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Indian Economy: An overview
Arti NanavatiProf. of Economics
Director, Centre for Canadian Studies Maharaja Sayajirao University of Baroda
Vadodara - 390002 Gujarat - INDIA
Dept.of Economics, Simon Fraser University Burnaby-BC, Canada.
July 9, 2008
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Some General Facts
• India is the world’s second most populous country of over 1 billion people.
• Urban population 28% of total. (China 39%)
• More than half of its population is 25 years of age. ‘Demographic dividend’.
• Measured in USD exchange rate terms, 12th largest in the world, with a GDP of $1 trillion (2008)
• PCI $4542 at PPP and $1089 in nominal terms (2007)
• National savings (24% of GDP) almost half that of China’s 45% .
• World Bank classifies India as a low income economy
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• Labour force participation rate 71% in 2003. (China 87%)
• Rural workers constitute about 60% of the workforce.
• Urban informal sector – the growing sector – represents the residual.
• Unemployment rate is 7.3%.
• Organized sector employs 7% of workforce (two thirds of which are in public sector), and produces 40% of GDP. Rest in informal sector --with predominance of ‘women.’
• Despite a decline, poverty is a serious problem. 27% of Indians are poor.(2004-5).
• 70% of Indians(800million), lived on less than 20 rupees( slightly less than C50 cents) per day with most working in informal sector with no social security. (2007 Report on National Commission for Enterprises in the unorganized sector)
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Why India?
• GDP growth rate 9% ( 2007-2008)
• Services are a growing sector and play an important role in Indian economy. India is an imp. ‘back office’ destination for global outsourcing of customer services and technical support.
• Major exporter of highly skilled workers in financial, software, software eng.
• Potentials are in , manufacturing, pharmaceuticals, biotechnology, nanotechnology, telecommunication, shipbuilding, aviation, tourism and retailing.
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Composition of India’s GDP (at Factor Cost by Economic Activity –
at 1999-2000 prices, in%)
1999-0 2000-01 2007-08 (RE)
1)Agriculture etc 24.99 23.89 17.75 2)Industry 25.31 25.80 26.63 2.1 Manufacturing 14.78 15.30 15.36 2.2 Construction 05.71 05.81 07.263) Services 49.69 50.30 55.62 3.1 Trade, hotel, Restaurants 14.22 14.34 27.55* 3.2 Transport, storage $ communica. 07.46 07.96 3.2 Finance, insurance, etc 13.07 13.04 14.68 3.3 Community, social and per. 14.92 14.98 13.39 service * Inclusive of 3.2. Source : EPW 14TH June , 2008Source: EPW June 14, 2008
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India-China Comparative Scenario
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India- Structural Transformation-?
• Economic policy: Approach
i) Since independence (1947) – till almost late eighties followed a socialist inspired approach- strict govt. control over -private sector participation, foreign trade and FDI (Approach-import substituting rather than export promoting) .
ii) India’s low average growth rate ( 3%) from 1947-80 was referred as ‘Hindu rate of growth’, because of the unfavorable comparison with the other Asia countries, especially the ‘East Asian Tigers’.
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• A period of import tariff, export taxes, quantitative restrictions , approvals needed for 60% of new FDI in the industrial sector.
• FDI averaged only $200M between 1985-1991. • In 2004, net FDI inflow was about 7-8 USD bn. ( China,
52 USD bn) • A large percentage of the capital flows consisted of
foreign aid, commercial borrowing and deposits of non resident Indians.
• Largely and intentionally isolated from world markets.
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• Late eighties: the govt. led by Rajiv Gandhi eased restrictions on capacity expansion for incumbents, removed price control and reduced corporate taxes.
• Phase of high growth with high fiscal deficit and worsening current account
• Collapse of soviet union – a major trading partner, first Gulf war causing spike in oil prices led to major balance of payment crisis with the prospects of defaulting on its loan.
• Prime Minister Narasimha Rao with Finance Minister Manmohan Singh initiated the economic liberalization of 1991.
• Reforms did away with license Raj in investment, industrial and import licensing-ended many public monopolies, introduced automatic approvals of FDI in many sectors.
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Agriculture
• India ranks second world wide in farm output.• In 2007, accounted for 16.6% in GDP employing 60% of
the total workforce.• After having growth rate of 2% for many years- now the
growth rate is about 4.5%.• Two thirds of India’s workforce still earn their livelihood
directly or indirectly through agriculture.• High level of disguised unemployment.• Despite improvements, average yield in India ranges
from 30-50% of the highest average yield in the world.
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Industry
• India ranks 14th in the world in factory output.• Industry accounts for 27.6% of the GDP and
employs 17% of the work force.• Manufacturing growth rate 8.4%.• One third of industrial labour force is engaged in
simple household manufacturing only.• Economic reforms led to more private sector
participation, an expansion in the production of consumer goods and both domestic and foreign competition.
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Services
• India is fifteenth in services output.• The growth rate which was 4.5% in 1951-80 increased to
7.5% in 1991-2000. Recent growth rate 10.7%.• Its share in GDP was 15% in 1950 which is now about
55.6%.• Fastest growing services are –business services,
information technology enabled services, business process outsourcing contributing about one third of total output of services in 2000.
• India’s IT industry an important contributor to BOP, accounts for only about 1% of total GDP and 1/50th of the total services
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Foreign Trade & FDI
• Almost stagnant export for the first 15 years after independence. Dominated by products like tea, jute and cotton manufacturers having generally inelastic demand.
• Imports mainly were machinery, equipment and raw material.
• Since liberalization ex-im have become much broad based.
• India’s exports are consistently rising, covering about 80% of its imports.
• Merchandise trade of India about 28% of GDP. in 2004 (China 70%.)
• Exports of goods as % of GDP of India 12%. (China 36%). (2004)
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• Though net importer, since 1996-7, overall BOP has been positive largely on account of increased FDI and deposits from NRIs.
• Its major trading partners are the U.S.A., UK, China, Germany, Japan and UAE.
• India’s major exports are textile goods, gems and jewellery, engineering goods, chemicals and leather manufacturers.
• India’s major imports are crude oil, petroleum products, machinery, gems,
fertilizer and chemicals.
• The top five countries in FDI inflows (2000-2007) are Mauritius (44%),United States(9.4%), UK( 8%), Netherlands(6%)and Singapore(5%).
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Year Export Import Exim
1990-91 6.08 7.86 15.621993-94 8.12 8.52 15.631995-96 9.00 10.38 18.501996-97 8.72 10.20 18.621997-98 8.58 10.17 17.631998-99 7.93 10.12 19.901999-00 9.09 12.25 21.352000-01 10.70 12.13 22.512001-02 10.1 11.89 21.662002-03 11.3 13.18 24.492003-04 11.6 14.25 25.652004-05 12.7 17.25 29.97
Source: Calculated from Govt. of India, Economic Survey
Trade Openness: India (% of GDP)
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Situating India in World Merchandise Exports and Imports
Year Exports (% share)
World Canada India China N.America Asia
(b$)
1948 58 5.5 2.2 0.9 28.1 14.0
2006 11783 3.3 1.0 8.2 14.2 27.8
Imports(% share)
1948 62 4.4 2.3 0.6 18.5 13.9
2006 12113 3.0 1.4 6.5 21.0 25.0
Source: WTO, World Trade Statistics, 2007
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India-China Trade & FDI Partners
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Source: Source: Reserve Bank of India
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Source: CEIC Source: CEIC
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Percentage Share(2006) and growth rate (1996-2006) : Trade in Commercial Services of India and few selected countries and regions
Countries %Share Growth rate (%)
EX IM EX IM
World 100 100 7.2 7.4
North America 18.85 15.19 5.3 7.3
Canada 2.35 2.71 6.7 6.8
Asia 25.36 25.05 8.0 6.5
China 3.72 3.79 14.7 14.8
India 3.01 2.41 21.5 26.9
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Is development inclusive?
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Labour Market
Growing employment is accompanied by poor quality of labor with proportion of regular wage earner employees only about 15%.
Economic growth could be made more inclusive by achieving faster growth in regular employment, as opposed to casual and self-employment. Although regular employment has risen, its growth has been almost exclusively in the smaller, least productive enterprises.
About 87% of manufacturing employment taking place in micro enterprises(<10 persons) producing just a third of manufacturing output.
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Employment in firms with more than ten employees accounts for only around 3.75 per cent of total employment (one quarter of regular employment) and has been falling. Indeed, India has a much smaller proportion of employment in enterprises with ten or more employees than any OECD country.
In non-agriculture sector growth in employment is in informal sector.
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Year Sex Ratio
Rural Urban Total
1901 979 910 972
1911 975 872 964
1921 970 846 955
1931 966 838 950
1941 965 831 945
1951 965 860 946
1961 963 845 941
1971 949 858 930
1981 951 879 934
1991 938 894 927
2001 946 901 933
Sex Ratio in Population with Rural-Urban break up
Source : Office of the Registrar General, India
Sex Ratio 1901-91 (Total, Rural and Urban) from Brief Analysis of PCA paper-2 of 1992
1961 Population from PCA 19611971 Population from Social and
Cultural Tables1981 figures from Series Part-II A(I),
General Population Tables – Census of India 1981.
Figures of 1991 (including interpolated data for JK-1991 based on 2001 census) and 2001 from PCA census of India -2001
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Trends in Gender Disparity in Literacy Rate
Year
Male
Female Male/FemaleLiteracy rate
disparity
Slightly more than half of total
women are literate.
Male-Female LR
disparity is ondecline.
1961
40.4
15.3
0.45
1971
39.5
18.4
0.38
1981 56.3 29.7 0.35
1991 63.8 39.4 0.28
2001 75.8 54.1 0.21
Source: Census of India various years
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Labor Force Participation Rate by Age: 2000-2004
Age
Male Female Rural femaleL/F participationrate higher to theirurban counterpartmainly due toAgriculture.
15-29
Rural
75.10 30.9
Urban 67.30 17.930-44
Rural
98.7 46.6
Urban 98.4 26.6Source : NSSO, 61ST Round
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Industry divisionRural Male
Rural Female
Urban Male
UrbanFemale
All
Agriculture and allied activities 66.5 83.2 6.1 18.1 56.4Mining & Quarrying 0.6 0.3 0.9 0.2 0.6Manufacturing 7.9 8.4 23.5 28.2 12.2Electricity,gas and water supply 0.2 0.0 0.8 0.2 0.3Construction 6.8 1.5 9.2 3.8 5.7Trade , hotels and restaurants 8.3 2.5 28.0 12.2 9.9Transport, Storage & communication 3.8 0.2 10.7 1.4 4.1Finance, insurance, real estate and business services 0.7 0.1 5.9 3.2 1.7Social, community and personal services 5.2 3.8 14.9 32.7 9.1
Industrial Distribution of Workforce by Gender: 2004-2005
Source: National Sample Survey Organization : 61st Round (July 2004 – June 2005)
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Year % of women in Public sector
% of women in Private sector
% of women in Total
1995 13.4 20.2 15.4
2000 14.8 23.9 17.6
2001 14.9 24.2 17.8
2002 15.4 24.3 18.1
2003 15.6 24.5 18.4
2004 15.9 24.8 18.7
Share of women employment out of total employment in organized sector in India
Source : Quarterly Employment Review, Directorate General of Employment & Training, Ministry of Labor
(Figures in thousand)
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RURAL
15-29 30-44 45-59 60 & above Total
Female
Male Female
Male Female
Male Female
Male F’male Male
July 1999 – June 2000
3.7 5.1 0.4 0.6 0.2 0.1 0.0 0.2 1.5 2.1
July 2004 – June 2005
7.0 5.2 1.8 0.6 0.5 0.3 0.5 0.2 3.1 2.1
URBAN
July 1999 – June 2000
16.6 11.5 2.8 1.4 0.5 0.4 0.0 0.0 7.1 4.8
July 2004 – June 2005
19.9 10.0 5.1 1.2 0.8 1.0 0.0 0.3 9.1 4.4
Source : National Sample Survey Organization: 55th and 61st rounds
Unemployment rate by Age and Sector for India
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• women wage lower than men by 33-40 points. Women-men wage differential is 0.75:1.
• The gender based wage differential though has narrowed down with increase in education level. It is still high.
• Urban wage differential persists but narrower than in rural area.
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The Working Poor by Gender and Activity Status: 1999-2005 (in%)
Pop. Seg.
1999-2000 2004-05
S.E RWS CL Total S.E RWS
CL Total
Male 43 8 49 66,441 47 8 45 66,943
20.1 11 37.7 24 18.7 9.7 35.3 21.6Female 43 3.5 53 36,721 51 5 44 37,544
23.5 13.6 42.2 29.7 21.1 14.2 37 25.3Total 43 6.5 50 103162 48 7 45 104487
21.2 11.4 39.3 25.7 19.6 10.5 35.9 22.8Figures in italics are proportion of workers in that population segment and activity status.Source: EPW, 28 July 2007
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HUMAN DEVELOPMENT INDICATORS
( India’s position among 177 countries)
Particulars Rank ValueHDI 128 0.62
Life expectancy at birth( yrs) 125 63.9
Adult literacy rate (%) 114 61.0
Combined(pri—ter)enrolment 122 63.8ratio
GDI as % of HDI 138 97.0
Adult F.literacy rate 134 65.2
Combined(pri-ter) enrolment 159 87.7Ratio( F. as % of male)Source: Human Development Report-2007
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India-China Human Development Scenario-2003
Particulars India China
i) LF participation rate (%) 71 87ii) Female LFP rate 45 79 iii)Average Life Expectancy (years) 63 71iv)Infant mortality (per 1000 live births) 63 30v)Adult Literacy (%ages 15 and above) 68 95vi)Tertiary enrolment rate(%) 11 13vii)Mobile phones per’000 people 25 215viii)PC per’000 people 07 28viii) Internet uses per’000 people 17 63ix) Gini Coefficient 33
44.7 Source: World Development Indicators- 2004, 2005
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GLOBAL COMPETITIVENESS RANKING 2007-8: India and China(Rank out of 131 countries)
Pillars Components India ChinaGCI Global Competitiveness Index 48 34 Basic requirements 74 441 Institutions 46 772 Infrastructure 67 52 3 Macroeconomic stability 108 07 4 Health and primary education 101 61 Efficiency Enhancer 31 45 5 Higher education and training 55 786 Goods market efficiency 36 587 Labour market efficiency 96 55 8 Financial market sophistication 37 118 9 Technological readiness 62 7310 Market Size 3 2 Innovation and Sophistication factors 26 50 11 Business sophistication 26 5712 Innovation 28 38
Source: Global Competitiveness Report 2007
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Major Areas of Reforms Needed
• Labour market: Stringent labour laws should be relaxed• Business environment: Lowering the barriers to entrepreneurship Ending reservation of products fro SSI Need for Bankruptcy law Dispersion of tariff rates Easing of Service sector FDI restrictions More privatization of public sector enterprises.• Financial sector: More liberalization Privatization of public sector banks• Infrastructure : Electricity reforms to be speeded up transport: More private sector involvement• Public Finances: Better targeting of subsidies, GST • Education: Higher public expenditure on primary and education, Addressing financing of higher edu.
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In Conclusion
• India and China – non comparable: India-- Democracy (messy)
Highly diverse social structure Reforms reactionary in nature- a late starter
Less integrated to Global market (including East Asia) Dissimilar trade pattern
Lagging behind in FDI and infrastructure
Weak link between economic development and social welfare at regional level compared to China.
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• Two divergent development Paths:
India Chinai) Increasingly building ground up Top down approach
ii) Service sector led growth Manufacturing sector and foreign tradeiii) Private sector led growth State led (early nineties) modernization (late 1970’s) iv) Consumption driven Investment driven.
iv) Knowledge based sector-labour Cheap- assembly line workers
vi) World’s back office Factory of the world
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• Yet--
India can learn from China in:
Social and Physical Infrastructure
Improving manufacturing sector’s productivity
India- A country with Potentials for ‘sustaining’ development!!
