India’s Economic Prospects

Prof. Gulshan Sachdeva

J Nehru U Delhi & ICCR Chair at CGG, KU

What’s on our plate?

• Introduction by Piet Sercu, FEB @ KU Leuveno Reforms since early nineties have falteredo Huge needs, e.g.

• Infrastucture (traffic, power, courts, etc)• Administration• Labour markets

o New opportunities: • BJP has a clear majority, • PM has a promising track record

• Main Talk by Gulshan Sachdeva, J Nehru U & ICCR Chair

Economic Prospects of IndiaBy

Prof Dr Gulshan SachdevaICCR India Chair, KU Leuven

Chairperson, Centre for European StudiesSchool of International Studies,

Jawaharlal Nehru University, New Delhi

27 October 2014

29 States, 7 Union Territories

1.25 billion population (2013)Equal to = EU + USA + Brazil + Japan + Russia

16 Indian States with a population of minimum 25 million ( 2011 census)Another 20 states/UT range between 0.6 million to 16 million

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India: Physical

Land borders, coastline TOTAL LAND BORDER: 14,103 km 1. Bangladesh 4,053 km2. Bhutan 605 km3. Myanmar 1,463 km 4. China 3,380 km 5. Nepal 1,690 km6. Pakistan 2,912 km COASTLINE 7516 km

Climatic map

Truly Multi Cultural Society

• Multi Ethnic- All the five major racial types - Australoid, Mongoloid, Europoid, Caucasian, Negroid found in India

• Multi Religious- Hindus 80.5 %, Muslims 13.4% Christians ,2.3%, Sikhs,1.9%, Buddhists 0.8%, Jains 0.4%, others 0.7% (2001 census)

• Multi Lingual - 22 languages have been recognized by the Constitution of India, of which Hindi ( and English) are the official national language + hundreds of languages and dialects.

• Its diversity makes it unsuitable for any other form of government but DEMOCRACY

Political System

• Democratic

• Federal – demarcation of roles and responsibilities

• Secular

• Republic

• Union Government ( President- Prime Minister heads Council of Ministers)- Supreme Court

Bicameral- Lok Sabha ( lower House), Rajya Sabha ( Upper House)

• State Government- (Governor- Chief Minister- High Court)

Grassroots Democracy

• 73rd and 74th amendment of constition “

• Panchayati Raj”

• 600,000 villages

• About 240,000 village panchayats

• 6000 blocks, 500 districts

• Towns/ municipalities ( 8000 towns)

• 2.8 million elected representatives (1/3 women)

From Indian National Congress-Coalition governments- BJP

2014 Lok Sabha ( lower House) election results

272 seats needed to form government

National Democratic Alliance

336 / 543

282 18 16 6 4 3 2 1 1 1 1 1

BJP SS TDP LJP SAD RLSP AD PMK SWP AINRC NPP NPF

Non-Allied

147 / 543

37 34 20 11 2 3 4 3 2 2 5 1 1 9 3 1 9

AIADMK AITC BJD TRS INLD AIUDF AAP J&KPDP JD(S) JD(U) SP SDF AIMIM YSRCP Ind CPI CPI(M)

United Progressive Alliance

60 / 543

1 1 2 2 4 6 44

RSP KC(M) JMM IUML RJD NCP INC

• India is making a successful transition from an excessively inward-oriented economy to a more globally integrated economy.

• As a result of new policies, it has become one of the fastest growing economies of the world

• Despite serious challenges ( global slowdown, energy security, infrastructure, poverty, regional disparities, internal security) indications are that high growth may continue

Background

• After independence, the critique of colonialism formed the basis for the policy of “self reliance’ in India

• The policy emphasized a state directed, inward-oriented, import substituting industrialization as an appropriate strategy for India

• Some reforms started in the 1980s• Reforms triggered by macroeconomic crisis in

1991

Nature of Indian reforms

• Coincided with economic transformation in the former Soviet bloc from a Centrally Planned Economy to Market Economy

• In Transition economies- Stab, Lib, Priv

• In India- Removal of License/ Permit Raj ( removing restrictions from the private sector/ opening to outside world

Economic Reforms since 1991• External Sector Reforms Exchange rate, Tariffs, FDI, portfolio inv

• Internal Sector Reforms Industrial reforms removal of licensing regime, controls deregulation of product prices reduction in protection to SME disinvestment ( privatisation) labour reforms

Economic Reforms• Fiscal reforms tax structure, fiscal prudence• Banking sector reforms• Infrastructural reforms roads ports, telecom, airports, power, SEZs Agriculture

Sector Breakdown, percentage

1960 1970 1980 1990 2012

Agriculture 53 47 40 33 14.1

Industry 18 21 23 26 27.5

Services 29 33 37 41 58.4

Sectoral contribution 1950-2013

Sectoral Growth Rates

1960s 1970s 1980s 1990s 2000-2005

Agriculture 2.3% 1.0% 4.3% 3.0% 1.9%

Industry 6.5% 3.5% 6.7% 5.7% 6.9%

Services 4.9% 4.4% 6.6% 7.6% 8.0%

Sectoral growth in the last few years

2008 2009 2010 2011 2012 Agriculture 0.1 0.8 7.9 3.6 1.8

Industry 4.4 9.2 9.2 3.5 3.1

Services 10.0 10.5 9.8 8.2 6.6

GDP 6.7 8.6 9.3 6.2 5.0

Growth Performance in Five Year PlansEleventh Plan ( 2007-12) Average Growth 7.9% ( Target 9%)Average 7.8% in the last ten years ending 2012

12 FYP ( 2012-17)

• The focus is on creating human, physical and institutional capabilities to achieve targeted 8.2 per cent growth in the next five years.

• Although rapid growth in the last ten years has raised expectations, domestic and global circumstances are less favourable today.

• Still, the overall aim is to bring 9 per cent growth back by the end of 12th plan.

• As a result of these changes, India is adapting itself simultaneously to the economic globalization and to the emerging balance of power.

• Changes in India’s internal and external economic policies also coincided with the end of the Cold War.

Foreign Trade

\Year 2008-2009

2009-2010

2010-2011

2011-2012

2012-2013

EXPORTS 185,295 178,751 251,136 305,963 300,400 %Growth -3.53 40.49 21.83 -1.82

IMPORTS 303,696 288,372 369,769 489,319 490,736 %Growth -5.05 28.23 32.33 0.29

TOTAL TRADE 488,991 467,124 620,905 795,283 791,137 %Growth -4.47 32.92 28.08 -0.52

TRADE BALANCE -118,400 -109,621 -118,632 -183,355 -190,335

Services Trade(figures in brackets are software exports)

Year Exports (USD bn)

Imports (USD bn)

Total (USD bn)

2002-03 20.8 17.1 37.9 2003-04

26.9 16.7 43.6

2004-05

43.2 27.8 71.0

2005-06

57.7 (46.3)

34.7 92.1

2006-07

73.8 (49.7)

44.3 118.1

2007-08 90.1 (55.5)

52.5 142.6

2011-12 142.3 (62.2)

78.2 220.5

2012-13 145.7 (65.9)

80.8 226.5

Top Ten Trading Countries, 2013-14

Rank Country Export Import Total Trade Trade

Balance 1. CHINA P RP 14,824.36 51,034.62 65,858.98 -36,210.26

2. U S A 39,142.10 22,505.08 61,647.19 16,637.02

3. U ARAB EMTS 30,520.42 29,019.82 59,540.24 1,500.60

4. SAUDI ARAB 12,218.95 36,403.65 48,622.60 -24,184.69

5. SWITZERLAND 1,796.95 19,311.01 21,107.96 -17,514.06 6. GERMANY 7,515.81 12,932.41 20,448.22 -5,416.59 7. HONG KONG 12,731.74 7,322.20 20,053.93 5,409.54 8. INDONESIA 4,850.20 14,748.30 19,598.50 -9,898.09 9. IRAQ 918.03 18,520.86 19,438.89 -17,602.83 10. SINGAPORE 12,510.54 6,762.49 19,273.03 5,748.05

Top 20 Trading Countries, 2013-14

Rank Country Export Import Total Trade Trade

Balance 1. CHINA P RP 14,824.36 51,034.62 65,858.98 -36,210.26 2. U S A 39,142.10 22,505.08 61,647.19 16,637.02 3. U ARAB EMTS 30,520.42 29,019.82 59,540.24 1,500.60 4. SAUDI ARAB 12,218.95 36,403.65 48,622.60 -24,184.69 5. SWITZERLAND 1,796.95 19,311.01 21,107.96 -17,514.06 6. GERMANY 7,515.81 12,932.41 20,448.22 -5,416.59 7. HONG KONG 12,731.74 7,322.20 20,053.93 5,409.54 8. INDONESIA 4,850.20 14,748.30 19,598.50 -9,898.09 9. IRAQ 918.03 18,520.86 19,438.89 -17,602.83 10. SINGAPORE 12,510.54 6,762.49 19,273.03 5,748.05 11. KUWAIT 1,061.14 17,153.55 18,214.69 -16,092.41 12. BELGIUM 6,377.32 10,752.04 17,129.35 -4,374.72 13. NIGERIA 2,667.75 14,097.84 16,765.59 -11,430.10 14. KOREA RP 4,208.69 12,470.60 16,679.28 -8,261.91 15. QATAR 969.06 15,707.99 16,677.04 -14,738.93 16. JAPAN 6,814.07 9,480.75 16,294.82 -2,666.68 17. U K 9,779.07 6,045.10 15,824.17 3,733.98 18. UNSPECIFIED 11,544.49 4,097.07 15,641.57 7,447.42 19. IRAN 4,971.35 10,307.16 15,278.51 -5,335.81 20. VENEZUELA 196.96 13,940.13 14,137.09 -13,743.17

Export Diversification(Share of India’s Exports)

FDI- $340 billion(between 2000 and August 2014)

Foreign Exchange Reserves

Year (USD bn) 2002-03 76 2003-04

113

2004-05

141

2005-06

151

2006-07

199

2007-08 309 2010-11 304 2012-13 295

• The strategic consequences of Indian economic performance in the last two decades are clearly evident.

• Growth and outward orientation has helped India to forge new relationships with its neigbours in Asia and with major powers

• India has also moved towards regional integration (SAFTA, India- ASEAN; India-Japan, Singapore; AUS, NZ, bilateral deals, negotiations are on with many partners)

India and Regionalism

• Compared to its earlier faith in global trade deals, India has also taken an aggressive approach towards regionalism.

• The collapse of Doha development round of WTO negotiations pushed many countries including India to look for alternatives to multilateral negotiations to improve their trade positions.

• Since 2005 India has put its proposed regional trade agreements on fast track.

Indian Exports Region wise

• In the past, India had adopted a cautious approach to regionalism, and was engaged in only a few bilateral/regional initiatives, mainly through Preferential Trade Agreements (PTAs) or through open regionalism.

• In recent years, it has started concluding Comprehensive Economic Cooperation Agreements (CECAs) with many countries.

• The CECAs cover Free Trade Agreements (with limited negative lists) in goods, services, investment and other identified areas of economic cooperation.

• Some important signed agreements include South Asian Free Trade Area (SAFTA), and agreements with ASEAN, Japan, Singapore, Afghanistan, Singapore, Bhutan, Sri Lanka, Nepal, MERCOSUR etc. Serious negotiations are on with the EU, GCC, IBSA, South Korea, Australia, Malaysia etc

SAARC

• SAFTA

• Recent Focus: , connectivity, trade, economic cooperation, agriculture, social development, environment and security

• India continues to drive major projects within SAARC such as South Asian University, SAARC Development Fund, SAARC Food Bank

India-ASEAN

• One significant aspect of this phase of economic growth is India’s increasing economic cooperation with Southeast Asia through regional, sub-regional and bilateral engagements.

• After years of difficult negotiations, India finally signed a free trade agreement with ASEAN in 2009.

• BIMSTEC

• Mekong-Ganga Cooperation initiative

• Bilateral trade agreements with Thailand (2003) Singapore (2005),Malaysia (2011).

India ASEAN Connectivity

• India’s economic exposure to ASEAN is still limited. One of the major reasons for this is physical connectivity with the region.

• Although FTAs in trade, services and investment is central to India’s strategy, it is realized that infrastructure challenges could hamper growth in linkages.

• Emerging nodes of India-ASEAN connectivity- Myanmar and Northeast India -are both weak in infrastructure.

• At the same time, this is also an area which has difficult landscapes and infested with insurgencies.

• The new opening in Myanmar will definitely help building connectivity further.

• Economic development strategies within Myanmar as well as Indian Northeast could have significant impact on India-ASEAN connectivity

58

India –EU Broad based Trade & Investment Agreement ( negotiations since 2007)

• Trade in Goods: • Trade in Services:.• Investment: • Public Procurement: • Technical Regulations: cooperation on technical

barriers to trade (TBT) and sanitary and phyto-sanitary measures (SPS).

• Intellectual Property • Competition Policy: • Dispute settlement

BRICS

• Major issues covered in recent meetings• reform of global political and economic governance,

• global economic situation,

• the contemporary political situation (including developments in West Asia),

• WTO and the international trading regime,

• reform of international institutions of global governance,

• sustainable development, terrorism,

• food and energy security and consolidation of intra-BRICS cooperation

• Setting up of BRICS Development Bank

• India-China-Russia/ India Brazil South Africa (IBSA)

Eurasian Region

• Traditionally very close economic and political relations with the Soviet bloc

• After disintegration trade and economic linkages with Russia and other CIS countries has declined considerably

• India is looking for closer linkages with the emerging Eurasian economic Union ( Rus, Belarus, Kaz)

• Membership in SCO

GCC

• India has a vital stake in the stability, security and economic well-being of the Gulf ( trade, energy, remittances, 6 millions Indian workers in the region, $ 145 billion trade in 2011-12)

• In 2004, India and GCC signed framework agreement for the enhancement of trade and other economic linkages

• Working towards India-GCC FTA

Indian Strategy for Linking South & Central Asia

• Provided $ 2 billion assistance to Afghanistan• Active Participant in the RECCA process• Supported The New Silk Road Strategy• Hosted Delhi Investment Conference on AFG

( June 2012)• In the Istanbul process, India leads in two CBMs

viz. Commercial Opportunities CBM and Chambers of Commerce CBM.

• Announced 12 points Connect Central Asia Policy ( 2012)

Challenges

Energy Security

• The era of high economic growth in the western world between 1945 and the first oil crisis of 1973, coincided with a period of cheap oil prices.

• Recent years of high economic growth in countries like India and China have coincided with periods of increased oil price uncertainty.

• India’s oil requirements for its 8-9 per cent growth every year since 2003 have been financed at increasing global oil prices.

Import dependence

• India imports 76% of its oil, 23% of its gas and 20% of its coal.

• Its energy imports last year exceeded $130 billion or 26% of its import bill of $ 490 billion.

• By the end of the 12th Plan(2017) India's energy imports could be $150-$160 billion.

Indian Energy Security

• Despite fairly low per capita consumption, India is the fourth largest consumer of energy in the world after USA, China and Russia

• It is believed that India’s energy security can be increased by diversifying both energy mix and sources of energy imports;

( 2/3 oil comes from Middle-East/ Coal is likely to continue as a major source)

seriously perusing overseas acquisitions of energy assets; and

initiating domestic policy reforms to attract foreign investment as well as improving domestic production, distribution and consumption.

.

• Coal remains the dominant source of primary energy.

• Domestic production of coal and lignite account for two-third of total production of commercial energy in 2000–01 and is projected to be about the same in 2021–22.

• The combined share of oil and natural gas in energy consumption was about 25% in 2011–12 and is expected to be about the same in 2021–22.

Import dependence will increase

• Even though domestic production of energy resources is projected to increase, import dependence will continue at a high level.

• The main area of import will be crude oil, where nearly 78 per cent of the demand will have to be met from imports by 2017

• Import dependence for coal is also estimated to increase from 19% in 2011–12 to 22.4 per cent in 2017 and 26 % 2022.

Energy Diplomacy

• In the last few years, energy diplomacy has also become one of the main agendas of country’s foreign and security policy.

• India is seriously perusing nuclear energy option as well as import sources beyond the Middle-East.

• Indo-US nuclear agreement as well as consistent engagements with the countries of Eurasia, Africa and Latin America could be seen from this perspective

• Overall, at this stage of economic modernization, India is vulnerable due to insufficient energy resources.

•Regional Disparities

Average 11th Plan 7.9%Average 10th Plan 7.7%

Infrastructure:

Telephone subscribers

Poverty

Internal Security Challenges

South Asian conflicts

•Drivers of Growth

Demographic dividend

• Half of India’s 1.2-billion population is under the age of 25.

• By 2020, India will have the world’s youngest population, with a median age of 29 years, compared with a median age of 37 in China.

• This demographic dividend could potentially give India the biggest labor force and make it the largest consumer market in the world.

Demographic divident

Growing middle class( already 250 million strong)

Strong IT Sector

Focus on Infrastructure100 smart cities/ high speed rail network($1 trillion investment in next 5 years)

A New National Programme

BRICS ( Goldman Sachs)

India’s Soft Power

• From Buddha to Bollywood to BPO

• Democracy

• Films/Music ( 1602 films made in 2012)

• Development Cooperation

• Education

• Trade/Commerce