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19 charts that explain Indias economic challenge

India has come a long way in modernizing its economy, reducing poverty and improving
living standards for a large segment of its population.
Its economy has been one of the largest contributors to global growth over the last decade,
accounting for about 10% of the worlds increase in economic activity since 2005, while GDP
per capita in PPP (purchasing power parity) terms is today three times as high as in 2000.
Yet, this period also witnessed a rise in inequality, which has been mainly driven by income
gaps between Indias states, and a growing urban-rural divide. India continues to have the
largest number of poor in the world (approximately 300 million are in extreme poverty), and
nearly half of the poor are concentrated in five states.
Growth has slowed in recent years and several challenges remain unsolved. Bringing more
people into the process of generating growth and sharing the gains more widely will
make India more resilient for the future.

With one of the largest and youngest populations in the world, India needs to create millions
of good-quality jobs in the near future to ensure decent living conditions for the vast
majority of its citizens.
The country is often cited as an example of an economy that is modernizing by jumping
directly into services without passing through manufacturing. The weight of manufacturing
in India has been relatively stable over the past two decades, at much lower levels than
China and ASEAN countries. Business services a high value added sector represent a
larger share of economic activity in India than in Europe.
Will India be able to achieve shared prosperity without a growing manufacturing sector?
Agriculture accounts today for only 16% of total value added (down from 44% in 1965), but
still employs about half of the Indian population. Productivity in this sector did not increase
significantly in the past decades, limiting improvements in living standards in rural areas.

The competitiveness landscape

After five years of decline, Indias competitiveness improved notably this year as measured
by the Global Competitiveness Report 2015-2016, where the country improves 16 ranks to
55th of 140 economies.

This improvement can be largely attributed to two main factors.

Firstly, macroeconomic conditions improved significantly. Inflation eased to 6% in 2014,
down from near double-digit levels the previous year. The government budget deficit has
gradually dropped since its 2008 peak, although it still amounted to 7% of GDP in 2014, one
of the worlds highest.
Secondly, the country benefits from the momentum initiated by the election of Narendra
Modi, whose pro-business, pro-growth, and anti-corruption stance has improved the business
communitys sentiment toward the government. Infrastructure has also improved, but
remains a major growth bottleneck. The fact that the most notable improvements are in the
basic drivers of competitiveness bodes well for the future, but other areas also deserve
attention, including technological readiness.

How inclusive is growth?

Despite Indias relatively strong record in terms of economic growth over the last decade, its
middle class remains small and getting a job is no guarantee of escaping poverty.
India must take further action to ensure that the growth process is broad-based in order to
reduce the share of the population living on less than $2 a daymany of whom are
employed in informal and low skilled jobs. Educational enrollment rates are relatively low
across all levels, and quality varies greatly, leading to notable differences in educational
performance among students from different socioeconomic backgrounds.
The gender gaps in labour force participation and wages are both high, showing that Indias
women are not benefiting equally from economic opportunities. India scores well in terms of
access to finance for business development and real economy investment (investment
channelled towards productive uses), yet new business creation continues to be held back
by administrative burdens. India also under-exploits the use of fiscal transfers compared to
peer countries.

Modernizing Indias public institutions

Modernizing public institutions has been high on the agenda of reforms in India in recent
years, and results are starting to show. In 2015, businesses perceived lower levels of
corruption among public officials and showed more trust in governments decisions.
Improved public institutions are one of the main drivers of the increase in Indias
competitiveness. Yet, there is still a lot of ground to cover.

Private investment, especially from foreign firms, requires a favourable business

environment, which includes strong property rights protection and also fair and speedy trials
in the case of disputes. To this end, ensuring the independence of the judicial system and
increasing efficiency in settling disputes will be key. Business ethics should also improve in
line with that of public institutions. Reporting and accounting standards are necessary to
ensure transparency in the private sector, increase trust and facilitate long-term financing
and investment.

Talent, education and social mobility

Educational enrolment rates are relatively low across all levels: barely above the median for
its peer group on pre-primary and primary, and below the median for secondary, vocational
and tertiary levels.
Only 1.4% of secondary students are enrolled in technical and vocational programs, limiting
the talent pool for skilled labor. The average level of education is only 7.3 years and a
gender gap continues to persist, with boys benefiting from two more years of schooling than
girls. India ranks 31st out of 37 lower middle income countries in providing equal
educational opportunities for men and women, which translates into low levels of female
participation in the labor force.

The gap in educational attainment between children from the top and bottom quintiles in
India is 8.7 years, with those in the bottom quintile receiving only 2.8 years of education on
average and those in the top income quintile receiving 11.56 years. The disparities in
educational attainment by income are greater in India than in most other countries with
similar income levels, and can be important in transmitting inequality down the generations.
The gap is much smaller in Vietnam, Thailand, Indonesia and the Philippines and larger only
in Laos. Thailand stands out for having the best educational outcomes in this peer group on
average (nearly 5 more years than India).

Unequal access to finance

India scores relatively well in terms of access to finance for developing businesses and
investing in the economy. Indias entrepreneurs have better access to bank accounts, credit,
venture capital, and equity markets than their counterparts in most peer countries.
However, access to finance remains limited for low income individuals, especially women.

400 million people remain unbanked in India and disconnected from the financial system
despite impressive gains in recent years. Most unbanked are poor and female: only 27% of
individuals in bottom quintiles and 37% of women have access to a bank account. Finance
can help poor households optimize severely constrained resources across their lifetime.

Barriers to Entrepreneurship
Yet, only 7% used their savings account to start a business (the proportion is even smaller
for those in the bottom 40% of the income distribution). A last-placed ranking on small
business ownership is evidently not for want of good ideas, as India scores fourth on a
measure of patent applications. But budding entrepreneurs are held back by red tape and an
inefficient justice system, with relatively low rankings for indicators such as the time and
cost of starting a business, enforcing a contract and resolving insolvency.

Closing the infrastructure gap in India

Infrastructure development has not keep up with the increasing needs of the economy. Since
2007, the country slipped 14 ranks to 81st worldwide in terms of overall quality of
infrastructure. In a recent report, the World Bank estimates that India might need up to 1.7
trillion dollars to close its gap in infrastructure development. Such a huge challenge
cannot be borne by the government alone and will require more private investments and
public-private partnerships. Private infrastructure financing totalled only 2.4 % of GDP per
year on average from 2009-2013.

A quarter of Indians still do not have access to electricity and almost a third of the urban
population live in slums. 65% of the population does not have access to improved sanitation
and access remains unevenly distributed. This is also the case for clean drinking water.

Modernizing transport infrastructure will be particularly important to increasing Indias

competitiveness. The airline sector is one of the weaknesses of Indias transport system.
Operational airports are still out of reach for large parts of the country given that only half of
Indian roads are paved, contributing to one of the highest accident rates in the world. On the
flipside, the railway system performs relatively better than other modes of transport,
traversing the country for approximately 65,000 kilometers (the fourth largest in the world).
Nonetheless, investments are needed to improve the speed and efficiency of the system,
especially within urban areas.

Connecting India
Despite many clusters of excellence in the IT industry and a vibrant service sector, India is
not fully leveraging ICTs (information and communication technologies) for the benefits of its
entire population. Regulation of the ICT sector is among the most competitive in the world
and costs are low by international standards. Yet, the uptake of ICTs in India remains very
low. Fewer than one in five Indians access the Internet on a regular basis, with only 1 percent
of the population having fixed broadband (more worryingly, this figure has not gone up
significantly in recent years). Smartphones are the privilege of the very few, with 5 mobile
broadband subscriptions for every 100 population, while less than two in five Indians are
estimated to own even a basic cell phone.

India has been slipping behind other countries in developing Asia over the last decade. Until
2007, internet usage was in line with the median performance of other economies in the
region. Since then, countries such as Thailand and the Philippines have experienced a
tremendous increase in the uptake of ICTs. Connecting India will mean investing in both
physical and human capital to bridge the gap with other emerging markets. ICT could help
fulfil Indias ambition to become a global manufacturing hub. Furthermore, ICT could do
wonders in improving productivity in agriculture and the services sector, while boosting
access to some basic services among the rural population.

Indias tax tystem and social safety net

Some countries effectively use redistribution to reduce inequality, but India is not among
them. Its Gini coefficient (a measure of income distribution) is the second highest among
lower middle income countries and is barely changed by fiscal transfers. Tax revenues are
extremely low and Indias tax code is regressive, meaning that the poor bear a heavier
burden than the rich, which is not offset by social spending. The country spends only 2.5% of
GDP on social protection compared with over 6% in many peer countries.

India has a great deal of opportunity to enhance the generosity and progressivity of its social
protection system so that it can give its citizens the safety net needed to take risks and
participate fully in the economy and society.
Increasing its narrow tax base can also give India more fiscal space to make these much
needed social expenditures, particularly in health. Indias public health system remains
limited in coverage. Out-of-pocket expenses are high, limiting affordability. This translates
into poor (and unequal) health outcomes. Inequality adjusted life expectancy is 25 years
while in many peer countries like Thailand and Vietnam there is only around 10 years
difference between high and low-income individuals.

The way ahead

To achieve both economic growth and social inclusion, India should focus on a number of
areas of reform, including:

Authors: Gemma Corrigan, Economist, Economic Growth and Social Inclusion Initiative,
Inclusive Growth, World Economic Forum. Attilio Di Batisto is a Quantitative Economist at
the World Economic Forum.
Image: Passengers ride an overcrowded bus as they head towards their village to celebrate
Dashain. REUTERS/Navesh Chitrakar