demographics point to a large potential for higher growth through augmented supply of labour and savings. Indeed, these trends have already been at work over the 15 years or so, helping to raise Indias household savings from around 15-16 percent of GDP in the late 1980s to 22-24 percent in recent years. 7 7 This could be an important part of the explanation to the puzzle How does India sustain high growth despite aggregate fiscal deficits above 7 percent of GDP over the last twenty years? 13 Table 9 appropriate of Working Population (1 5-59 yrs) Country 1950 1975 2000 2025 2050 India 55. 5 54. 0 58. 9 64. 3 59. 7 China 59. 53. 6 65. 0 62. 1 53. 8 Japan 56. 9 64. 0 62. 1 52. 8 45. 2 US 60. 5 60. 0 62. 1 56. 6 54. 6 Western Europe 61. 7 58. 1 61. 3 54. 8 50. 4 Source http//www. un. org/esa/population/publications/worldageing19502050/countriesor flying fields. htm Some Recent Policies As noted above economic reforms slowed after 1995 and then revived to some extent in the period 2000-04. Also, real interest rates declined worldwide and in India too. In India this may have been helped by renewed efforts to reduce burgeoning fiscal deficits, including through enactment of the Fiscal Responsibility and cypher Management Act (2003) at the aboriginal level.The fiscal position of the States as well amend from the dire straits plumbed following the Fifth Pay Commission. The invokes too adopted fiscal responsibility laws following the recommendations (and conditional debt write-offs) of the ordinal Finance Commission ( Government of India, 2004). Furthermore, tax taxation enhancements at both levels of government were buoyed by renascent economic (especially industrial) growth after 2002/3. The net result was a decline in the gross fiscal deficit from almost 10 percent of GDP in 2001/2 to 7. percent in 2004/5 and an even larger decline in the revenue deficit from 7 to 3. 7 percent of GDP (Table 10). This was the single most important factor explaining the increase in aggregate savings from around 24 percent of GDP in 2001/2 to 29 percent in 2004/5, which, in turn, helped finance the current investment boom. 14 Table 10 famines, savings and investiture (as % of GDP) Year 1995-96 Gross Fiscal Deficit 2001-02 2004-05 6. 5 9. 9 7. 5 3. 2 7. 0 3. 7 25. 1 (-2. 0) 26. 9 23. 6 (-6. 0) 23. 0 29. 1 (-2. 7) 30. 1 (Centre and States) Revenue Deficit (Centre and States)Gross Domestic Savings (of which Government) Gross Domestic enthronization Source RBI, Handbook of Statistics on the Indian Economy, 2005 -06 and CSO website (http//mospi. nic. in/mospi_cso_rept_pubn. htm ) (http//mospi. nic. in/mospi_press_releases. htm ) International Economic surroundings Despite the war in Iraq and the high anele prices of recent years the world economy has magnanimous at almost 5 percent over the last four years, propelled by strong growth in US and China and some recovery in Japan and Europe. domain of a function trade in goods and services has expanded rapidly.This favorable environment has helped rapid growth of exports (of goods and services) from India, which, in turn, has been a significant driver of economic growth in this recent period. 8 III Risks to Future Strong Growth There are some well-known risks or coynesss to the sustenance of the 8 percent growth enjoyed by India since 2003. These include 1) re-create fiscal stress from democrat policies 8 Panagariya (2006) emphasizes this point. 15 2) Infrastructure bottlenecks 3) agitate market rigidities 4) Weak performance of agricu lture 5) mistreat of economic reforms ) Weaknesses in human resource development programmes 7) The international economic environment. Each of these merit brief elaboration. Populism and Renewed Fiscal Stress The recent get ahead in fiscal consolidation, noted above, is real but modest. The overall fiscal deficit form high at 7. 5 percent of GDP in 2005/6, as does the government debt to GDP ratio at 80 percent (compared to about 60 percent in 1995/6). While the fiscal responsibility laws enacted by key and state governments (22 out of 28 states have passed such laws so far) are promising, they are not immune to populist pressures.Especially since the advent of the UPA government in 2004, populist expenditure programmes, such as the National Rural piece of work Guarantee scheme, have gained new momentum. The sixth Pay Commission has been constituted and is expected to submit its report by mid-2008, with governmental action likely before the contiguous general election. The po ssibility of significant public pay increases is obviously high. On the revenue side, the state level VATs have contributed to revenue buoyancy. But the recent scheme for limited Economic Zones is fraught with unduly generous tax concessions.So the prospects for fiscal consolidation are mixed, at best. Infrastructure Bottlenecks Indias radix problems are legendary and also conjecture failures in public sector performance and governance. A recent appraisal (World Bank, 2006) points out that the average manufacturer loses 8. 4 percent in sales annua lly on account of power 16 outages, over 60 percent of Indian manufacturing firms own author sets (compared to 27 percent in China and 17 percent in Brazil) and Indias combined real cost of power is almost 40 percent higher than Chinas. The mensuration and quality of roads is also a serious bottleneck.While there has been some progress in recent years with national highway development, the state and rural road networks are sadly inade quate, especially in poorer states (Figure 1). Urban infrastructure (especially piddle and sewerage) is another major constraint for rapid industrial development and urbanisation (Figure 2). The palmy example of rapid telecom development is very promising. But conflicting telecom, the sectors of power, roads and urban infrastructure are burdened by long histories of a subsidy culture and dual (centre and states) thorough responsibilities.Unless the various infrastructure constraints are address swiftly and effectively, it is difficult to see how 8 percent (or higher) economic growth can be sustained. Fig 1Percentage of habitations not connected by roads, by Indian state Haryana Kerala Andhra Pradesh Punjab 0% 3% 4% 7% Karnataka 8% Tamil Nadu 8% Maharashtra Gujarat Uttar Pradesh Rajasthan 12% 23% 43% 51% Bihar 58% Orissa 58% Jharkhand Madhya Pradesh West Bengal 59% 62% 69% Chattisgarh 82% Source Ministry of Rural Development, Government of India, as cited in World Bank (2006). 17 Fig 2 Percentage of the population with access to sewerage facilities, by Indian stateRajasthan 8 Orissa 9 Chattisgarh 10 Madhya Pradesh 10 Andhra Pradesh 15 West Bengal 17 Tamil Nadu 29 Karnataka 33 Uttar Pradesh 37 Uttaranchal 37 Maharashtra 49 Gujarat 63 0 10 20 30 40 50 60 70 Source of import Public Health and environsal engine room Organization, 2000, as cited in World Bank (2006). Labour Market Rigidities According to ordained data, Indias non-agricultural employment in the private organized (units employing more than 10 workers) sector has stagnated below 9 million for over 20 years, although the labour force has grown to exceed 400 millionA major cause has been Indias conglomerate and rigid labour laws, which hugely discourage fresh employment while protect those with organized sector jobs. 9 Investment climate surveys by the World Bank indicate that India has some of the most regulatory labour laws in the world, which, in effect convert labour (in organized units) i nto a fixed factor of production (lay-offs are extremely difficult) and thereby discourage fresh employment in the organized sector while promoting more casualization and insecurity among the 9The skill and capital-intensive pattern of development of Indias modern industrial and services sectors (despite the endowment of rank unskilled labour) has been noted by many an(prenominal) analysts, including Kochhar et. al. (2006), Panagariya (2006) and World Bank (2006). All of them point to restrictive labour laws as a major culprit. 18 93 percent of workers in the unorganized sector. The laws are not just rigid but also numerous (a typical firm in Maharashtra has to deal with 28 disparate acts pertaining to labor, World Bank, 2006).Without significant reform of existing labour laws, Indias cheesy labour advantages remain hugely underutilized. tone to the future, the challenge will increase as the demographic dividend brings further large increases in the labour force. In fact, as I have pointed out elsewhere (Acharya, 2004), the economic and political challenge is far greater than normally appreciated because the bulk of the demographic bulge will occur (in the next few decades) in the poor, slow-growing and populous states of central and eastern India (notably, Uttar Pradesh, Bihar, Orissa and Madhya Pradesh).Weak Agricultural Performance Since 1996/97 the growth of agriculture has dropped to barely 2 percent, compared to earlier trend rate ranging between 2. 5- 3. 0 percent. The reasons are many and include declining public investment by cash-strapped states, grossly inadequate maintenance of irrigation assets, f lling water tables, inadequate rural road networks, a unresponsive interrogation and extension services, dent damage from excessive urea use (encouraged by high subsidies), weak reference work delivery and a distorted motivator structure which impedes diversification away from intellectual nourishment grains.Tackling these problems and revital ising agriculture will take time, money, understanding and political will. It will also require much greater investments in (and maintenance of) rural infrastructure of irrigation, roads, farming conservation, etc. and reinvigoration of the present systems of agricultural research and extension. While the central government can play a significant habit in revamping systems, the main responsibility for strengthen rural infrastructure lies with the states. However, their financial and administrative capabilities have weakened over time. The share of agriculture in GDP has declined to scarcely 20 percent.But agriculture is still the chief occupation of nearly 60 percent of the labour force. Thus better performance of this sector is essential for poverty embossment and containment of rising regional and income inequalities. 19 Pace of Economic Reforms There is trivial doubt that economic reforms have slowed since the UPA government pretended office in May 2004 10 . The privatizat ion programme has been halted, although Government remains the dominating owner in banking, energy and deification and the rough-cut ills of public ownership chastise the performance of many enterprises in these key sectors.The legislative proposals of the previous government to reduce government ownership in public sector banks to 33 percent have lapsed and not been renewed. There has been some revival of interest rate controls and order credit. Follow-up action on the reform-minded new Electricity Act (2003) passed by the NDA government has been slow. The pricing of petroleum products has become more politically administered than before. Education policy has focused on introducing caste-based reservations in institutions of higher education. Introduction of such reservations in private sector employment are also being considered.Reform of labour laws remains stalled. There has been little forward progress in reform of agriculture policies. Indeed, the wonder is that the econ omys growth momentum has remained so strong despite the stalling of economic reforms. If the growth dividends of econo mic reforms occur with a lag, then the paucity of reforms in the period 2004-06 may take their toll in the years ahead. Weak Human Resource Policies The semipermanent performance of the Indian economy must(prenominal) surely depend on successful policies and programmes f r education, skill-development and health service o rovision. Yet the government- led programmes in these sectors suffer from very serious weaknesses and lack of reform impetus. For example, World Bank (2006) cites a number of surveys which show that less than half of government teachers and health workers are very to be found in grooms and clinics they are serving (the situation is typically worse in poorer states) . Even though school enrolment rates have climbed over time, the actual cognitive skill acquired in schools (even simple reading and arithmetic) is still very 10 For a recent review see Acharya (2006c). 0 low (Pratham, 2006). In health, a survey shows that medics in primary quill health clinics in Delhi had a greater than 50 percent chance of prescribing a harmful therapy for specified, common ailments (Das and Hammer, 2004a and 2004b). The competence of these medics was found to be less than comparably find out counterparts in Tanzania and substantially worse than counterparts in Indonesia. Even in higher education, an area of supposed competence, studies point to enormous problems of quality, quantity and relevance (see, for example, Aggarwal, 2006).Quite clearly, the current portfolio of policies and programmes in these circumstantial sectors need urgent improvement if India is to keep on her competitive edge in an increasingly ball-shapedized, knowledge-based, world economy. International Economic Environment The latter half of 2006 has witnessed a lucid slowing in the growth of the US economy, still the single most potent locomotive of global growth. The Doha polish up of multilateral trade liberalization remains mired in limbo. Oil prices, though off their peaks, remain high with little prospect of falling below $50 a barrel.The chances of some slackening in the growth of world output and trade are clearly rising. Just as the Indian economy has benefited from strong global expansion in the last four years, so it may expect to nominate some downside risks from slower world growth in the years ahead. IV average Term Growth Prospects Since 2003/4 there have been quite a few studies projecting sustained, high growth of the Indian economy in the long-run, including the Goldman Sachs BRICs report (Wilson-Purushothaman, 2003), Rodrik-Subramanian (2004) and Kelkar (2004).Their particularised projections and time-periods differ Goldman Sachs foresaw near 6 percent growth for 50 years Rodrik-Subramanian intercommunicate a minimum of 7 percent for the next 20 years and Kelkar was even more optimistic with his growth expectation of 10 percent. 11 More recently, with a three-year 8 percent average already achieved and the 11 See Acharya (2004) for a sarcastic assessment of these optimistic growth expectations. 21 current year likely to cash register a similar rate, the Governments Planning Commission (2006) has outlined GDP growth projections for 2007/8-2011/12 of 8 to 9 percent.Bhalla (2007, forthcoming) goes further and foresees 10 percent growth as almost inevitable. Most probably, the volume of serious economists in India would today expect economic growth in the medium term (say, 2007-12) to average at least 8 percent. Such optimism is not whole mis situated. It is based on the continuing strength of the positive factors outlined in section II above, especially globalization and catch-up, the demographic dividends, the rising middle class, a vivacious entrepreneurial culture, positive expectations of future economic reforms and a generally benign international economic environment.The optimists are no t sieve to the risks and threats outlined in section III. They but expect the growth-enhancing tendencies to prevail or, more subtly, for the moral forces of growth to generate solutions to constraints such as infrastructure and education. Figure 3 provides cost increase to the bullish outlook. 22 Figure 3 Indias GDP Growth 8 7 Percentage 6 5 4 3 2 1 2006-07 2003-04 2000-01 1997-98 1994-95 1991-92 1988-89 1985-86 1982-83 1979-80 1976-77 1973-74 1970-71 1967-68 1964-65 1961-62 1958-59 1955-56 0 Year Rolling Average (5 year)In my view, the downside factors outlined in section III, should carry more weight in assessing Indias medium term growth prospects. There is a good chance that the currently bullish view of growth expectations is overly influenced by the recent past (2003 onwards), a period of strong cyclical upswing in both the global economy and Indian industry. The strength of the cycle could abate in the next couple of years and Indias growth could revert to a trend rate in the range of 6 to 7 percent, perhaps closer to the higher figure.Even then, under this pessimistic scenario, annual per capita growth would be at a historical peak for India (Table 11). If this is pessimism, then I plead indictable to the charge (though it does place me among a delicate minority of Indian economists today) 23 Table 11 Medium Term Growth Expectations 1992/3 2005/6 2002/3 -2006/7 2007/8 2011 /12 Optimist Pessimist GDP % 6. 4 7. 2 * 8 10 6. 5 7. 0 GDP per capita (%) 4. 4 5. 5 6. 5 8. 5 5 5. 5 * Assuming Reserve Bank projection of 8. percent GDP growth for 2006/7 Perhaps the most noteworthy point is that medium- term growth expectations for India are so buoyant that the range between optimists and pessimists is placed so high, within a sanely narrow band of about 7 to 9 percent. Only time will tell who is closer to being right. V Some Implications of Indias Rise Indias growth at an average rate of almost 6 percent a year over the past quarter of a century (with per capita growth of nearly 4 percent a year) is both remarkable and commendable.Certainly, back in 1980, there was almost no respectable prentice or institution predicting such sustained development of this poverty-ridden, populous country. At the same time, the prevailing fashion of bracketing Indias rise with Chinas exceptionally dynamic development under rubrics like China and India Rising may mask more than it reveals. If Indias development in the last 25 years has been good, Chinas has been extraordinary. Furthermore, while India has been a gradual globalizer, Chinas surging development has been far more intensively based on global trade and capital flows.As a consequence, the global economic impact of Chinas rise has been much more dramatic in terms of the usual metrics of international economic dealing trade, capital flows and energy. A glance at Table 12 illustrates this obvious point. The equation of columns 5 and 6 of the table is especially instructive. It highlights both the 24 dramatic increase in Chinas fighting with the world economy over the five years 2000 to 2005, as well as the much milder rise in Ind ias international economic integration. For example, Chinas goods exports increased by an amount which was five times the level of Indias total goods exports in 2005.Similarly, the increase in oil consumption in China was almost equal to Indias total oil consumption in 2005. Table12 China and India Global Impact China India Increment (2000-05) 2000 (1) 2005 (2) 2000 (3) 2005 (4) China (5) India (6) 249. 1 762. 4 45. 5* 104. 7* 513. 3 59. 2 Share of World Exports (%)e 3. 9 7. 3 0. 7 0. 9 3. 4 0. 2 Service Exports ($ billion) a,b 30. 4 74. 4 16. 2* 60. 6* 44 44. 4 Current Account balance ($ billion) a,b 20. 5 160. 8 -2. 7* -10. 6* 140. 3 -7. 6 Foreign Exchange Reserves ($ billion) a 165. 6 818. 9 37. 2 131. 0 653. 3 93. 8FDI inflow ($ billion)c 30. 1 72. 4 1. 7 6. 6 42. 3 4. 9 FDI stock (Inward, $ billion) c 193. 3 317. 9 17. 5 45. 3 124. 6 27. 8 Oil economic consumption (million tonnes)d 223. 6 327. 3 106. 1 115. 7 103. 7 9. 6 Primary talent Consumption (million tonnes oil equivalent) d 966. 7 1554. 0 320. 4 387. 3 587. 3 66. 9 Merchandise Exports ($ billion) a,b Note * information for India refer to fiscal year 2000-01 and 2005-06 1990-2000 (Annual Average) Sources a International Financial Statistics, December 2006 (http//ifs. apdi. net/imf/) b RBI, Handbook of Statistics on the Indian