Managing India to Managing India to take Dreams to take Dreams to RealityReality

S L RaoS L Rao

February 24 2010February 24 2010

OutlineOutline

1. India’s Potential-Slides 1-61. India’s Potential-Slides 1-6 2. Recent economic 2. Recent economic

developments-Slides 7-11developments-Slides 7-11 3. Risks to Growth- Slides 12-193. Risks to Growth- Slides 12-19 4. Issues in Making Dreams into 4. Issues in Making Dreams into

Reality-Slide 20Reality-Slide 20

India’s PotentialIndia’s Potential  

1. World’s Largest Pool of Trained 1. World’s Largest Pool of Trained Manpower:Manpower:

  200 million college graduates (~16%) 200 million college graduates (~16%)   500 million trained, skilled workforce (~40%)500 million trained, skilled workforce (~40%)   Universal LiteracyUniversal Literacy 2. World’s Leaders in Industry and Commerce2. World’s Leaders in Industry and Commerce   30 of Fortune 100 from India30 of Fortune 100 from India 3. India Accounts for 10 % of World Trade3. India Accounts for 10 % of World Trade   A broad scope of products and servicesA broad scope of products and services 4. India as a Source of Global Innovations4. India as a Source of Global Innovations   New Businesses, New Forms of Organization,New Businesses, New Forms of Organization,   New TechnologiesNew Technologies

India’s PotentialIndia’s Potential

5.  Source of Innovations for the 5.  Source of Innovations for the WorldWorld

Leaders in Health, Education, Energy, Leaders in Health, Education, Energy, Recycling, Transportation, Sustainable Recycling, Transportation, Sustainable Development for all)Development for all)

Markets-rural, small townMarkets-rural, small town 6. A Flowering of Art, Literature, Films and 6. A Flowering of Art, Literature, Films and

ScienceScience 10 Nobel Prize Winners from India10 Nobel Prize Winners from India 7. A New Moral Voice for People Around the 7. A New Moral Voice for People Around the

WorldWorld India as a country where Universality and India as a country where Universality and

Inclusiveness is widely practiced.  India Inclusiveness is widely practiced.  India becomes the most Benchmarked country for becomes the most Benchmarked country for its capacity to accept and benefit from its its capacity to accept and benefit from its diversitydiversity

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India’s PotentialIndia’s Potential– By 2010 medical tourism will earn $10 bnBy 2010 medical tourism will earn $10 bn – Rs 53982 crores raised by mutual funds in Rs 53982 crores raised by mutual funds in

January-November 2008; steep fall nowJanuary-November 2008; steep fall now – Rs 61000 crores 10 year National Maritime Rs 61000 crores 10 year National Maritime

Development Programme thru public private Development Programme thru public private partnership to boost major portspartnership to boost major ports

– New international airports in Bombay. Delhi, New international airports in Bombay. Delhi, Bangalore, Hyderabad; Slowed expansionBangalore, Hyderabad; Slowed expansion

– Road toll collections fall 6% Feb 08 to 09Road toll collections fall 6% Feb 08 to 09 – Rail container traffic fallsRail container traffic falls

Demographic DividendDemographic Dividend   2004-Population =1080 million of which 2004-Population =1080 million of which

– Age between 15 and 64 = 672 million Age between 15 and 64 = 672 million – Below 15 and over 64, non-working or dependent Below 15 and over 64, non-working or dependent

population=408 million population=408 million – Dependency ratio of 0.6; 2030-0.4 Dependency ratio of 0.6; 2030-0.4 – 2020 Average Age: India-29; China-37; Japan-48: 2020 Average Age: India-29; China-37; Japan-48:

youngest working age population in world youngest working age population in world – Less children=more women at work; more saving; Less children=more women at work; more saving;

greater growth greater growth over the next 15-20 years. By 2020, India over the next 15-20 years. By 2020, India

will have 270mn people (more than today’s will have 270mn people (more than today’s total US population) between the ages of 15 total US population) between the ages of 15 and 35. and 35. Savings rates and productive potential will Savings rates and productive potential will be at their highest.be at their highest.

HDI indicatorsHDI indicators  

Demographic DividedndDemographic Dividednd India’s Population(million): India’s Population(million): Above 60 = Above 60 = 65 (6.3%) (2001); 113 65 (6.3%) (2001); 113 (8.9%)(2016) (8.9%)(2016) Age 15-59 = 598 (2001); 811 (2016) Age 15-59 = 598 (2001); 811 (2016) Urbanization: Urbanization: 27.8% (2001); 50%? (2030) 27.8% (2001); 50%? (2030) Issues: Issues: Livelihoods, health, education, Livelihoods, health, education, housing, water, roads, sanitation, housing, water, roads, sanitation, social security, law and order social security, law and order

The Past Ten Years And The Past Ten Years And NowNow  

– GDP growth: From 1998-99-6.5, 6.1, 4.4, 5.8, 4.0, 8.5, 7.5, 9.5, 9.7, 9.0;   GDP growth: From 1998-99-6.5, 6.1, 4.4, 5.8, 4.0, 8.5, 7.5, 9.5, 9.7, 9.0;   2008-09 - 6.7%;  2009-10 ; 7.2% ?; 2010-8%? 2008-09 - 6.7%;  2009-10 ; 7.2% ?; 2010-8%?

– Industrial production negative growth Dec 08, Jan 09.and now growing Industrial production negative growth Dec 08, Jan 09.and now growing – High and Rising Savings rate High and Rising Savings rate – Rise in Capital formation Esp. Private Sector Rise in Capital formation Esp. Private Sector – Deepening Export Deepening Export – Inflation at single digit for a decade; 7.5% 2008-09, 4.2 in Dec 2005; Inflation at single digit for a decade; 7.5% 2008-09, 4.2 in Dec 2005;

despite fuel, power, light & lubricants at 7.5; Declining from 2004-05; in despite fuel, power, light & lubricants at 7.5; Declining from 2004-05; in 2008 negative and Nov 2009; -0.9%; now rising; 2008 negative and Nov 2009; -0.9%; now rising;

– Export growth  trends; 01-02 onwards: 2.7, 22.1, 15.0, 27.9, 21.6 , 25.3, Export growth  trends; 01-02 onwards: 2.7, 22.1, 15.0, 27.9, 21.6 , 25.3, 14.7 & in 2008-09 - 16.9 and now + 15% 14.7 & in 2008-09 - 16.9 and now + 15%

– Rapid growth of I.T. and B.P.O. Exports of software services increased Rapid growth of I.T. and B.P.O. Exports of software services increased from 79.40 thousand crore in 2004-05 to 215.88 Thousand crore in 2008-from 79.40 thousand crore in 2004-05 to 215.88 Thousand crore in 2008-09 09

– Resilience: Survived face-off with USA and sanctions after nuclear Resilience: Survived face-off with USA and sanctions after nuclear explosions explosions

Signs of ImprovementSigns of Improvement

Modest signs of Growth in global Modest signs of Growth in global economyeconomy

Developed Economies in Jan 2009 Developed Economies in Jan 2009 grew at 0.5% and Oct 2010 at 3.1grew at 0.5% and Oct 2010 at 3.1

Emerging and Developing Emerging and Developing Economies grew from 3.3. to 5.1% Economies grew from 3.3. to 5.1%

India from 5.1 to 6.4 %India from 5.1 to 6.4 %

India-Recent economic India-Recent economic developments developments

Growth: Sectoral Contributions Reverting Growth: Sectoral Contributions Reverting to “Normal” (Q1- 07-08 Industry and to “Normal” (Q1- 07-08 Industry and Agriculture wwere 29% of GDP, fell in Q3 Agriculture wwere 29% of GDP, fell in Q3 of 98-09 to < 2%, now at 29%)of 98-09 to < 2%, now at 29%)

Growth: Govt. Expenditure dominates (8 Growth: Govt. Expenditure dominates (8 to 25 % in 15 mths), but slight pickup in to 25 % in 15 mths), but slight pickup in private spending ((10 to 5 now 7%)private spending ((10 to 5 now 7%)

Industrial Production: Driven by Durables; Industrial Production: Driven by Durables; growth only in somegrowth only in some

Inflation: Food-driven but signs of spreadInflation: Food-driven but signs of spread Credit Growth: Recovering, but slowlyCredit Growth: Recovering, but slowly Liquidity: Comfortable, at an aggregate Liquidity: Comfortable, at an aggregate

level and interest rates stickylevel and interest rates sticky

Drivers of Recovery: Drivers of Recovery: Fiscal PolicyFiscal Policy

%to GDP%to GDP Item 2008-09 2009-10Item 2008-09 2009-10 Tax reductions 0.2 0.4Tax reductions 0.2 0.4 Investment 0.8 0.1Investment 0.8 0.1 Pay Commission Impact 0.5 0.3Pay Commission Impact 0.5 0.3 Other Expenditure 0.9 1.0Other Expenditure 0.9 1.0 Total 2.4 1.8Total 2.4 1.8 Debt waiver 0.3 -Debt waiver 0.3 -

Drivers for 2010Drivers for 2010

Global economy showing signs of modestGlobal economy showing signs of modest recovery in 2010recovery in 2010 Domestic recovery appears to be gainingDomestic recovery appears to be gaining momentummomentum Contribution of manufacturing sector increasingContribution of manufacturing sector increasing Govt. borrowing requirements not likely toGovt. borrowing requirements not likely toexceed estimatesexceed estimates Ample liquidity in the system despite 2nd Ample liquidity in the system despite 2nd

quarterquarter surge in growthsurge in growth Current account deficit likely to remainCurrent account deficit likely to remain moderatemoderate

RisksRisks

Growth pattern is skewedGrowth pattern is skewed Recovery still driven by a few sectorsRecovery still driven by a few sectors Public spending contributing significantlyPublic spending contributing significantly Food inflation racing aheadFood inflation racing ahead As capacity constraints emerge, dangers of As capacity constraints emerge, dangers of

anan expectations-induced spiralexpectations-induced spiral High interest rates – restraining credit flows?High interest rates – restraining credit flows? Potential surge in capital inflowsPotential surge in capital inflows Global liquidity and domestic recoveryGlobal liquidity and domestic recovery

Weak part is Weak part is Agriculture-1Agriculture-1 Supports 60% of population Supports 60% of population

– Agriculture was 32% of GDP in 92-93; 17% in 2008-Agriculture was 32% of GDP in 92-93; 17% in 2008-09 (AE) 09 (AE)

– Agriculture growth or decline has direct effect on Agriculture growth or decline has direct effect on GDP; 97 GDP + 7.8% Agriculture +8.8; 04- 8.5 & A-GDP; 97 GDP + 7.8% Agriculture +8.8; 04- 8.5 & A-9,3 9,3

– Erratic rice & wheat production: Erratic rice & wheat production: –         08  07  06  05  00  91   81  (mn t) 08  07  06  05  00  91   81  (mn t) – R  96  93  92  83  85  74  54 R  96  93  92  83  85  74  54 – W 78  76  69  69  70  55   36 W 78  76  69  69  70  55   36 – Land availability limited: Since 1980 crop area for Land availability limited: Since 1980 crop area for

food grains static at around 124mn hectares food grains static at around 124mn hectares – Total Investment falling in 1990s as % to GDP from Total Investment falling in 1990s as % to GDP from

1.92 in 90-91; 1.83 in 99-00; 2006-07- 2.3 %1.92 in 90-91; 1.83 in 99-00; 2006-07- 2.3 %

Weak AgricultureWeak Agriculture  

Fall is in public investment; private keeps rising; Fall is in public investment; private keeps rising; funds for public investment diverted to poorly funds for public investment diverted to poorly targeted subsidies(water, power, fertilizer) targeted subsidies(water, power, fertilizer) – Productivity levels are low: Yield @ 100kg/HA; India Productivity levels are low: Yield @ 100kg/HA; India

and China in 2006: paddy 31.24 & 62.65; wheat and China in 2006: paddy 31.24 & 62.65; wheat 26.19 & 44.55; cotton 6.0 & 33.3; g.nut 8.6 & 31.2, 26.19 & 44.55; cotton 6.0 & 33.3; g.nut 8.6 & 31.2, s.cane 669.4 &825.25 s.cane 669.4 &825.25

– Poor policies encouraging unsuitable crops: free Poor policies encouraging unsuitable crops: free electricity; minimum support and procurement electricity; minimum support and procurement prices same; annual price increases; no ground prices same; annual price increases; no ground water policy; free power to agriculture60% water policy; free power to agriculture60% population lives on agriculture population lives on agriculture

– In downturn, companies turning to rural markets, In downturn, companies turning to rural markets, with new Marketing methods with new Marketing methods

– Huge potential as diversification progresses Huge potential as diversification progresses

Weak Infrastructure Weak Infrastructure   

Non-implementation of integrated energy Non-implementation of integrated energy policy; no coordination between electricity, policy; no coordination between electricity, coal and gas coal and gas – Government ownership of Electricity distribution, Government ownership of Electricity distribution,

coal  Government implementation poor on Roads coal  Government implementation poor on Roads – Infrastructure regulation/implementation awaiting  Infrastructure regulation/implementation awaiting 

overhaul overhaul – State ownership- high inefficiency in infrastructure State ownership- high inefficiency in infrastructure – Slow decision-making under government Slow decision-making under government

ownership; corruption ownership; corruption – Federal Constitution; states at loggerheads with Federal Constitution; states at loggerheads with

Centre Centre

HDI Rank out of 174:HDI Rank out of 174:

Sri Lanka 89; Sri Lanka 89; China 96;China 96; Indonesia 110; Indonesia 110; India 124India 124;; Pakistan 148 Pakistan 148

Erratic growth Erratic growth performanceperformance   Economy-4 to 6 year cycles Economy-4 to 6 year cycles

– Weak “real” economy, especially Weak “real” economy, especially agriculture; manufacturing low share; agriculture; manufacturing low share; services high! services high!

– Poor HDI; High poverty & rising inequalities Poor HDI; High poverty & rising inequalities – High unemployment and “disguised” High unemployment and “disguised”

unemployment unemployment – Pressure of population on Agriculture Pressure of population on Agriculture – High deficits; High deficits; – Weak infrastructure Weak infrastructure

Context of weak Context of weak fundamentalsfundamentals

– Rising deficits-not shown by Centre in Rising deficits-not shown by Centre in Budgets-Oil Bonds, FCI bonds, Fertilizer Budgets-Oil Bonds, FCI bonds, Fertilizer bonds, Farmer Loan write-offs, etcbonds, Farmer Loan write-offs, etc

– Putting Growth over inflation controlPutting Growth over inflation control – Desperation to add to Foreign Exchange Desperation to add to Foreign Exchange

ReservesReserves – Exemption from short-term capital gains tax; Exemption from short-term capital gains tax;

Mauritius as largest foreign investor; Very Mauritius as largest foreign investor; Very volatile FII funds-stock market like yo-yo as volatile FII funds-stock market like yo-yo as funds ebbed and flowedfunds ebbed and flowed

– Participatory Notes and round-tripping of Participatory Notes and round-tripping of Indian fundsIndian funds

Poor Implementation-Poor Implementation-administrative reformadministrative reform  

Government has been very inefficient in its   Government has been very inefficient in its   expenditures; more subsidies than asset building expenditures; more subsidies than asset building – Similarly Public Distribution System-e.g. food grains, Similarly Public Distribution System-e.g. food grains,

sugar, edible oils, cheap kerosene; sugar, edible oils, cheap kerosene; – Other subsidies poorly targeted, physical handling and Other subsidies poorly targeted, physical handling and

inefficiencies-fertilizers, free or cheap power to inefficiencies-fertilizers, free or cheap power to agriculture; agriculture;

– Social Programmes- NHRM, SSA-not efficient in spending Social Programmes- NHRM, SSA-not efficient in spending honestly. NREG should have added to purchasing power honestly. NREG should have added to purchasing power but with estimates ranging from 40 % to 60% wasted but with estimates ranging from 40 % to 60% wasted and leakage, its effect has been reduced. and leakage, its effect has been reduced.

– Unspent funds in most programmes Unspent funds in most programmes – Infrastructure spending is also slow, eg., NHAI. Infrastructure spending is also slow, eg., NHAI. – Many projects delayed due too many Ministries, lack of Many projects delayed due too many Ministries, lack of

coordination, non-accountability of bureaucracy coordination, non-accountability of bureaucracy

Issues to be dealt with if Issues to be dealt with if spending is to be efficientspending is to be efficient   

Administrative Reforms-specialization, performance Administrative Reforms-specialization, performance orientation, accountability, Poor coordination between orientation, accountability, Poor coordination between MinistriesMinistries

Labour LawsLabour Laws Administrative ReformAdministrative Reform Reduce Red TapeReduce Red Tape State Owned Enterprises:State Owned Enterprises: Distance government from managementDistance government from management Enterprise vs. administrative cultureEnterprise vs. administrative culture Management autonomyManagement autonomy Foreign investment-insurance, retail, other areasForeign investment-insurance, retail, other areas Private Sector: ImprovePrivate Sector: Improve Corporate Governance Corporate Governance ExpendituresExpenditures: Target subsidies; efficient delivery; eliminate : Target subsidies; efficient delivery; eliminate

undeservingundeserving Agriculture: Correct decades of NeglectAgriculture: Correct decades of Neglect Social programmes & infrastructure: Targeting; Decentralize Social programmes & infrastructure: Targeting; Decentralize

to Local Authoritiesto Local Authorities

THANK YOUTHANK YOU