World Economic Outlook – Growth Strategies of Developing Countries and the Case of India

Prologue

RITES Journal 7.1 July 2014

World Economic Outlook –Growth Strategies of Developing Countries

and the Case of India

Dhanendra KumarPrincipal Adviser

Indian Institute of Corporate Affairs, Ministry of Corporate Affairs,Former Executive Director, World Bank

andFormer Chairperson, Competition Commission of India.

The Author has vast experience in varioussectors of the economy like finance,industry, competition, amongst others.

In this well-researched Paper, he bringsout how the interconnection between theeconomies impacts other countries. Thecontinued carbon emissions due tohuman activity are causing problems ofinfrastructure deficit, capital formation,unemployment, etc. Striking an optimisticnote the Author brings out that withgreater all-round awareness, collectiveand corrective policy initiatives andimplementation are underway.

The Author, who had earlier served asSecretary Roads and Transport, Cultureand Defence Production in theGovernment of India, reiterates that foreconomic growth strategy, policy needsto be designed with creativity whichaddresses the aspirations of all sectionsof society, technology with innovationplaying a major role. For this, structuraland financial reforms are the need of thehour.

A very thought-provoking Paper fromsomeone who has been in the midst of itall.

- Editor

“Development is about transforming the lives of people, not just transforming economies”.

- Joseph E. Stiglitz, Nobel Laureate

In the present era, we are living in a truly global, inter-connected economy,in real sense of the term - “vasudhaiv kutumbkam (The world is one family)”- asdescribed in ancient Indian scriptures, thanks to the communication revolution. Asstated by Dalai Lama, “I find that because of modern technological evolution and our

7.2 World Economic Outlook – Growth Strategies of Developing Countriesand the Case of India

global economy, and as a result of the great increase in population, our world hasgreatly changed: it has become much smaller. However, our perceptions have notevolved at the same pace; we continue to cling to old national demarcations and theold feelings of ‘us’ and ‘them’.” Today, in the global village, a sneeze in a mightycorner can result in epidemic in several other areas. No country can consider itselfimmune from the going-on in the rest of the world. If there is trouble, or turmoil in theMiddle East, the rest of the world also immediately gets impacted. The recentbanking crisis in Portugal is the latest example which sent the stock prices in therest of the world into a tailspin.

The role of Bretton Wood Institutions, created seven decades ago after theSecond World War, still remains relevant, although it always needs to be chiseled tomeet the ever-changing global requirements. Several other blocks and groups ofnations, based on their homogeneity in socio-economic, politico-economic or socio-geographic characteristics, like BRICS, G-20, CIVETS, PIGS, N-11, MINT, Mercosur,ASEAN, etc. also play an important role in providing platforms for discussing commonissues. Yet in aggregation, the global economy remains vulnerable to various shocks,and has been passing through a roller-coaster journey during the last several years.In the process, it is the developing countries and relatively fragile economies whichinevitably have to pass through stressful situations and face various challenges.

The success or failure of underlying “economies” individually and also as agroup is generally measured on the “scale of development”. It is on this scale,various countries are generally characterized as “developed”, “under-developed” or“developing”. All the economies naturally strive to move up the ladder on the scale,while trying to strike a right balance between things they “could do” vs. they “shoulddo” so that they eventually achieve sustainable development. International bodieslike IMF, World Bank, African Development Bank, Asian Development Bank, regionalgroupings etc. have been designed to help them in the process.

The achievement of sustainability in national development1 requires a visionary,scientific and strategic approach, which is both long-term in its perspective andintegrated or ‘joined-up’ in linking various development processes so that they are assophisticated, as the challenges are complex. A strategic approach at the nationallevel implies:

� Linking long-term vision to medium-term targets and short-termaction;

� ‘Horizontal’ linkages across sectors, so that there is a coordinatedapproach to development;

1. Sustainable Development Strategies – A Resource Book (Compiled by Barry Dalal-Clayton andStephen Bass of The International Institute for Environment and Development).

Dhanendra Kumar 7.3

� ‘Vertical’ spatial linkages, so that local, national and global policy,development efforts and governance are all mutually supportive; and

� Genuine partnership between government, business, and communityand voluntary organizations, since the problems are too complex tobe resolved by any group acting alone.

In this article an attempt has been made to understand the current phase ofthe world economy, some of the common challenges being faced by the developingcountries and some options of growth strategies for them. The case of India hasbeen taken up as an illustration of an emerging nation poised in its remarkablejourney of graduation from a developing country to one of the strongest economies ofthe world within the next few years, moving up from its current position of 10th largestto become the third largest economy of the world2.

World Economic Outlook

Several years after the financial crisis of 2008-09, and a few hiccups inbetween, the world economic outlook can be considered to be coming back on therails towards sustainable growth. The period following the global financial turmoilwas marked with shocks, nervousness, extreme uncertainty and all-round measuresneeded for rehabilitation in affected countries. Most countries came up with theirsurvival or revival stimulus packages which have now variously tapered off. Thesepackages were evolved generally keeping in view the needs of the local nationaleconomy, although as rightly commented then by Stephen Harper, Prime Minister ofCanada, “We have to remember we are in a global economy. The purpose of fiscalstimulus is not simply to sustain activity in our national economies, but to help theglobal economy as well, and that is why it is so critical in those packages to avoidanything that smacks of protectionism”. The mood, however, remained somber,which has now started becoming optimistic. In between, the Eurozone crisis dampenedthe green shoots of recovery. The tidings for future continued to appear uncertain anddismal until the beginning of year 2013. The impact of recovery in US economy andexpectation of monetary steps likely to be taken there added to the stress on dollarreserves in developing countries. The period witnessed sharp fluctuations in globalcurrencies and rise in inflation in most developing countries, resulting in designing ofmonetary policies by the Central Banks to tighten liquidity and control inflation. Itwas a tight rope walking for many nations to balance inflationary pressures and theneeds of maintaining growth. Fortunately, despite a bumpy start in 2014, and onaccount of various geo-political factors, performance of the US economy and recoveryof economy in several countries, the world economy is now expected to considerablyimprove further in 2014-15. According to an IMF Report, much of this developmenthas been influenced by the economic growth in the advanced economies. On the

2. PricewaterhouseCoopers (PwC), Economic Outlook – July 2014.


other hand, the development in the emerging economies has been slower thanexpected, according to the Report. Table 1 below enumerates the world growth outputof various countries.

Table 1 : Growth of World Output 2007-153

3. World Economic Situation and Prospects 2014, United Nations.

Dhanendra Kumar 7.5

Looking at FY 2013, there was definitely an improvement in economy andshort-term risks appeared to be have been well addressed.4 However, global economyin different regions was evolving at different velocities, and the improved financialconditions did not percolate evenly into growth, and in fact added to the challenges.

With regards to policy making, strong actions were taken by Europeanpolicymakers which helped avert major risks of a tail event in the euro area, USpolicymakers had been able to avoid the fiscal cliff, Japan had adopted moreexpansionary macroeconomic policies including ambitious changes to the monetarypolicy framework and policy easing in key emerging market economies helped supportinternal demand. There is a global recognition that crisis situations need emergent,sometimes unconventional, but durable solutions to combat underlying risks.

With regards to macroeconomic framework, financial stability hadstrengthened, market volatility had subsided, and asset prices rallied, confidence,though still wavering and recovery uneven. Although policy actions had helped easenear-term risks, old and new dangers still clouded the outlook.

IMF’s latest forecast puts global GDP growth at 3.6% in 2014 as comparedto 3.0% percent in 2013, which is reasonably decent, though still below the potentialgrowth of around 4%. It should therefore appear that the world could still grow fasterand generate considerably more jobs without fueling inflationary pressure.

This would also mean that the various member countries of the IMF -advanced economies to developing economies – still have to tighten belts and workharder for ensuring an accelerated economic growth. The burden lies on the shoulderof the policymakers to ensure that the policies implemented cater to all aspects –fiscal, structural and financial. There also exists a need to encourage and strengtheninternational cooperation by involving various players and groupings such as IMF,World Bank, ADB, AfDB, G20, APEC and BRICS etc. Furthermore, emerging marketgiants as the likes of India and China must necessarily play a major role in leadingthe global momentum towards sustainable and stronger economic growth.

The global economy is still very much influenced by the activities in advancedeconomies. Though these economies are showing stronger growth in the year 2014,the risks associated with stagnation and deflation cannot be taken lightly. The globalleaders and the national policymakers may have to follow certain bold and sometimesunconventional monetary policies, until the economic growth is once again strongand sustained.

As the biggest economy in the world, the United States has been one of themain driving forces behind the global economy. It is showing an increase in privatedemand as well as a stronger economic growth in 2014. It is, however, important thatthe policy makers take a larger global vision and do ensure that there exists certainty

4. Annual Report 2013 – International Monetary Fund.


and continuity about the direction of the economic policies of their governments asthis alone could help in restoring the confidence in the market and the economy.

In Japan, recovery has been spurred by the mix of aggressive monetary andfiscal policies, now known as “Abenomics”, after the Prime Minister Shinzo Abe. Thekey challenge that lies is in relation to medium-term fiscal adjustments and structuralreforms. Some economists believe that in order to increase the confidence in themarket, it is important that the government takes further measures to deregulateproducts and services markets and boost the share of women in the workplace.

Due to consistent efforts of policy makers around the globe, the danger ofanother great depression has been avoided during the past five years. However, theneed of the hour is to further push appropriate policies, in order to accelerate andsustain economic growth, with considerations of equity, and most importantly, creationof jobs. It has to be kept in mind that pockets of hunger, and tensions of joblessnesscreate regions of conflicts and trouble.

Europe is another mighty region of the world where any developmentimmediately impacts the world economy. Fortunately, despite the recent crisis,Eurozone is now indicating recovery, although the same is uneven and unbalanced.Chart 1 shows the variance of growth in Europe and US. Though the general economyis doing well, factors such as weak demand and unemployment are some of thetroubling areas. Another area of uncertainty pertains to the health of the Europeanbanks. At the time of writing this article Portugal is witnessing this problem. Stresstests and asset-quality review will go a long way in restoring the confidence in thesebanks. To improve demand and to ensure sustained growth, it is important thatEurope considers undertaking structural reforms encouraging it.

5. Global Economy Prospects, June 2014.

Chart 1 : Despite Slow Growth,Europe and US Signal further Expansion in Growth5

Dhanendra Kumar 7.7

Prospects and Strategies in Developing Countries

“Arthasampat Prakratisampada karoti” – Chanakya(Economic Prosperity of the state creates prosperity for the people)

The ancient Indian economist and master of state-craft had observed morethan 2000 years ago that economic prosperity of the state is a sine-qua-non forcreation of prosperity for its people. In the strategies for economic growth with equity,states have to calibrate their policies according to specific conditions of the societyand needs of various sections of its people. As it happens there are largely similarproblems in most developing countries, of infrastructure, manufacturing, agriculture,employment, gender balance, education, healthcare, efficient utilization of its naturalresources, preservation of environment, infusion of modern technology, etc. Most ofthem remain very vulnerable to global economic turmoil. As observed by India’sFinance Minister, Arun Jaitley, while presenting his budget of 2014-15 in July 2014,the current slowdown in the emerging economies poses a big threat to global economicrecovery. The economic prospects of the developing countries do not appear to be aspromising as those of the advanced economies. In comparison with the impressivegrowth witnessed in the last decade, the past four years have seen rapid deceleration.Most of the economists feel that this deceleration in growth can be attributed to thelack of structural reforms, which could have triggered the economic growth. Theeconomies of some of the big emerging markets such as India and China, apart fromBrazil, South Africa, Vietnam, etc. hold promise to drive the growth of world economyin the course of next few years.

Many of these developing countries have been at the helm of economicrecovery for the past five years. Their contribution to the world’s GDP growth hasbeen three-quarters of the total GDP growth. Unfortunately, this recovery considerablyslowed down in 2013 due to a variety of factors. As observed in Chart 2, the pace ofeconomic growth has started catching up again, albeit, at a modest pace.

Chart 2 : Developing Country Activity is Strengtheninghowever at a Modest Pace6

6. Global Economy Prospects, June 2014.


Developing countries are now facing new policy challenges. Some economistsbelieve that policymakers in these countries must remain careful and avoid assetbubbles or rising debt. They also believe that attention must be paid to strengtheningof financial regulation.

The low-income countries have generally been able to escape the fall-out ofglobal economy crisis. Countries in Africa enjoyed strong growth where the annualoutput increased by 5% in 2013. Some economists believe that the governments ofthese countries must now try to capitalize on this growth and prepare themselvesagainst any downturn in the economy, while they should continue to invest in buildingtheir infrastructure, scientific exploration of extracted mineral resources, creation ofinstitutions, education and healthcare and other social programs. There is need ofbetter and closer cooperation among developing countries, in exchange of experienceand strategies.

Several Middle Eastern countries are facing additional challenges in theform of social or political unrest and instability. Social and political unrest in theregion keeps on simmering for one reason or the other, and owes its origin to anumber of factors. It needs concerted actions on the part of the local governmentsand international community to support peace and stability. For the economicproblems there is need of structural reforms aimed at building robust and dynamiceconomy and inclusive growth. Modernization, rapid development in the economyand creation of jobs is also likely to contribute to political and social stability.

Map 1 : A.M. Best’s Country Risk Tier (CRT) for MENA region (5 – HighestRisk, 1 – Lowest Risk) September 2013

Dhanendra Kumar 7.9

It is important to remember that the problems faced by each country aredependent upon the specific characteristics of that region or economy and thereforethese challenges vary from country to country. Despite a forecast of growth, it isimportant that the policymakers must first turn their attention towards addressingproblems such as high public and private debt, fiscal and current-account imbalances,and growth models that are unable to generate enough jobs.

Apart from the financial problems mentioned above, the developing countriesaround the world also face various other problems related to efficient utilization ofresources and development of infrastructure, which are crucial for the economicgrowth of a country.

The availability and scientific management of natural resources like mineralsand extractive resources is vital to country’s economic and social growth. Managementof land resources and land reforms is yet another critical ingredient in the process.One can refer to the classic example of Mexico, which, after a revolution ,witnessedredistribution of land from large landowners to ordinary small peasants. This resultedin many small fragmented land holdings, which is now preventing the Mexican farmersfrom supplying agricultural produce at competitive costs in international markets.There exist in the world many examples of countries which have either efficientlyutilized their meagre natural resources, e.g. Hong Kong and Taiwan, and also ofcountries which haven’t been able to effectively use and manage their resources.

An important aspect with regard to economic growth is the quality of workforceemployed by a company. Human workforce employed in the economy of a statematters a lot as far as the sustained economic growth is concerned. More than thenumber of people employed, it is the training and expertise of these people thatmatters. This is one aspect where the developing economies have been found to fallshort of expectations. In the modern world, most of the production is knowledge-intensive, thus putting a premium on a well-educated skilled workforce. Developingcountries usually lack the requisite educational set-up to deliver such trained personneland this leads to a slow or stagnant economic growth.

While education is important, provision of right skills based in the demand iseven more important for optimum utilization of the human resources.

For most developing countries, agriculture plays a major role in economicgrowth. Considering that in most developing countries, majority of population directlyor indirectly depends on agriculture, any incremental growth in this sector leads toeconomic empowerment of larger sections of population. This in turn adds to theirpurchasing power with increase in demand and positive spin-offs in the rest of theeconomy. The UK Food and Agriculture Association estimates that world populationwill increase 47% to 8.9 billion, by 2050. Investment in agriculture is essential tomeet the demands of food and nutrition for this growing population. For developing


countries, which are characterized by agriculture supported economies, this is anopportunity to increase their economic growth. However, agriculture in these developingcountries can also suffer from various dangers and vagaries of nature. There is needof suitable investments in appropriate technologies and R&D, water and energymanagement techniques. One of the other serious impediments is also the continuedemergence of too many small fragmented landholdings as a result of successionand partition among the families. This could result in increasing the costs per farmerfor each produce. Several governments have followed suitable policies for consolidation,cooperatives or community farming. Any neglect in suitable policies towards promotingagriculture in these areas can play havoc.

Population growth is an acute problem in most developing countries whichleads not only to fragmentation of lands as enumerated above, but also to a constantlyincreasing pressure on limited resources of food, education, healthcare, etc. In factthere is a correlation between illiteracy and poverty on one hand and populationburst on the other, Chart 3 shows the expected trend in population growth till 2150.In order to maintain and sustain growth and quality of life for all their citizens, developingcountries have to lay much greater emphasis on population control.

Chart 3 : Expected Trend in Population Growth till 2150

Women constitute nearly half the population but do not have an adequateshare in economic growth, largely on account of lack of opportunities. In order tofully utilize this largely untapped talent base, it is important to ensure theirempowerment and education facilities. According to various global studies, bestinvestment to fight poverty, fuel growth and combat extremism is to invest in girls’

Dhanendra Kumar 7.11

education. An extra year of primary school boosts girls’ potential wages by 10-20%.According to another study, girls who stay in school for 7 or more years typicallymarry 4 years later and have two fewer children than those who dropout. An NGO inits study – EGO – has found that when girls and women earn income, they invest90% of it in their families, books, medicines, etc., while for men this figure 30-40%.In fact, Larry Summers when he was Chief Economist at the World Bank wrote that“Investment in girls’ education may well be the highest return available in the developingworld”. Similarly, it is important to boost investment in the healthcare of all citizens,and especially girls.

Developing countries also typically suffer from lack of efficiency inmanufacturing sector and performance below the optimum levels. Today, in the globallyinterconnected world and with the advancement of communication technologies, thetrends and demands in markets keep on changing rapidly. It therefore becomesincreasingly important for the manufacturing sector to continuously remain agile andrespond to market trends more quickly, in order to remain relevant in the market. Inmost developing countries the challenges on account of government policies whichimpact manufacturing sector arise from difficult business environment and regulatoryshackles, rent seeking and corruption, infrastructure deficits, labour policies, expensiveor scarce commercial bank credit, etc. and all these lead to a vicious cycle oferosion in economy, employment, demand and growth. As an illustration, Table 2indicates quarter wise growth in manufacturing sector in India, which has generallyremained stagnant.

Table 2 : Quarter-wise Growth in the Manufacturing Sector

Incidentally in India’s case, the sector wise share in total employment, asshown from Table 3, the share of employment in manufacturing and agriculture hasbeen going down, which is the story in many developing countries.


Table 3 : Sector-wise Share in Total Employment7

1999-2000 2004-2005 2009-2010

Agriculture 59.9% 56.6% 52.9%Manufacturing 11.1% 12.2% 10.5%Non-manufacturing 5.3% 6.5% 12.2%Services 23.7% 24.7% 24.4%

Infrastructure services are like arteries and veins of an economy and in mostdeveloping countries remain a weak link. Electricity, telecommunications, roads,rail, ports, airports, etc. are crucial for the development and sustenance of a modernand efficient economy. They are also critical for the growth of industry, trade andtourism. It is ironical that infrastructure deficit is often caused on account of lack ofcapital investment, inadequate government policies, inefficiency, corruption and poorplanning, and ultimately leading to clogging of wheels of economy, which furtherleads to lack of capital formation. In the power sector, there are often issues relatingto generation due to inadequate coal linkages, inefficiencies in transmission anddistribution, and ultimate losses leading to shortages. Infrastructure is key to efficiencyand economic development and needs to be given the attention it deserves. Apartfrom development, maintenance is another aspect which often gets neglected.

One of the multiple ways that countries generate money to fund theirdevelopmental schemes is through foreign direct investment (FDI). Cautious optimismhas returned to global FDI. Global FDI inflows rose by 11% in 2013, to an estimatedUS$ 1.46 trillion – a level comparable to the pre-crisis average reaching the upperrange of UNCTAD’s forecast. After the 2012 slump, global FDI returned to growth,with inflows rising 9 per cent in 2013, to US$ 1.45 trillion. UNCTAD projects that FDIflows could rise to US $1.6 trillion in 2014, US $1.7 trillion in 2015 and US $1.8trillion in 2016, with relatively larger increases in developed countries. The followingchart represents the Global FDI inflows, average 2005–2007, 2007–2013 (Billions ofUS dollars):8

Chart 4 : Global FDI Inflows

7. Planning Commission, Government of India.

8. UNCTAD.


Continuing their 2012 performance, developing economies accounted formore than half of global FDI again in 2013, as their inflows reached a new high, at anestimated US$ 759 billion. The increase was mainly driven by Latin American andthe Caribbean, and Africa while developing Asia “the world’s largest recipient regionfor FDI” saw its flows at a level similar to 2012. Among major regional and inter-regional groupings, APEC9 and BRICS almost doubled their share of global FDIinflows from the pre-crisis level. APEC now accounts for more than half of global FDIflows, at par with the G20, while BRICS jumped to over one fifth. In ASEAN10 andMercosur11, the level of FDI inflows doubled compared to the pre-crisis level. Regionaland inter-regional groups of which developed economies are members (e.g. G20,NAFTA) are all experiencing a slower recovery. For development, it is important thatsuitable measures are taken by developing countries in order to attract FDI, asmoney naturally flows where there are returns and productivity. Table 4 shows thenet financial inflows to developing countries.

Table 4 : Net Financial Flows to Developing Countries12

9. Asia-Pacific Economic Cooperation.10. Association of Southeast Asian Nations.11. Argentina, Brazil, Paraguay, Uruguay, Venezuela and Bolivia.12. Global Economy Prospects, June 2014.


Many developing countries also suffer from problems of governance deficit,leading to inefficiency in delivery of services, corruption and rent seeking. Accordingto various global studies, this aspect is a major contributor to inefficient utilization ofnatural resources, slow economic growth, discontent and low morale. Strong,responsive and transparent governance apparatus is vital to the growth of anyeconomy. People’s participation in decision making and growth oriented policies areessential for economic development. Another important pillar is competition orientedregulatory policy framework designed to promote fair competition among all players,to encourage entrepreneurship and talent. There is also need of reviewing all theregulatory policy framework on an ongoing basis to ensure that redundant and archaicregulations are done away with. Many advanced countries have standing reviewmechanisms to judge whether the time and cost of compliance is commensuratewith the benefits to accrue therefrom. This need cannot be summed up moreappropriately than in the words of the great ancient Indian economist-statesmanChanakya, “Arthasya Mula Rajyam”, which means that prosperity or wealth dependson good governance of the state. According to World Economic Forum, Philippinesis considered a perfect example of good governance.13 Once considered the “sickman of Asia”, it is now seen as an economic success. This has happened all becauseof certain economic reforms that the previous governments were shy to undertake,despite the urging of the various economists to do so. As a result of these reforms,the GDP of Philippines grew by 7.2% in 2013, despite the country suffering fromvarious natural disasters. It has also gone up 26 places in the World EconomicForum’s “Global Competitiveness Index” since 2010, and 30 places in the WorldBank’s and the International Finance Corporation’s “Doing Business Index” in 2013.

One of the biggest problems in emerging economies is corruption. Billionsof dollars are lost as a result of corruption, which otherwise could have been used forfueling the economic and structural development of the country. Apart from the lossof huge amount of money, corruption also results in increasing income differences,economic growth without results on social indicators, market distortions, etc. In areport titled Illicit Outflows from Developing Countries 2002-2011, published by theGlobal Financial Integrity, a research and advocacy organization based in Washington,D.C., it has been stated that hundreds of billions of dollars that could have beenused for anything from food security to education, have instead been wasted awayas part of numerous illicit deals around the globe. The report further stated that thelarger the economy, the more were the illicit outflows.14 Corruption, which is like acancer for the economic growth, has to be curbed in a determined manner with theright policies. The developing economies must strictly implement and enforce anti-

13. Purisima, Cesar V. : “Why good governance is good economics”, available at http://forumblog.org/2014/05/purisima-philippines-governance-corruption-growth-economics-east-asia-2014/.

14. Fortin, Jacey : “Trillion Dollar Theft: In Developing Countries, Staggering Losses Due To CorruptionExceed Incoming Aid, Says Report”, as reported in International Business Times on December27, 2013.


corruption laws in their territories. There is also a need for international cooperationfor ending this vicious practice.

Institutions play a major role in achieving essential pillars of economics,which could lead to well-being of the world at large. This is primarily because theoperating scale has grown to such proportions that it has become difficult to bemanaged by individuals. To substantiate this point, Daron Acemoglu and James A.Robinson, in their excellent work “Why Nations Fail”, a New York Times best seller,suggest the following about Institutions -

“Poor countries are poor not because of their geographies or culturesor because their leaders do not know which policies will enrich theircitizens. Poor countries are poor because of their institutions.

Rich countries are organized around “inclusive” political andeconomic institutions. Inclusive institutions give the average persona voice in the political realm. In the economic realm, they establisha level playing field, protect property rights, offer the average personopportunities to rise up, and reward innovation.

Poor countries are poor because they are organized around‘extractive’ institutions. An extractive economic institution is onedesigned to extract resources from many by the few. Theseinstitutions are the norm, not the exception.”

Very often we would have wondered as to why two nations that look verysimilar to each other, endorsing similar economic strategies, perhaps having moresimilarities than differences in every dimension of comparison, differ so greatly intheir economic, social and political development. The subtle response to this reallyvery valid question lies in the difference in “Institutional Developments” across variouscountries. Even if we choose the best strategy ever thought of, the merit of thestrategy lies in its execution and implementation.

The Case of India

Angus Maddison of the University of Groningen has noted that India was thelargest economy in the world in the early 1700s, before the onset of the IndustrialRevolution, with China close behind15. However this was followed by a recession ofabout 250 years. India is now on a trajectory of rapid growth, and poised to join theleague of world’s biggest markets. It could well take lessons from countries likeSouth Korea, which are now prosperous, but have experienced financial crisis earlierin one form or another.

15. Speech by former Union Finance Minister Shree P. Chidambaram on “The Rise of the East:Implications for the Global Economy” delivered at Harvard University, April 2013.


Looking at the trends during the past several years, India’s growth swingsfrom 4% to 9%. India, by virtue of being one of the most populated nations of theworld, has a global impact on all material facts and figures like global averages. Forinstance, World Bank report16 in the year 2008 suggests the following on fallingPoverty levels and why it is likely to fall further:

“In the last 30 years absolute poverty has fallen substantially. This is almostentirely due to sustained growth. The fall is likely to continue because India is likelyto grow at a fast pace for another 15 years, when it will catch up to where China istoday, and China has another 600 million people in agriculture yet to move into moreproductive employment in urban areas.”

India’s long-term growth potential is considered very high by most economistsand research organizations. The country has just undergone a peaceful changeoverof government during 2014 democratic elections, the biggest such exercise on theplanet. The new government has been voted in, with overwhelming majority, on thepromise of rapid development and robust economic growth, and all the initial signsduring the earliest few weeks confirm to the above determination. Challenges, however,are immense but the direction and strategies appear to be sharply focussed.

According to Indian Economic Survey 2014, the country is expected to growbetween the range of 5.4 -- 5.9 percent in the current fiscal year. While presentingthe Budget 2014-15 before the Parliament , the Indian Finance Minister, Mr. ArunJaitley, expected a sustained growth of 7% for India in the next five years. In view ofthe past performance, this is not unachievable. There is an unprecedented focus oneducation and skill development. One of the motto’s for the present government is“Har Haath Ko Hunar” (Providing skill to every person) and “Skilled India”, which inessence strive to break the barriers between formal education and skill development,and put in place a mechanism to give academic equivalence to vocationalqualifications. As Stephen Covey famously wrote “Studies have identified a significant‘skills gap’ between what students are currently being taught and the skills employersare seeking in today’s global economy. Our children must be better prepared thanthey are now to meet the future challenges of our ever-changing world”. There is anenormous focus on infrastructure, manufacturing, job creation, agriculture, irrigation,smart cities and induction of new technologies. The new government has a sharpfocus on good governance, curbing corruption and black money, simplification of theprocedures and strengthening the trade infrastructure so as to reduce transactiontime and costs. There is a sharp focus on promotion of investments in theinfrastructure sector, and areas like domestic production in defence manufacturingand other sectors. FDI policies have also been re-calibrated to attract greater capitalinflows into the selected sectors, including defence, insurance and construction.

16. The Growth Report “Strategies for Sustained Growth and Inclusive Development” by Commissionon Growth and Development (World Bank) in 2008.


The levels of GDP growth during the last several years in India have remainedstagnant or declining as evident from Chart 5. It is, however, expected that this trendwill show rapid improvement in the next few years.

Chart 5: India’s GDP Growth17

The policymakers are conscious of the fact that a lot of the growth in India isstill to come as it realizes its demographic dividend, while India’s share of the workingage population will continue to rise. Nearly one-half the additions to the Indian labourforce over the period 2011-30 will be in the age group 30-49, even while the share ofthis group in advanced countries will continue to decline. This means greaterproduction, savings and investment in India as the demographic dividend is reaped.

The challenges before India, like many other developing countries, aredaunting. It has to support world’s largest chunk of poverty stricken population, andraise their standard of living to certain basic minimum acceptable levels. It has toprovide them basic needs of healthcare, education, clean drinking water, housingand employment. Development of infrastructure and energy remains a mammothtask. While it has not utilized its fair share of earth’s carbon space like most developingcountries, there are fears that global warming might impact availability of basicnecessities like fresh water, food and energy. As per survey, 400 million Indians donot have access to electricity in their homes and 800 million use some form ofbiomass as their primary or only energy source for cooking. The strategies enunciatedby the new Government in India to achieve these objectives have been endorsed bymost economists and seem to be relevant for consideration by other developingcountries too.

Growth in different sectors has been characterized by a gradual declineduring the past few years. Chart 6 below shows the growth levels in agriculture,services and industry sector during the period 2011-14.

17. Deloitte India Budget Analysis, July 2014.


Chart 6 : Percentage Sectoral Quarterly GDP Growth of India18

Economic Strategies in India19

The new government has already outlined its roadmap for fiscal prudence,with an eye on growth. There is a strong emphasis on fiscal consolidation, disciplineand reforms in the financial sector. The Finance Minister has mentioned establishmentof an Expenditure Management Commission, among many other measures, toachieve it.

Some of the strategies suggested by economists to strike specific challengesare:

Table 5 : Custom Economic Strategies that work well in a given situation

A Situation An Economic Strategy

Financial Crisis

Price Stability

18. Deloitte India Budget Analysis, July 2014.

19. Patnaik, Ila : Chapter 1 “ Maintaining Macroeconomic Stability”, Getting India Back on Track:An Action Agenda for Reform - Ashley J. Tellis, Bibek Debroy and Reece Trevor.

� Sound Financial Regulation�Macroeconomic stabilizationthat reduces the volatility of Business cycle

� In order to achieve this, there is a need for low and stableinflation as witnessed by India for only 7 years in history,1999-2006. As a consequence, low interest rate environmentwill prevail along with reduced relative price fluctuations. Long-term investment is encouraged.

Contd.


Fiscal Crisis

A few strategies for developing the economic growth in India were also tabledbefore the Parliament by the Government in its Economic Survey Report, of July2014. A few of these and the announcements in the Budget thereon, are:

• Control on inflation and rising prices – fresh thinking on fiscal policyframework – increase supply side of the equation.

• Boost growth in agriculture sector to achieve second Green Revolution– review trade barriers and market distortions and move towards nationalmarkets. Strengthen distribution system.

• Review regulations to reform “Ease of Doing Business” environment,and attract FDI.

• Review policies on taxation to boost manufacturing sector, investmentsand trades.

• Set-up National investment and manufacturing zones (NIMZs) for a sharpboost to manufacturing and creation of jobs.

• Modernize infrastructure, roads, rails, ports, etc.• Set up smart cities, and modernize urban infrastructure.

Many of these strategies may be relevant for other developing countries too.

Conclusion

The world has now become a global village in terms of inter-connectedeconomies where any development anywhere impacts the others. In spite of thevarious institutions like the World Bank, IMF etc. the global economy has beenpassing through sharp turbulence and shocks. Fortunately the worst phase seemsto be over and the global economy is now witnessing green shoots of recovery andthere is an air of cautious optimism. There are, however, several problems that continueto loom large on the horizon, emanating from oil shocks, energy crisis, conflicts andtensions in certain regions and stressed banking institutions. In order to sustain theprocess of economic development and quality of life on the planet, there is need ofpreservation of environment, which has been brought under tremendous stress in thepast during the development process of developed nations. The continued

� Avoiding any populist measures which are likely to offer somepolitical gain and later, the country may have to pay theprice. In last few years, India was impacted with a number ofpopulist measures, that did not do much good, For instance,programs like NREGA may not be dynamic enough and justexpenditures in line with business cycle environment. Oneshould acknowledge the fact that growth is needed to financeredistribution. The new government had hinted on hardmeasures to bring the economy on track. Welfare schemesmay be revisited on their appropriateness and affordabilitybasis and an effort could be made to eliminate severeleakages.


carbonization has to stop as it may negate all efforts of development. Among thedeveloping countries there are huge problems of infrastructure deficit, governance,corruption, capital formation, unemployment, gender imbalance, etc. The good news,however, is that there is much greater awareness in all the regions and among thepeople, and corrective actions in policies and implementation are under way. In thepresent era of globalization, all the countries have to shoulder their share of burdenin the interest of sustainability and equilibrium. The current situation can be bestdescribed in the words of Mr. Kaushik Basu, Chief Economist of World Bank, “Thefinancial health of economies has improved. With the exception of China and Russia,stock markets have done well in emerging economies, notably, India and Indonesia.But we are not totally out of the woods yet. A gradual tightening of fiscal policy andstructural reforms are desirable to restore fiscal space depleted by the recent financialcrisis. In brief, now is the time to prepare for the next crisis”.

While governments in most developing countries are battling with challengesof governance, infrastructure deficit, inefficiencies in delivery of services, lack ofsecurity, appropriate policy matrices have to be designed for meeting with each oneof these, contributing into the fulcrum of rapid economic growth. This need is wellcaptured in the words of the former President of India, Dr. A.P.J. Abdul Kalam —“When learning is purposeful, creativity blossoms. When creativity blossoms, thinkingemanates. When thinking emanates, knowledge is fully lit. When knowledge is lit,economy flourishes.”

It is of prime importance that any economic growth strategy is designedwith creativity to meet the needs and aspirations of all sections of the society. In theprocess, the needs of youth and the role of women cannot be overlooked. The importantcontributors – infrastructure and agriculture – have to be given centre-stage alongwith the needs of employment of youth and their education and skilling. The role oftechnology, innovation and R&D in process is paramount for boosting productivity. Inview of the constant migration of rural population to urban areas, there is need ofmodernization of urban centres with attendant facilities of transport, energy andrelated infrastructure.

In order to effectively deal with the above mentioned problems, it is imperativefor the governments around the globe to implement various structural and financialreforms. A special emphasis must be placed on devising a set-up that will promoteand encourage good governance.

Economic Growth and Sustainable development, empowered by social,political and economic institutions of the country, will help a lot in addressing thevarious problems plaguing the world today. Echoing the sentiment expressed at thebeginning of the article, hopefully the world will continue to focus on learning asmuch as on money, so that not only growth is achieved but a “consistent” growth,not only “development” but a sustainable development and ultimately the standard ofliving of people and nature of the legacy that will be handed over to the next generationand century, should be of a kind that could make the current generation proud andmake them feel better. As the former US President, Bill Clinton said “No generationhas had the opportunity, as we now have, to build a global economy that leaves no-one behind. It is a wonderful opportunity, but also a profound responsibility”.

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Economy & Finance

World Economic Outlook – Growth Strategies of Developing Countries and the Case of India