India’s Development India’s Development ChallengesChallenges

Higher School of EconomicsHigher School of Economics

April 1, 2008April 1, 2008

India – Economic IndicatorsIndia – Economic Indicators

Context: Achievements and Context: Achievements and ChallengesChallenges

India’s economic success: India’s economic success: sustained rapid growth rates, sustained rapid growth rates, expansion of exports, expansion of exports, emergence of new industries, emergence of new industries, leader in some high tech fields, leader in some high tech fields, Avoided macro/financial crisisAvoided macro/financial crisis

Has India poised as a global super power of the Has India poised as a global super power of the 2121stst century century

India is now a star—but experience India is now a star—but experience shows stars generally fall to earthshows stars generally fall to earth

ChangeChange in growth rate, decade to in growth rate, decade to decade (in percent per annum)decade (in percent per annum)

Growth slowdown of Growth slowdown of previous decade’s stars previous decade’s stars versus other countriesversus other countries

Top ten growth Top ten growth performers of performers of

previous decadeprevious decadeAll othersAll others

70s vs. 60s70s vs. 60s -3.4-3.4 -1.0-1.0 -2.4-2.4

80s vs. 70s80s vs. 70s -3.4-3.4 -1.0-1.0 -2.4-2.4

90s vs. 80s90s vs. 80s -1.9-1.9 +0.2+0.2 -2.1-2.1

NotesNotes: Negative is a slowing in growth. : Negative is a slowing in growth. SourceSource: :

Regional variation in poverty in India—poorest places are Regional variation in poverty in India—poorest places are at African levels, richest near upper middle incomeat African levels, richest near upper middle income

0 10 20 30 40 50 60 70

China-Urban

Turkey

Egypt, Arab Rep.

HP -U

Jammu-U

Ukraine

Azerbaijan

Georgia

Indonesia

Sri Lanka

Punjab-R

Indonesia-Urban

Punjab-U

LAC-Lowest

Haryana-U

Yemen, Rep.

Haryana-R

Pakistan

Jammu-R

Gujarat-U

Turkmenistan

Tajikistan

Philippines

Uzbekistan

Kerala-U

HP - R

Kerala-R

LAC-Medium

AP -U

Karnataka-U

Rajasthan-U

TN-U

WB -U

Assam-U

Mahar-U

SSA-Lowest

Moldova, Rep.

MP -U

Indonesia-Rural

Orissa-U

Lao PDR

China-Rural

Rajasthan-R

UP-U

LAC-Highest

Mongolia

Gujarat-R

UP-R

WB -R

Bangladesh

Cambodia

TN -R

Bihar-U

El Salvador

AP-R

Nepal

India

Karnataka-R

MP-R

Mahar-R

SSA-Medium

Assam-R

Bihar-R

Orissa-R

SSA-Highest

The lagging states failed to The lagging states failed to accelerateaccelerate

Main issue is that Main issue is that while the middle while the middle income states income states accelerated in the accelerated in the 1990s over 1990s over 1980s, lower 1980s, lower income states did income states did notnot

Average Decadal Growth Rates of PCGSDP

0.1

1.0

2.7 2.72.5 2.83.5

3.12.5

4.8

2.5

5.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Low Medium North-High West-High

Avg Gr Rt of PCGSDP

1970s 1980s 1990s

Acceleration of Growth of PCGSDP

2.5

1.8

0.90.4

0.0

2.0

-1.0

2.4

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

Low Medium North-High West-High

Grow th Rates

80s 90s

Lagging sector: slow structural Lagging sector: slow structural transformation in Agricultural Sectortransformation in Agricultural Sector

0.0 50.0 100.0 150.0

ChhJhaBihMP

OrisRajTN

Mah

UPGujKar

APAll India

AssUttn

WBHarKerPun

Labor Productivity, Rs 000/worker

Non Ag

Ag

0% 25% 50% 75% 100%

ChhJhaBihMP

OrisRaj

TNMah

UPGujKarAP

All India

AssUttnWBHarKerPun

% of labor force

Ag GDP has declined to 24% in 2003/04

…but 58% of labor force still employed in agriculture, higher in poorest states

Extremely low labor productivity (closely linked to rural poverty)

Source: Census 2001, CSO

Major CausesMajor Causes Over-regulation of Over-regulation of

markets continuemarkets continue Unbalanced composition Unbalanced composition

of public expendituresof public expenditures Rising subsidiesRising subsidies

• Distorts incentives (water intensive Distorts incentives (water intensive foodgrains in water scarce areas) foodgrains in water scarce areas)

• Leading to natural resource Leading to natural resource degradationdegradation

Crowding out productivity-Crowding out productivity-enhancing investmentsenhancing investments

• direct impact on agric. growthdirect impact on agric. growth• indirect impact on private investments, indirect impact on private investments,

e.g. R&D, roads > diversificatione.g. R&D, roads > diversification Inadequate O&MInadequate O&M

• Recurrent expenditures going to Recurrent expenditures going to salaries salaries deterioration of irrigations, deterioration of irrigations, weak cost effectiveness of research weak cost effectiveness of research and extensionand extension

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

80/81

82–8

3

84–8

5

86–8

7

88–8

9

90–9

1

92–9

3

94–9

5

96–9

798

-99

Major Ag Subsidies Public Investments in Ag

India Public Ag Investments and Subsidies as % of GDP

Note: Ag subsidies include GOI foodgrain and fertilizer subsidies, state government power and irrigation subsidies

Source: Min.of Agriculture, Acharya and Jogi 2004

Binding constraint I: Economic Infrastructure—falling Binding constraint I: Economic Infrastructure—falling further behind Chinafurther behind China

Biases growth towards services: Biases growth towards services: “infrastructure camels”“infrastructure camels”

Supply chain manufacturing—Supply chain manufacturing—India as an export platform India as an export platform hindered the mosthindered the most

Not “need to invest X billion” but Not “need to invest X billion” but “fix the institutions that fix the “fix the institutions that fix the pipes”pipes”

0.00

50.00

100.00

150.00

200.00

250.00

300.00

1998Watts per

person

2003 1998Number oflines per1000 hab

2003 1998 Kmof pavedroads per100,000

hab

2003

India

China

Binding Constraint II: Fiscal DeficitBinding Constraint II: Fiscal Deficit

Debt is highDebt is high

Deficit is highDeficit is high

Interest payments are Interest payments are largelarge

Total Public Debt (% of GDP, 2000-04 Average)

0

20

40

60

80

100

120

Arg

entin

a

Philippin

es

Turk

ey

Indonesia

India

Bra

zil

Mala

ysia

Mexic

o

Russia

n

Federa

tion

Thaila

nd

Kore

a

Chin

a

Overall Balance (% of GDP, 2000-04 Average)

-16-14-12-10-8-6-4-2024

Rus

sian

Fed

erat

ion

Kor

ea

Mal

aysi

a

Tha

iland

Indo

nesi

a

Chi

na

Mex

ico

Bra

zil

Phi

lippi

nes

Arg

entin

a

Indi

a

Tur

key

Sustaining and Equalizing Growth: Sustaining and Equalizing Growth: Labor LawsLabor Laws

For every one person in For every one person in organized private sector organized private sector there are four there are four unemployed.unemployed.

The hollow middle: the The hollow middle: the proportion of small firms proportion of small firms ten times ten times as high in India as high in India as Korea (40% vs. 4%)as Korea (40% vs. 4%)

Employment elasticity of Employment elasticity of manufacturing output manufacturing output growth was growth was negative. negative.

0

5

10

15

20

25

30

35

40

Organized privatesector

Unemployment,Current Daily Status

Mil

lio

ns

2001

2002

2003

India1989-90

0 10 20 30 40 50

5-9

10-49

50-99

100-199

200-499

500+

% distribution of employment

Sustaining and Equalizing Growth : Sustaining and Equalizing Growth : Financial sectorFinancial sector

Reforms have gone much further in some Reforms have gone much further in some sectors than otherssectors than others

Access of new firms to debt finance is still Access of new firms to debt finance is still limited and limiting—but more ‘old style’ limited and limiting—but more ‘old style’ directed credit is not the solution directed credit is not the solution

Micro-finance can be part of the solution, Micro-finance can be part of the solution, when integrated with more broad based when integrated with more broad based empowerment.empowerment.

ConclusionsConclusions

India has achieved much in a decade of India has achieved much in a decade of transformation transformation

The agenda for sustainability remains daunting: The agenda for sustainability remains daunting: infrastructure, fiscal consolidation, financial infrastructure, fiscal consolidation, financial system reform, labor regulationsystem reform, labor regulation

Combining reforms with attention to Combining reforms with attention to inclusiveness will be key to find the consensus inclusiveness will be key to find the consensus required to carry this ambitious agenda forwardrequired to carry this ambitious agenda forward