A Summary of Indian Economy (with politics and demography) Tapen Sinha AXA Chair Professor, ITAM,...

A Summary of Indian Economy(with politics and demography)

Tapen SinhaAXA Chair Professor, ITAM, Mexico

Special Professor, University of Nottingham, UK

Outline

• Democracy• Demography• Macroeconomic performance• Role of the government• Broad sectoral performance• Trade and investment• Socioeconomic problems• Macroeconomic modelling of the future

Election in India

• 670 million voters• One million electronic voting machines• The machines cost around US$100• No electricity is needed: 6 volt battery• Design is akin to a “black box” in aircraft• Once a vote is cast, it is impossible to repeat• Counting is done in a few hours• Box stuffing is virtually impossible• Invalid votes used to exceed the winning margin

Election Results of 2009

Parties Seats Votes % Seats %

INC 205 28.52 37.75

BJP 116 18.84 21.36

BSP 21 6.18 3.87

CPM 16 5.34 2.95

NCP 9 2.05 1.66

CPI 4 1.43 0.74

RJD 4 1.27 0.74

Others 168 36.38 30.94

Current demographics

• Population: 1,189,172,906 (July 2011 est.)• (Mexico: 111,211,789)• Age structure:• 0-14 years: 31.1% • 15-64 years: 63.6% • 65 years and over: 5.3% • Median age: 25.3 years• (Mexico 26.3)

Current demographics• Population growth rate: 1.55% (2010 est.)

• (Mexico: 1.13%)

• Birth rate: 22.01 births/1,000 population

• (Mexico 19.71%)

• Death rate: 8.18 deaths/1,000 population

• (Mexico 4.78%)

• Net migration rate: -0.07 migrant(s)/1,000

• (Mexico -3.61)

Current demographics

• Sex ratio: • at birth: 1.05 male(s)/female• (Mexico 1.05)• under 15 years: 1.06 male(s)/female• (Mexico 1.04)• 15-64 years: 1.07 male(s)/female• (Mexico 0.94)• 65 years and over: 1.02 male(s)/female• (Mexico 0.82)• Total population: 1.06 male(s)/female• (Mexico 0.96)

Why is there an imbalance of sexes?

• In many Asian countries the ratio of male to female population is higher than in the West

• As high as 1.07 in China and India, and even higher in Pakistan.

• Amartya Sen, 1992 has suggested that this imbalance reflects excess female mortality

• As a result, he has argued that as many as 100 million women are missing

Sex Ratio in India 1961-2001

Year Females per 1000 males

1961 941

1971 930

1981 933

1991 927

2001 934

Population in India, China 1820-2000

0

200000

400000

600000

800000

1000000

1200000

1400000

1820 1840 1860 1880 1900 1920 1940 1960 1980 2000

Th

ou

san

ds

China

India

Growth rate of population India/China

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1850 1870 1890 1910 1930 1950 1970 1990

Gro

wth

ra

te p

er

de

ca

de

China

India

Mortality comparison

0

0.005

0.01

0.015

0.02

0.025

0.03

0.035

0.04

21 26 31 36 41 46 51 56

Age

q(x

)

O(25-35)

LIC(75-79)

LIC(94-96)

Preston Curve

Preston Curve for Mexico, 2004

72

72.5

73

73.5

74

74.5

75

75.5

5,000 10,000 15,000 20,000 25,000 30,000 35,000

GDP Per Capita in Pesos, 2004

Life

exp

ect

an

cy a

t b

irth

Infant Mortality Rate Per 1000

60

70

80

90

100

110

120

130

140

1971 1976 1981 1986 1991 1996 2001

Current rate 55, Mexico 21, US 6.5 and Singapore 2.2

India has a large rural population

Urban Rural1950 17% 83%1960 18% 82%1970 20% 80%1980 23% 77%1990 26% 74%2000 28% 72%

This is very different from the Latin American experience

Is India densely populated?

• Are there too many people in Holland?• Population density highest in the world are Hong

Kong and Singapore over 6,300 per square km• Perception versus reality: Indian ranks below

Bangladesh (1,000), Belgium, the Netherlands and Japan (400+)

• India has 330 persons per square km (rank 15)• Mexico ranks 117• The story of The Little Prince

Macroeconomic performance

• Measure of general well being is measured by per capita income

• But which per capita income• Atlas Method• PPP Method• Reason they do not coincide is that the

exchange rates do not reflect underlying purchasing power: BigMac Index

0

500

1000

1500

2000

2500

3000

3500

1700 1820 1870 1913 1950 1973 2000

CHINA

INDIA

Comparing per capita income: India China 1700-2000

Percapita income as a percent of US percapita income

5

5.5

6

6.5

7

7.5

8

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

per

cen

t

Healthcare expenditure is extremely uneven in India

Sectoral

• Agriculture: how it is shrinking but not demographics

• Industry: the industry puzzle

• Services

• Banking/Finance

• IT – the expanding role (cyber cafes and post offices)

Sectoral Transformation of the Indian Economy

0

10

20

30

40

50

60

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995

Year

Sh

are

of

Eco

no

mic

Pie

Primary

Secondary

Transport

Service

Table 3: Sectoral share of GDP at factor cost Sector 1980/81 2001/02 Agriculture, forestry, and fishing 38 25 Industry 26 26 Services 36 49 Total 100 100 Source: Central Statistical Organization.

Saving Investment 1951-1999

0

5

10

15

20

25

30

1951 1956 1961 1966 1971 1976 1981 1986 1991 1996

As

a p

erc

enta

ge

of

GD

P

Investment

Saving

Socio-economic problems

• Human development

• Poverty

• Corruption

• Unemployment

• Regional imbalance

• Ethnic-religious problems

HDI

Poverty

Corruption

0

10

20

30

40

50

60

70

80

90

100

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Consumption

Government

Investment

1.5

Role of the state

• State planning– Over half a century, India has undergone ten five year

plans

– Problem: What is planned does not necessarily happen

– The idea was to have key sectors under state control: defense, electricity, roads, education (public goods)

– Later it expanded to other things: insurance business, banking, sugar mills

• Public expenditure and receipts: what goes where

Government does not do things well

• Why? Incentives are wrong

• Most activities are NOT driven by needs

• They are driven by politics

• Example 1: public education problem

• Example 2: salaries of comparable public and private sector jobs

• Note: Mexican case

Government: Role of the state

• Deficit(t)=Revenue(t) minus Expenditure(t)

• Debt(t)=Deficit(t)plusDeficit(t-1)plus….

• They are usually measured as a percentage of GDP: GDP gives a proxy of ability to pay

• Is high debt to GDP ratio bad?

• Note: debt is not all foreign debt

Are government bonds net wealth

• Government deficit can be financed in two ways: printing money or issuing bonds

• But bonds have to be paid• How does government pay for outstanding

debt – by taxing• Who does it tax• Portfolio of people: government bonds

versus private bonds or stocks

What is the difference between pre-crisis and post-crisis periods?

Debt to GDP Ratio

0%

10%

20%

30%

40%

50%

60%

1973 1978 1983 1988 1993 1998

deb

t at

a p

erce

nta

ge

of

GD

P

Domestic

Foreign

Government revenue

• In the developed countries, they mainly come from income taxes

• In India, 8% people work in the formal sector

• Most taxes come from customs duty and other types of indirect avoidable taxes

• Government revenue is around 8% of GDP

Government expenses

• Policy: free rural electricity– It benefits the rural rich, it distorts the use of

energy for production

• Policy: highly subsidized seeds and fertilizer– Most subsistence farmers do not benefit from

them, it benefits the agri-business– It distorts incentives for farming

Trade

• Trade and investment

• Internal trade and infrastructure

• External trade

• Domestic saving and investment

• Foreign investment

Openness/GDP

0

5

10

15

20

25

30

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Year

Per

cen

t

Trade is good if...

• ...there is no compulsion• Usually developing countries export agricultural

products, textile, ...• Low tech• This is exactly what economic theory tells us• India is exporting high tech: does that contradict

economic theory?• No: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=705801

Rupees per USD 1922-2005

0

10

20

30

40

50

60

1920 1930 1940 1950 1960 1970 1980 1990 2000

year

rate

Why

Future

• Growth rate in the past decade has been high with low volatility

• India has the institutions right: better trade regime, better domestic institutions (such as democracy), better financial institutions (such as banks) yet it is low on growth compared with other countries with same traits

Table 1: Projected GDP in 2000 US dollars Year India France Germany UK 2000 469 1,311 1,875 1,437 2005 604 1,489 2,011 1,688 2015 1,411 1,767 2,386 2,089 2020 2,104 1,930 2,524 2,285 Source: Goldman Sachs, 2003.

Thank you

Tapen Sinha

tapen@itam.mx

http://icpr.itam.mx/Colmex2009/