Indian Economy: An overview - 08

1. Indian Economy: An overview - 08

2. Some General Facts • India is the world’s second most populous country of over 1 billion people. • Urban population 28% of total. (China 39%) • More than half of its population is 25 years of age. ‘Demographic dividend’. • Measured in USD exchange rate terms, 12th largest in the world, with a GDP of $1 trillion (2008) • PCI $4542 at PPP and $1089 in nominal terms (2007) • National savings (24% of GDP) almost half that of China’s 45% . • World Bank classifies India as a low income economy

3. Labour force participation rate 71% in 2003. (China 87%) • Rural workers constitute about 60% of the workforce. • Urban informal sector – the growing sector – represents the residual. • Unemployment rate is 7.3%. • Organized sector employs 7% of workforce (two thirds of which are in public sector), and produces 40% of GDP. Rest in informal sector --with predominance of ‘women.’ • Despite a decline, poverty is a serious problem. 27% of Indians are poor.(2004-5). • 70% of Indians(800million), lived on less than 20 rupees( slightly less than C50 cents) per day with most working in informal sector with no social security. (2007 Report on National Commission for Enterprises in the unorganized sector

4. Why India? • GDP growth rate 9% ( 2007-2008) • Services are a growing sector and play an important role in Indian economy. India is an imp. ‘back office’ destination for global outsourcing of customer services and technical support. • Major exporter of highly skilled workers in financial, software, software eng. • Potentials are in , manufacturing, pharmaceuticals, biotechnology, nanotechnology, telecommunication, shipbuilding, aviation, tourism and retailing.

5. Composition of India’s GDP (at Factor Cost by Economic Activity –at 1999-2000 prices, in%) 1999-0 2000-01 2007-08 (RE) 1)Agriculture etc 24.99 23.89 17.75 2)Industry 25.31 25.80 26.63 2.1 Manufacturing 14.78 15.30 15.36 2.2 Construction 05.71 05.81 07.26 3) Services 49.69 50.30 55.62 3.1 Trade, hotel, Restaurants 14.22 14.34 27.55* 3.2 Transport, storage $ communica. 07.46 07.96 3.2 Finance, insurance, etc 13.07 13.04 14.68 3.3 Community, social and per. 14.92 14.98 13.39 service * Inclusive of 3.2. Source : EPW 14TH June , 2008 Source: EPW June 14, 2008

6. India- Structural Transformation-? • Economic policy: Approach i) Since independence (1947) – till almost late eighties followed a socialist inspired approach- strict govt. control over -private sector participation, foreign trade and FDI (Approach-import substituting rather than export promoting) . ii) India’s low average growth rate ( 3%) from 1947-80 was referred as ‘Hindu rate of growth’, because of the unfavorable comparison with the other Asia countries, especially the ‘East Asian Tigers’.

7. A period of import tariff, export taxes, quantitative restrictions , approvals needed for 60% of new FDI in the industrial sector. • FDI averaged only $200M between 1985-1991. • In 2004, net FDI inflow was about 78USD bn. ( China, 52 USD bn) • A large percentage of the capital flows consisted of foreign aid, commercial borrowing and deposits of non resident Indians. • Largely and intentionally isolated from world markets.

8. Late eighties: the govt. led by Rajiv Gandhi eased restrictions on capacity expansion for incumbents, removed price control and reduced corporate taxes. • Phase of high growth with high fiscal deficit and worsening current account • Collapse of soviet union – a major trading partner, first Gulf war causing spike in oil prices led to major balance of payment crisis with the prospects of defaulting on its loan. • Prime Minister Narasimha Rao with Finance Minister Manmohan Singh initiated the economic liberalization of 1991. • Reforms did away with license Raj in investment, industrial and import licensing-ended many public monopolies, introduced automatic approvals of FDI in many sectors.

9. Agriculture • India ranks second world wide in farm output. • In 2007, accounted for 16.6% in GDP employing 60% of the total workforce. • After having growth rate of 2% for many years- now the growth rate is about 4.5%. • Two thirds of India’s workforce still earn their livelihood directly or indirectly through agriculture. • High level of disguised unemployment. • Despite improvements, average yield in India ranges from 30-50% of the highest average yield in the world.

10. Industry • India ranks 14th in the world in factory output. • Industry accounts for 27.6% of the GDP and employs 17% of the work force. • Manufacturing growth rate 8.4%. • One third of industrial labour force is engaged in simple household manufacturing only. • Economic reforms led to more private sector participation, an expansion in the production of consumer goods and both domestic and foreign competition.

11. Services • India is fifteenth in services output. • The growth rate which was 4.5% in 1951-80 increased to 7.5% in 1991-2000. Recent growth rate 10.7%. • Its share in GDP was 15% in 1950 which is now about 55.6%. • Fastest growing services are –business services, information technology enabled services, business process outsourcing contributing about one third of total output of services in 2000. • India’s IT industry an important contributor to BOP, accounts for only about 1% of total GDP and 1/50th of the total services

12. Foreign Trade & FDI • Almost stagnant export for the first 15 years after independence. Dominated by products like tea, jute and cotton manufacturers having generally inelastic demand. • Imports mainly were machinery, equipment and raw material. • Since liberalization ex-im have become much broad based. • India’s exports are consistently rising, covering about 80% of its imports. • Merchandise trade of India about 28% of GDP. in 2004 (China 70%.) • Exports of goods as % of GDP of India 12%. (China 36%). (2004)

13. Though net importer, since 1996-7, overall BOP has been positive largely on account of increased FDI and deposits from NRIs. • Its major trading partners are the U.S.A., UK, China, Germany, Japan and UAE. • India’s major exports are textile goods, gems and jewellery, engineering goods, chemicals and leather manufacturers. • India’s major imports are crude oil, petroleum products, machinery, gems, fertilizer and chemicals. • The top five countries in FDI inflows (2000-2007) are Mauritius (44%),United States(9.4%), UK( 8%), Netherlands(6%)and Singapore(5%).

14. Trade Openness: India (% of GDP) Source: Calculated from Govt. of India, Economic Survey

15. Situating India in World Merchandise Exports and Imports Year Exports (% share) World Canada India China N.America Asia (b$) 1948 58 5.5 2.2 0.9 28.1 14.0 2006 11783 3.3 1.0 8.2 14.2 27.8 Imports(% share) 1948 62 4.4 2.3 0.6 18.5 13.9 2006 12113 3.0 1.4 6.5 21.0 25.0 Source: WTO, World Trade Statistics, 2007

16. India-China Trade & FDI Partners

18. Source: Source: Reserve Bank of India

19. Source: CEIC Source: CEIC

22. Percentage Share(2006) and growth rate (1996-2006) : Trade in Commercial Services of India and few selected countries and regions Countries %Share Growth rate (%) EX IM EX IM World 100 100 7.2 7.4 North America 18.85 15.19 5.3 7.3 Canada 2.35 2.71 6.7 6.8 Asia 25.36 25.05 8.0 6.5 China 3.72 3.79 14.7 14.8 India 3.01 2.41 21.5 26.9

23. Is development inclusive?

24. Labour Market • Growing employment is accompanied by poor quality of labor with proportion of regular wage earner employees only about 15%. • Economic growth could be made more inclusive by achieving faster growth in regular employment, as opposed to casual and self-employment. Although regular employment has risen, its growth has been almost exclusively in the smaller, least productive enterprises. • About 87% of manufacturing employment taking place in micro enterprises(<10 persons) producing just a third of manufacturing output.

25. Employment in firms with more than ten employees accounts for only around 3.75 per cent of total employment (one quarter of regular employment) and has been falling. Indeed, India has a much smaller proportion of employment in enterprises with ten or more employees than any OECD country. • In non-agriculture sector growth in employment is in informal sector.

26. Sex Ratio in Population with Rural-Urban break up Source : Office of the Registrar General, India Sex Ratio 1901-91 (Total, Rural and Urban) from Brief Analysis of PCA paper-2 of 1992 1961 Population from PCA 1961 1971 Population from Social and Cultural Tables 1981 figures from Series Part-II A(I), General Population Tables – Census of India 1981. Figures of 1991 (including interpolated data for JK-1991 based on 2001 census) and 2001 from PCA census of India -2001

27. Trends in Gender Disparity in Literacy Rate Source: Census of India various years

28. Labor Force Participation Rate by Age: 2000-2004 Source : NSSO, 61ST Round

29. Industrial Distribution of Workforce by Gender: 2004-2005 Source: National Sample Survey Organization : 61st Round (July 2004 – June 2005)

30. Share of women employment out of total employment in organized sector in India (Figures in thousand) Source : Quarterly Employment Review, Directorate General of Employment & Training, Ministry of Labor

31. Unemployment rate by Age and Sector for India Source : National Sample Survey Organization: 55th and 61st rounds

33. women wage lower than men by 33-40 points. Women-men wage differential is 0.75:1. • The gender based wage differential though has narrowed down with increase in education level. It is still high. • Urban wage differential persists but narrower than in rural area.

34. The Working Poor by Gender and Activity Status: 1999-2005 (in%) Figures in italics are proportion of workers in that population segment and activity status. Source: EPW, 28 July 2007

35. HUMAN DEVELOPMENT INDICATORS( India’s position among 177 countries) Particulars Rank Value HDI 128 0.62 Life expectancy at birth( yrs) 125 63.9 Adult literacy rate (%) 114 61.0 Combined(pri—ter)enrolment 122 63.8 ratio GDI as % of HDI 138 97.0 Adult F.literacy rate 134 65.2 Combined(pri-ter) enrolment 159 87.7 Ratio( F. as % of male) Source: Human Development Report-2007

36. India-ChinaHuman Development Scenario-2003 Particulars India China i) LF participation rate (%) 71 87 ii) Female LFP rate 45 79 iii)Average Life Expectancy (years) 63 71 iv)Infant mortality (per 1000 live births) 63 30 v)Adult Literacy (%ages 15 and above) 68 95 vi)Tertiary enrolment rate(%) 11 13 vii)Mobile phones per’000 people 25 215 viii)PC per’000 people 07 28 viii) Internet uses per’000 people 17 63 ix) Gini Coefficient 33 44.7 Source: World Development Indicators- 2004, 2005

38. GLOBAL COMPETITIVENESS RANKING 2007-8: India and China(Rank out of 131 countries) Pillars Components India China GCI Global Competitiveness Index 48 34 Basic requirements 74 44 1 Institutions 46 77 2 Infrastructure 67 52 3 Macroeconomic stability 108 07 4 Health and primary education 101 61 Efficiency Enhancer 31 45 5 Higher education and training 55 78 6 Goods market efficiency 36 58 • Labour market efficiency 96 55 • Financial market sophistication 37 118 • Technological readiness 62 73 • Market Size 3 2 Innovation and Sophistication factors 26 50 • Business sophistication 26 57 • Innovation 28 38 Source: Global Competitiveness Report 2007

39. Major Areas of Reforms Needed • Labour market: Stringent labour laws should be relaxed • Business environment: Lowering the barriers to entrepreneurship Ending reservation of products fro SSI Need for Bankruptcy law Dispersion of tariff rates Easing of Service sector FDI restrictions More privatization of public sector enterprises. • Financial sector: More liberalization Privatization of public sector banks • Infrastructure : Electricity reforms to be speeded up transport: More private sector involvement • Public Finances: Better targeting of subsidies, GST • Education: Higher public expenditure on primary and education, Addressing financing of higher edu.

40. In Conclusion • India and China – non comparable: India-- Democracy (messy) Highly diverse social structure Reforms reactionary in nature- a late starter Less integrated to Global market (including East Asia) Dissimilar trade pattern Lagging behind in FDI and infrastructure Weak link between economic development and social welfare at regional level compared to China.

41. Two divergent development Paths: India China • Increasingly building ground up Top down approach • Service sector led growth Manufacturing sector and foreign trade iii) Private sector led growth State led (early nineties) modernization (late 1970’s) • Consumption driven Investment driven. • Knowledge based sector-labour Cheap- assembly line workers vi) World’s back office Factory of the world

42. Yet-- India can learn from China in: • Social and Physical Infrastructure • Improving manufacturing sector’s productivity India- A country with Potentials for ‘sustaining’ development!!