Challenges of Indian Economic growth

Submitted By:
Bidit Neel Mandal- 10202108 Arnab Sinha Roy-10202074 Kastur Banerjee-10202073 Jagannath Giri-10202121 Sambit Choudhury-10202098 Priyanka Singh-10202083 Sayamdeep Mohanty-10202092

Road Map
Reviews on Indias economic reforms; Comparison between Indias economy with a peer group of large developing economies in Asia the Peoples Republic of China, Indonesia, Malaysia, the Philippines, and Thailand that compete with India both in export markets and for inward foreign direct investment; and Assesses the challenges that India must overcome to sustain rapid economic growth and reduce poverty over the long term.

The Indian situation

Second largest population in the world Very successful service sector, but a poorly performing industrial sector Nation of English speakers Geographic economic disparity Democratic government & traditions Strong financial institutions The Economy of India is the tenth largest in the world by nominal GDP and the fourth largest by purchasing power parity (PPP)

Comparing India With China we see that ..

Economic Reforms- An overview ReformsFrom 1947 to 1984, India had a development policy of import substitution industrialization - discouraging imports through international trade and investment barriers, Soviet-style central planning . India instituted comprehensive controls, known as the license raj (regime). In 1984, Prime Minister Rajiv Gandhi began economic reform by abolishing the licensing system for twenty-five industries and substantially liberalizing it for others. An economic crisis prompted Prime Minister Narasimha Rao to initiate sweeping reforms - progressively abolished licensing for all industries except atomic energy, defense equipment, alcoholic beverages, and tobacco.

Bifurcated Economy
India is the worlds second most populous country. In contrast to China, Indias working age population (ages 15 to 64) is projected to grow by 53.9 percent from 691 million in 2005 to 1.064 billion in 2050. India favored developing internationally competitive colleges, universities, and technical institutes for a limited number of students -developed a large pool of educated, highly skilled, English-speaking managerial, professional, and technical workers compared with the peer group . Another sector of Indias economy is underdeveloped. Agriculture still accounted for 18.4 percent of Indias GDP,54.2 percent of Indias total employment - both higher than competing Asian economies. As a result, India suffers from far more extreme poverty than the peer group.
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Growth Accounting Comparison

Why services grew but not industry?

In 1981, Indias industrial sector was on par with those of other countries. At that time, its service sector actually lagged (in terms of the value-added as a percent of GDP and in terms of employment share) However, at that time India did not favor labor intensive industry in 1981; it instead favored skill intensive industry

Challenges to Long-Term Growth LongIndia must create millions of new jobs for unskilled and semiskilled workers that are currently unemployed or underemployed in subsistence agriculture. (A) Inadequate infrastructure 1) Electricity:
Three central GOEs generate most of Indias electricity, while state electricity boards (SEBs) distribute electricity

(2) Transportation- Indias airports, ports, railways, and roads are grossly
inadequate . Inefficient ports slow turnaround time to 3.5 days.1 Manufacturers pay about 35 percent more to ship an identical cargo to the United States from India than from China .   Railways charge substantially below market fares for passengers . To recoup these losses, Indian Railways charges firms above market freight rates . Extremely high rail costs have caused manufacturers to shift the bulk of their domestic freight to trucks. Unfortunately, Indias road system cannot accommodate this demand .
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(B) Workforce Quality-

Skilled labor shortages have ignited a bidding war, Widespread adult illiteracy prevents many Indian workers from securing jobs in knowledge-intensive and capital-intensive industries.

(C) Incomplete Economic Reforms (1) Remnants of License Raj-In 2006, the World Bank found that India
ranked 134th of 175 economies as an overall place to do business. Indias ranking in opening new facilities, paying taxes, trading across borders, enforcing contracts, and closing a bankrupt business were lower than the peer group.

(2) Rigid Labor Market- Indias rigid labor laws are a major impediment to
labor-intensive manufacturing. These laws slow the transition of the 93.6 percent of Indian workers who are employed in agriculture or the informal urban sector into generally higher productivity jobs in the formal urban sector. Indias labor laws apply to employers with ten or more workers, become more stringent as the number of employees increase, encourage unionization, and generally favor workers over employers .

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(3) Inefficient Government-Dominated Financial

System- Indias central government-controlled financial system is highly inefficient in channeling Indias saving into productive investment.

Because banks cannot lend gold bars and jewelry, a large portion of Indian savings cannot be intermediated into economically productive investments through banks and other financial institutions. This reduces the potential size of Indias economy. Excessive regulations have stunted Indias corporate debt and equity markets as external financing sources for large private Indian firms. Consequently, these firms must rely on bank loans to a larger extent than similar firms elsewhere, crowding out small- and medium-size firms . The McKinsey Global Institute reported that reforming Indias financial system would increase the current size of Indias economy by $47.3 billion and would boost Indias potential real GDP growth rate to 9.4 percent a year over the next decade

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(4) International Trade and Investment Liberalization-

In 2007, India reduced its peak import tariff rate on most non-agricultural goods to 10 percent. Nevertheless, import tariff rates on agricultural goods remain extremely high. India also retains significant non-tariff trade barriers including cumbersome customs procedures and weak enforcement of copyright protection for recordings and software.

Indias international trade flows do not compare favorably with competing Asian economies. Despite its size, India accounted for only 1.3 percent of world goods exports and 1.6 percent of world goods imports in 2005. Likewise, India trailed competing Asian economies in attracting foreign direct investment . (D) Chronic Large Fiscal Deficits- In fiscal year 2006-07, the consolidated deficit for both the central and state governments was 6.3 percent of GDP. The relatively high fiscal deficits compared with the peer group limit the ability of central and state policymakers to fund education and necessary investments in infrastructure.

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Actual and Predicted Output per worker growth

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The traditional growth pattern

The traditional economic growth recipe relies heavily upon industrial sector expansion Industrial growth can lift a large proportion of a countrys population out of poverty Industry brings in capital and encourages infrastructural development Export-driven growth is useful for developing countries Yet India is lacking industrial growth

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India s greatest obstacle to growth is its poor industrial sector

We believe that Indias service sector growth cannot substitute for industrial growth indefinitely Indias large (and quickly growing) population needs abundant industrial jobs to raise living standards  Service sector jobs requiring extensive education affect too few people We will now address why Indias manufacturing sector is performing poorly, and how it can be set right

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Why did some states accelerate faster than others?

Some states simply had a larger capacity for growth (initially) Kochhar, used a diversification index to capture each states capacity for growth Diversification is a proxy for the amount of highly skilled human capital

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The role of decentralization

Decentralization led to Indias states being more in control of their growth paths Some states had inherent qualities that enabled them to take advantage of the liberalization reforms and boost their service sectors Quality of infrastructure Amount of investment Education level Financial sector strength

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Divergence amongst states

Indias current strategy is leading to state divergence in investment and growth Fast growing peninsular states vs. sluggish hinterlands Can the inland states catch up with the growth of the peninsular states? What Can India Do? The lagging states need to follow a more traditional pattern of growth: labor-intensive manufacturing Easier to employ the masses Easier to export manufactured goods What has prevented India from doing such a thing in the first place?- Harmful regulation is the primary culprit
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Data Relating to Divergence among States

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India s pathway to growth

Dual-track growth: industrial growth in the inland states alongside continued service-sector expansion Pruning regulations and labor laws relating to manufacturing Allow people to be fired Encourage industrial firms to achieve economies of scale Gradually wean India off of import-substituting policies to force domestic industry to become competitive in the international marketplace Investing in education, especially in primary and secondary education for the general public Investing in public infrastructure Focus on aiding industry
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Is corruption hindering Indian growth?

We initially thought so, but

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Although its economy is booming, India must confront a number of challenges to sustain rapid economic growth . India should encourage labor-intensive manufacturing to create jobs for these workers. India must overcome a number of challenges to foster laborintensive manufacturing and broaden economic prosperity. Indias electricity supply is costly and undependable, and its transportation system is woefully inadequate High adult illiteracy prevents many workers from benefiting from Indias boom.

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Thats a wrap, folks!

Thank you
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