1

Mid and Long-Term Perspectives on India, Pakistan and Bangladesh

Joseph E. StiglitzColumbia University

April 2004

Some Thoughts..

2

Bangladesh, India and Pakistan: At A Glance

Bangladesh India Pakistan OECD

Population 136 m 1,048 m 145 m 909 m

Percentage of Population in Large Urban Areas (>1m)

13.22 % 10.36 % 20.68 % 33.78 %

GDP Per Capita(US$ PPP)

US$ 1,736 US$ 2,571 US$ 2,013 US$ 28,217

Road Network (km) per 1,000 people

1.6 km 3.3 km 1.9 km 14.9 km

Paved Roads as % of total roads

9.53% 45.7% 43.0% 88.0%

Passenger Cars per 1000 People

0.45 5.15 4.84 436.70

Fuel Imports (as % of total merchandise import)

7.48 % 36.66 % 33.29 % 10.71 %

Source: WDI 2003

3

India, Pakistan and Bangladesh: GDP Growth Rate

0

2

4

6

8

10

12

Year

Gro

wth

Rat

e (%

)

BGD Bangladesh

IND India

PAK Pakistan

Source: WDI 2003

GDP Growth Rate: 1980-2002

4

Economic Forecast: Real GDP Growth Rate

Forecast of Real GDP Growth Rate

0

1

2

3

4

5

6

7

8

9

2003e 2004 2005 2006 2007 2008

Gro

wth

Rat

e (%

) Bangladesh

India

Pakistan

World

South Asia

e: estimate; Source: Economist Intelligence Unit

It is highly likely that India, Bangladesh and Pakistan will grow at an average of 6%-7% per year during 2005-2008

5

India, Pakistan and Bangladesh: Economic Forecast

At an average of 7% a year during 2004-08, India will boast one of the fastest-growing economies during the period

The services sector will remain the main engine of growth in 2004-08, particularly in the area of information technology (IT)-enabled services

Major government infrastructure programs, including the Golden Quadrilateral road project to build highways linking India's main cities and provinces, will continue to fuel industrial expansion during this period

The growth projection heavily hinges on the expectation that peaceful relationship with Pakistan will continue and that there will be no major outbreak of insurgency, in Kashmir or in the NE, during the forecast period

Pakistan’s annual growth rate of about 6% during 2004-2008 will largely come from the investment to modernize its textile sector

6

US financial support in return for Pakistan's continued cooperation in the US-led "war on terror" will also support the country’s overall growth during the forecast period

Domestic turmoil,rise of fundamentalists and fall of President Musharraf factions or another war with India (though unlikely) may undermine Pakistan’s growth prospects

Growth in Bangladesh, projected at 5.5% during 2004-08, will be largely fuelled by solid increases in government and private consumption, reflecting a strong performance in the agricultural sector and a further increase in remittances from Bangladeshi workers abroad

The biggest challenge for Bangladesh will be to remain competitive in post MFA ready-made garments export. Exports are expected to increase further in response to more robust demand in Bangladesh's main trading partners, but will be limited by infrastructural weaknesses and intensified competition—especially from Chinese-based producers

India, Pakistan and Bangladesh: Economic Forecast

7

Income of the Top Ten Percent and Car-Ownership in Bangladesh, India and Pakistan

Bangladesh 12.8 m 26.71 US$ 4121 58,068 0.45%India 99.9 m 33.47 US$ 7,993 5,142,655 5.15%Pakistan 13.5 m 28.26 US$ 5,349 652,398 4.84%

Percentage of Top Decile that Own a Car

Total Number of People in Top Decile

Share of National Income of the Top Decile

Per Capita Income (PPP) of the Top Decile

Total Number of Passenger Cars

It is assumed that only top ‘Decile’ (top 10%) of the income groups owns a Car and that each person only owns one car

There are only 5.85 million passenger cars for the 125 million people belonging to the top ‘Decile’ in these three countries i.e 46.35 cars per 1000 people

To reach the car ownership rate of the ‘Upper Middle Income’ countries (about 115 cars per 1000 people), this groups’ car ownership rate must grow at the rate of 20% per year for the next 5 years

Source: WDI 2003

8

Import of Passenger Cars

1998 1999 2000 2001 2002Bangladesh 64,096 73,710e 81,081e 89,733 98,706eIndia 25,160 19,517 16,849 18,751 69,988Pakistan 161,243 166,108 185,156 128,228 156,229Total 250,499 185,625 202,005 236,712 226,217

Import of Passenger Cars by Bangladesh, India and Pakistan ('000' US$)

e: estimate; Source: ITC, International Trade Statistics

Passenger car imports stagnated largely because India meets most of its demand with domestically produced cars. India also had a ban on import of cars with engine capacity between 1000 CC and 2500 CC (the most common range for passenger cars) until 2001

India’s import volume for cars (in $ terms) increased 268% between 2001 and 2002 due to lifting of the ban on import of second-hand cars and engine capacity

9

Import Duty on Foreign Cars

Import Duty on Cars with Cyliner Capacity Under 1500 CC

0%

20%

40%

60%

80%

100%

120%

India Bangladesh Pakistan

Import Duty

Both India and Pakistan have maintained very high import duty on foreign cars, mainly to support domestic production and assembly of cars

Bangladesh’s import duty on cars is very low but it also is a relatively small importer of foreign cars

Source: National Revenue Boards of India, Bangladesh and Pakistan

10

Passenger Car Production

India and China: Passenger Car Production

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1997 1998 1999 2000 2001 2002

Nu

mb

er o

f C

ars

China

India

India and China: Car Production Growth Rate

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

1998 1999 2000 2001 2002

Percen

tag

e C

han

ge

China

India

India is losing ground to China as preferred production base for automobiles

Source: www.autoindustry.co.uk

11

Thirteen manufacturers make cars and utility vehicles in India, most of them local units of global automakers like General Motors, Toyota and Ford. Total industry sales are estimated to touch a million units in the financial year ended March 31, 2004

According to industry statistics, India's passenger vehicle sales surged 34 percent this year driven by GDP growth forecast at over 8.0 percent and very low interest rates.

India’s national Auto Policy (2002) aims to establish a globally competitive auto industry in India and double its contribution to the GDP by 2010

The Auto Policy allows automatic approval for foreign equity investment up to 100% in the automotive sector and does not lay down any minimum investment criteria

Despite this very favorable treatment, Indian Auto Industry has not been able to attract major foreign investments during the past two years (except for General Motor’s decision to take over Daweoo plant)

Prospect of the Automobile Industry in the Region

12

On the other hand, high import duty of 105% have restricted import of foreign made cars into India (also into Pakistan)

But while high import duties have encouraged domestic production, they will create a stumbling block for India as it must lower import duties to meet the Asian Free Trade Area's (AFTA) requirements

India’s car market could grow at the rate of 20 percent a year provided that the country can achieve the projected 8% growth rate, interest rates and oil price remain low, and provided it significantly lowers the import duty on foreign cars. Rapid urbanization will also contribute to the increase of demand for automobiles

Once the tariff is lowered, it is unlikely that domestic producers will be able to compete with the foreign manufacturers – the excess demand will be met through higher import of foreign cars (already the trend is evident and consumers are unlikely to tolerate the long present level of waiting period)

Pakistan is also likely to lower import duty on cars and there will be surge in import provided growth expectations are met

Prospect of the Automobile Industry in the Region