Engaging the World · A most striking feature of this new global order ... telecommunication, defense and insurance – FII – External Commercial Borrowings C I T D ... – Expenditure

Engaging the World: Engaging the World: IndiaIndia’’s Opportunities and Challengess Opportunities and Challenges

Amit Shovon Ray, Amit Shovon Ray, D.Phil. (Oxon.), FRSHD.Phil. (Oxon.), FRSH

Professor of Economics and ChairpersonProfessor of Economics and ChairpersonCentre for International Trade and DevelopmentCentre for International Trade and Development

School of International StudiesSchool of International StudiesJAWAHARLAL NEHRU UNIVERSITYJAWAHARLAL NEHRU UNIVERSITY

New Delhi 110067 INDIANew Delhi 110067 INDIA

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The New Era of GlobalizationThe New Era of Globalization�� A new era of A new era of GlobalizationGlobalization following the principles of following the principles of free trade free trade and and laissezlaissez--fairefaire. The . The

primary architect: World Trade Organization, Supplemented by ecoprimary architect: World Trade Organization, Supplemented by economic prescriptions nomic prescriptions of sof structuraltructural adjustmentadjustment offered to developing nations by the IMFoffered to developing nations by the IMF--World Bank World Bank

–– Developed Country PerspectiveDeveloped Country Perspective�� Unprecedented post war rates of growth tapering offUnprecedented post war rates of growth tapering off�� Desperately seeking to expand markets to unexplored territories Desperately seeking to expand markets to unexplored territories and to and to

relocate their production base to low cost locations overseasrelocate their production base to low cost locations overseas–– Developing Country PerspectiveDeveloping Country Perspective

�� Started with ISI in the post independence periodStarted with ISI in the post independence period�� From the 1970s, the limits to growth prospects of economies follFrom the 1970s, the limits to growth prospects of economies following the owing the

inward looking industrialization increasingly apparentinward looking industrialization increasingly apparent–– By the end of the 1980s, there was near consensus among developmBy the end of the 1980s, there was near consensus among development ent

economists (with a few noted exceptions) about the importance ofeconomists (with a few noted exceptions) about the importance of free trade in free trade in fostering economic development. This reinforced the eagerness offostering economic development. This reinforced the eagerness of the developed the developed market economies to establish a new world order of globalizationmarket economies to establish a new world order of globalization, culminating in , culminating in the establishment of WTO as its main architect. the establishment of WTO as its main architect.

�� A most striking feature of this new global order A most striking feature of this new global order –– active engagement of active engagement of almost all almost all nationsnations of the world to be a part of this process of globalization, espof the world to be a part of this process of globalization, especially, the two ecially, the two large and traditionally inward looking economies, India and Chinlarge and traditionally inward looking economies, India and China.a.

�� The new order has generated unprecedented opportunities for manyThe new order has generated unprecedented opportunities for many developing developing countries, at the same time it has also posed serious challengescountries, at the same time it has also posed serious challenges and threats. In this and threats. In this presentation, we intend to understand the Indian model of econompresentation, we intend to understand the Indian model of economic reforms against ic reforms against the backdrop of the new world order and analyze the opportunitiethe backdrop of the new world order and analyze the opportunities and challenges it s and challenges it has posed for India.has posed for India.

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Outline of presentationOutline of presentation�� IndiaIndia’’s economic reforms experiences economic reforms experience�� Salient features of the Indian EconomySalient features of the Indian Economy�� Unfolding opportunities for IndiaUnfolding opportunities for India

–– Human Capital, Technology, KnowledgeHuman Capital, Technology, Knowledge

�� Supporting conditions to exploit these Supporting conditions to exploit these opportunities opportunities

�� Threats and challenges for IndiaThreats and challenges for India–– Social Sectors (poverty, health, education)Social Sectors (poverty, health, education)

�� Concluding remarksConcluding remarks

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IndiaIndia’’s Reforms Experience:s Reforms Experience:GenesisGenesis

�� prepre--1980: 1980: –– Post independence inward looking ISI regime (inspired Post independence inward looking ISI regime (inspired

by the soviet model)by the soviet model)–– Self reliance played a major role in defining the norm of Self reliance played a major role in defining the norm of

developmentdevelopment–– Socialistic thrusts: role of the state, lack of faith on the Socialistic thrusts: role of the state, lack of faith on the

market, further perpetuated in the 1970s.market, further perpetuated in the 1970s.�� Piecemeal attempts to liberalize from mid 1980sPiecemeal attempts to liberalize from mid 1980s

–– Flipside revealed itself in the form of InefficienciesFlipside revealed itself in the form of Inefficiencies–– Changing norm: technology driven world view Changing norm: technology driven world view

�� 1990 crisis and major reforms from 19911990 crisis and major reforms from 1991–– BoPBoP crisis, reforms and WTO crisis, reforms and WTO –– all coincidedall coincided

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IndiaIndia’’s Reforms Experience:s Reforms Experience:First Phase (1991First Phase (1991--96)96)

�� External Sector:External Sector:–– Abolition of QR, reduction of tariff, exchange rate reforms, forAbolition of QR, reduction of tariff, exchange rate reforms, foreign eign

investment policyinvestment policy�� Industrial Sector:Industrial Sector:

–– Remove state intervention in the form of licenses, MRTP, Remove state intervention in the form of licenses, MRTP, Reservations for public sector and small scale sectorReservations for public sector and small scale sector

–– Abolition of freight equalization policyAbolition of freight equalization policy–– Divestment of public sector unitsDivestment of public sector units

�� Financial Sector:Financial Sector:–– Deregulation of interest rates, lending, banks, capital marketDeregulation of interest rates, lending, banks, capital market

�� Fiscal Consolidation:Fiscal Consolidation:–– Limited effort primarily to contain the fiscal (especially) reveLimited effort primarily to contain the fiscal (especially) revenue nue

deficitdeficit–– Some limited tax reformsSome limited tax reforms

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IndiaIndia’’s Reforms Experience:s Reforms Experience:Second Phase (late 1990s onwards)Second Phase (late 1990s onwards)

�� Deepening of external and industrial sector Deepening of external and industrial sector reformsreforms

�� More progressive and radical (but somewhat More progressive and radical (but somewhat difficult) reforms in areas like difficult) reforms in areas like –– fiscal consolidationfiscal consolidation–– legal framework legal framework –– public sectorpublic sector–– infrastructureinfrastructure–– capital markets and financial institutionscapital markets and financial institutions

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Indian Reforms: OutcomesIndian Reforms: Outcomes

�� External Sector:External Sector:–– All All QRsQRs liftedlifted–– peak rate of customs duty (for nonpeak rate of customs duty (for non--agricultural products) agricultural products)

reduced to 15%reduced to 15%–– Exchange rate market aligned, restrictions on capital Exchange rate market aligned, restrictions on capital

account convertibility substantially removed, although account convertibility substantially removed, although full capital account convertibility not reachedfull capital account convertibility not reached

–– FDI rules relaxed FDI rules relaxed …… permitted in real estate, ports, permitted in real estate, ports, telecommunication, defense and insurance telecommunication, defense and insurance

–– FIIFII–– External Commercial BorrowingsExternal Commercial Borrowings

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�� Industrial Sector:Industrial Sector:–– De licensing and deDe licensing and de--reservationreservation–– Small Scale list reduced (800+ reduced by more than Small Scale list reduced (800+ reduced by more than

200 including 30 textile items)200 including 30 textile items)–– Privatization, Disinvestment, Closure of PSU Privatization, Disinvestment, Closure of PSU -- slowslow–– Establishment of Investment Commission and National Establishment of Investment Commission and National

Manufacturing Competitiveness CouncilManufacturing Competitiveness Council�� Fiscal Reform:Fiscal Reform:

–– FRMB ActFRMB Act–– VATVAT–– Subsidies reduced (petroleum)Subsidies reduced (petroleum)–– Expenditure Compression Expenditure Compression –– not much achievednot much achieved

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�� Financial Sector:Financial Sector:–– BanksBanks–– Capital markets: securities laws amendment billCapital markets: securities laws amendment bill–– Interest ratesInterest rates–– InsuranceInsurance

�� Agriculture/ rural economy:Agriculture/ rural economy:–– Little progress due to lack of political Little progress due to lack of political

consensus: subsidies (power, water, fertilizers), consensus: subsidies (power, water, fertilizers), prices and procurement, PDS, rural credit etc.prices and procurement, PDS, rural credit etc.

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�� InfrastructureInfrastructure�� Private initiative and FDI encouragedPrivate initiative and FDI encouraged�� Efficient pricing attemptedEfficient pricing attempted

–– TelecomTelecom–– PortsPorts–– Civil AviationCivil Aviation–– PowerPower

�� IPR:IPR:–– The New Patent Act 2005The New Patent Act 2005

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Indian Economy: Salient FeaturesIndian Economy: Salient Features�� GDP and Growth rates:GDP and Growth rates:

–– GDP PPP (US$ 3787 GDP PPP (US$ 3787 bnbn in 2005) fourth largest after US, China and Japanin 2005) fourth largest after US, China and Japan–– Growth rate of real GDP at factor costs: 8.5 (2003Growth rate of real GDP at factor costs: 8.5 (2003--04), 7.5% (200404), 7.5% (2004--05), 9.0% (200505), 9.0% (2005--

06, quick estimate), 9.2% (200606, quick estimate), 9.2% (2006--07, projected) 07, projected) –– Growth driven by manufacturing and servicesGrowth driven by manufacturing and services–– SectoralSectoral composition: agriculture (19%) industry (28%) services (54%)composition: agriculture (19%) industry (28%) services (54%)

�� Openness:Openness:–– Trade intensity (about a quarter of GDP Trade intensity (about a quarter of GDP –– merchandise trade only)merchandise trade only)–– ForexForex Reserves of US$ 190 Reserves of US$ 190 bnbn (6(6thth largest reserve holding nation) largest reserve holding nation)

Impressive Reserve Adequacy Indicators: ReservesImpressive Reserve Adequacy Indicators: Reserves--Debt ratio 113.8; Short term Debt ratio 113.8; Short term debt only 5% of reserves.debt only 5% of reserves.

–– FDI US$ 10.6 FDI US$ 10.6 bnbn (2006(2006--07 up to Dec) but yet to catch up Chinese levels, UNCTAD 07 up to Dec) but yet to catch up Chinese levels, UNCTAD says India 2says India 2ndnd best destination of FDI and the 3best destination of FDI and the 3rdrd best for R&D related FDI after best for R&D related FDI after China and US)China and US)FII (portfolio investment) US$ 12 FII (portfolio investment) US$ 12 bnbn (2003(2003--04) US$ 9.9 (200504) US$ 9.9 (2005--06) indicates 06) indicates robustness of Indian capital market (stock market has reaching nrobustness of Indian capital market (stock market has reaching new highs ew highs continuously over the last 18 months)continuously over the last 18 months)

–– Remittance received US$ 21.7 Remittance received US$ 21.7 bnbn (largest in the world) 2(largest in the world) 2ndnd is China (21.3) (not the is China (21.3) (not the latest figures)latest figures)

�� Macroeconomic fundamentals:Macroeconomic fundamentals:–– Inflation 4.6% (ending Nov 2005) ... Has shot up recently beyondInflation 4.6% (ending Nov 2005) ... Has shot up recently beyond 6%6%–– Unemployment rate 3.1% (2004Unemployment rate 3.1% (2004--05)05)–– Poverty 35% ($ a day), 26% (Indian Poverty Line)Poverty 35% ($ a day), 26% (Indian Poverty Line)

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IndiaIndia’’s Opportunities in the New s Opportunities in the New World OrderWorld Order

�� The Asian MiracleThe Asian Miracle–– Unprecedented rates of growth in East and South East Asia Unprecedented rates of growth in East and South East Asia –– not an not an

isolated regional phenomenonisolated regional phenomenon–– Changing pattern of international trade since 1960s: a new interChanging pattern of international trade since 1960s: a new international national

division of labordivision of labor–– Flying geese modelFlying geese model

�� India in the Asian MiracleIndia in the Asian Miracle–– Post colonial policy baggagePost colonial policy baggage–– Participation in labor intensive export growth limited to the exParticipation in labor intensive export growth limited to the extent of tent of

opening upopening up–– Economic reforms in 1991 Economic reforms in 1991 –– dismantling of an agedismantling of an age--old autarkic trade old autarkic trade

regimeregime–– But other policy elements still present But other policy elements still present –– reservation for small scale for reservation for small scale for

instance.instance.–– Effectively we almost voluntarily opted out of the mass market fEffectively we almost voluntarily opted out of the mass market for or

traditional labor intensive goods traditional labor intensive goods –– it was the conquest of this market that it was the conquest of this market that propelled Chinapropelled China’’s boom in the 1990ss boom in the 1990s

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IndiaIndia’’s Opportunities s Opportunities ……. 2. 2�� Beyond Simple Unskilled Labor AdvantageBeyond Simple Unskilled Labor Advantage

–– Pervasive nature of low labor costs Pervasive nature of low labor costs –– extending beyond extending beyond traditional labor intensive goods to new industries and traditional labor intensive goods to new industries and services (software, IT, biotech, pharmaceuticals, BPO services (software, IT, biotech, pharmaceuticals, BPO etc)etc)

–– IndiaIndia’’s advantages s advantages --�� University educated middle classUniversity educated middle class�� Investment in Science and TechnologyInvestment in Science and Technology�� EnglishEnglish

–– Transition to a Transition to a ““Knowledge EconomyKnowledge Economy””�� 2 pillars: Human Capital and Technology2 pillars: Human Capital and Technology

IndiaIndia’’s opportunities s opportunities …… 33

�� The Role of Human CapitalThe Role of Human Capital–– Employment and Income opportunities for an upwardly Employment and Income opportunities for an upwardly

mobile classmobile class–– Not an inclusive strategy Not an inclusive strategy –– in the midst of an ocean of in the midst of an ocean of

illiteracy and povertyilliteracy and poverty–– Rising aspirations and unsustainable in a democratic Rising aspirations and unsustainable in a democratic

set upset up–– Contrast with ChinaContrast with China–– Stimulate labor productivity through investment in health Stimulate labor productivity through investment in health

and primary education of the massesand primary education of the masses

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IndiaIndia’’s opportunities s opportunities …… 44

�� The Role of TechnologyThe Role of Technology–– Stages of Technological Capability Acquisition Stages of Technological Capability Acquisition

by by LDCsLDCs�� Know how versus know why Know how versus know why –– basic researchbasic research

–– IndiaIndia’’s technological trajectorys technological trajectory�� Self reliance and knowSelf reliance and know--whywhy�� Shift from institutional to industrial R&DShift from institutional to industrial R&D�� TFPGTFPG

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IndiaIndia’’s Opportunities s Opportunities …… 55�� Towards a Knowledge EconomyTowards a Knowledge Economy

–– India missed the opportunities to be a part of the Asian India missed the opportunities to be a part of the Asian miracle in the 1970s, 1980s and 1990smiracle in the 1970s, 1980s and 1990s

–– New opportunities for India New opportunities for India –– cancan’’t afford to miss it t afford to miss it ––requires appropriate nurturing of its human capital and requires appropriate nurturing of its human capital and technological capabilitytechnological capability

–– Success in high end human capital and technology but Success in high end human capital and technology but tragic neglect of the low end tragic neglect of the low end ––�� Primary education and health Primary education and health �� These are the also the areas of major threats and challenges forThese are the also the areas of major threats and challenges for

the Indian economy in the era of the Indian economy in the era of globalisationglobalisation –– social sectors social sectors the soft target for fiscal compressionthe soft target for fiscal compression

Supporting ConditionsSupporting Conditions�� Growth performance and prospectsGrowth performance and prospects�� InvestmentInvestment

–– Investment Rates, ICOR, Public Investment Rates, ICOR, Public vsvs PrivatePrivate–– FDIFDI

�� InfrastructureInfrastructure–– Role of State: Provider to RegulatorRole of State: Provider to Regulator–– Telecom success, Other sectorsTelecom success, Other sectors

�� InstitutionsInstitutions–– Democracy, legal, administrative, regulatoryDemocracy, legal, administrative, regulatory

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Threats and Challenges for India Threats and Challenges for India

�� 3 Key areas: Health Education and Poverty3 Key areas: Health Education and Poverty�� It is somewhat ironical that while the primary It is somewhat ironical that while the primary

threats of globalization in India are directed threats of globalization in India are directed towards the underprivileged masses of its towards the underprivileged masses of its enormous population, it is this same pool of enormous population, it is this same pool of human resources, if properly nurtured, will prove human resources, if properly nurtured, will prove to be her greatest strength and source of to be her greatest strength and source of opportunity to embrace globalization positively and opportunity to embrace globalization positively and productively to become a global economic powerproductively to become a global economic power

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ChallengesChallenges�� HealthHealth

–– Significant achievement but a long way to goSignificant achievement but a long way to go–– Market versus StateMarket versus State–– TRIPS: New Drug Discovery, Drug prices, QualityTRIPS: New Drug Discovery, Drug prices, Quality

�� EducationEducation–– Exclusive (not inclusive)Exclusive (not inclusive)–– Market versus stateMarket versus state

�� PovertyPoverty–– Growth without poverty reductionGrowth without poverty reduction–– Jobless growth, skill divide and inequalities,Jobless growth, skill divide and inequalities,–– Market determined credit allocationMarket determined credit allocation–– Targeted approach to poverty reductionTargeted approach to poverty reduction

Concluding RemarksConcluding Remarks

�� Gradualism: Not a big bang approachGradualism: Not a big bang approach�� Well SequencedWell Sequenced�� The Unfinished agenda (three types of it in a The Unfinished agenda (three types of it in a

democratic set up)democratic set up)–– Lack of academic and political consensusLack of academic and political consensus–– Strong power lobbiesStrong power lobbies–– Lack of motivationLack of motivation

�� Reforms with a human face?Reforms with a human face?–– Reforms that focus only on the high end creamy layer of Reforms that focus only on the high end creamy layer of

human capital is bad economics and bad politicshuman capital is bad economics and bad politics

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Engaging the World · A most striking feature of this new global order ... telecommunication, defense and insurance – FII – External Commercial Borrowings C I T D ... – Expenditure