Presentation on India at Canadian High Commission Event

Assessing India’s Compe00veness

Professor Amit Kapoor

Honorary Chairman of Ins0tute for Compe00veness, India & Professor of Strategy & Industrial Economics at MDI, Gurgaon, India

Ins$tute for Compe$$veness (IFC), India is an independent, interna0onal ini0a0ve centred in India, dedicated to enlarging and dissemina0ng the body of research and knowledge on compe00on and strategy, pioneered over the last 25 years by Professor M.E. Porter of the Ins0tute for Strategy and Compe00veness, Harvard Business School (ISC, HBS), USA. IFC, India works in affilia0on with ISC, HBS, USA to offer academic & execu0ve courses, conduct indigenous research and provide advisory services to corporate and Government within the country. The ins0tute studies compe00on and its implica0ons for company strategy; the compe00veness of na0ons, regions & ci0es; suggests and provides solu0ons for social problems. IFC, India brings out India City Compe00veness Report, India State Compe00veness Report, India Economic Quarterly, Journal of Compe00veness and funds academic research in the area of strategy & compe00veness. To know more about the ins0tute write to us at [email protected].

1

Natural Endowments Population and GDP’s of the world

India

China USA

European Union

7% of the Land area, 5% of the Popula0on, 23%

of the GDP


of the GDP


of the GDP


of the GDP

GDP over the years

Source: WDI and Institute for Competitiveness Analysis

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

European Union India China United States Rest of the World

39% in 2010

23% in 2010

9% in 2010

3% in 2010

26% in 2010

Agriculture and Allied

Industry

Manufacturing

Services

Construction Transport, Storage & Communication

Finance, Business & Real Estate Services

Community and Personal Services

-10

-8

-6

-4

-2

0

2

4

6

8

10

-10 0 10 20 30 40 50 60

% C

hang

e in

the

Con

tribu

tion

to G

DP

(199

4-20

00)

Percentage Contribution in GDP (2000)

Structural shift in Indian Economy (1994-2000)

Ins0tute for compe00veness Analysis

Agriculture and Allied

Industry

Manufacturing

Electricity, Gas and Water Supply

Services

Construction Transport, Storage & Communication Finance, Business & Real Estate Services

Community and Personal Services

-15

-10

-5

0

5

10

15

-10 0 10 20 30 40 50 60 70

% c

hang

e in

con

tribu

tion

2000

-201

0)

Percenatge Contribution in GDP (2010)

Structural shift in Indian Economy (2000-2010)

Ins0tute for compe00veness Analysis

Geographic Influence on Compe00veness

World Economy

Broad Economic Areas

Group of Neighboring Na0ons

Na0on

State, Provinces

Metropolitan Areas

Rural Areas

6 Ins0tute for Compe00veness, India

The business environment at a given loca0on is the cumula0ve outcome of policy at all levels of geography Microeconomic Compe00veness raises the importance of lower levels of geography The alloca$on of responsibili$es across levels of geography is a crucial policy challenge

Microeconomic Compe00veness: The Diamond (Understanding Business Environment)

7 Ins0tute for Compe00veness, India

Context for Firm Strategy and Rivalry

Related and Suppor0ng Industries

Factor Condi0ons

Demand Condi0ons

Local rules and incen$ves that encourage investment and produc0vity e.g. salaries, incen0ves for capital investments, intellectual property protec0on Vigorous local compe$$on i.e., openness to foreign and local compe00on; sophis0ca0on of company opera0ons

Availability of suppliers and suppor$ng industries Presence of clusters instead of isolated firms

Sophis0ca0on of local customers and needs i.e., strict quality, safety, and environment standards

Access to high quality business inputs i.e., natural endowments, human resources, capital availability, physical infrastructure, administra0ve infrastructure, informa0on infrastructure, scien0fic and technological infrastructure

Successful economic development is a process of successive upgrading, in which the business environment improves to enable increasingly sophis0cated ways of compe0ng

Ins0tute for Compe00veness, India 9

FRIDAY l DECEMBER 9 l 2011 Reflectw w w . f i n a n c i a l e x p r e s s . c o m 9

The Bharatiya Janata Par-ty’s position on reforms istakensectorbysector.Theparty looks at each sectorforitsstrengthsandweak-

nesses in terms of having to face in-ternational competition once thesector is partly or fully opened up.Importantly,theBJPwishestoensurethat lives, livelihoods or any way oflifearenotwashedoff whentheflood-gates are opened for the much-requiredinvestmentstoflowin.

Pension sector reforms started inearnest during the National Democ-ratic Alliance period, when the newpension scheme came into force onJanuary 1, 2004. Under this scheme,all employees (excluding the mili-tary) recruited since 2004 were toshift from defined benefits to a de-fined contribution regime. Earlier,in August 2003, through an executiveorder, an interim Pension Fund Reg-ulatory and Development Authoritywas set up. Its functions are ex-plained in its title. The necessary le-gal backing could not be obtaineddue to the onset of elections.

After the United Progressive Al-liancecametopower,itintroducedthePFRDA Bill in Parliament. But, notethat the Standing Committee chairedby Shri BC Khanduri had studied theBill in great detail and submitted itsreportin2005,interaliaapprovingthenew scheme introduced by the NDA.Again, due to the general elections in2009, theBillcouldn’tgetpassed.

UPA-II tabled the Bill yet again.AndafterconsiderationbytheStand-ing Committee, this time chaired byShri Yashwant Sinha, a consensuswas reached. However, the govern-ment appears to disagree with twokey recommendations made by theCommittee. The BJP considers thosetwo recommendations as critical to

the sector because of their long-term implications. They are: (a) aminimum assured return on invest-ment, for example, comparable tothe Employee Provident Fund Or-ganisation interest rate, and (b) fix-ing a cap on foreign investment; thatis, foreign direct investment inpension funds should not exceed26%. We want these conditions tobe part of the Bill so that if anygovernment wants to change them,it will have to come back to getParliament’s mandate.

While the BJP is working consis-tently and continuously on sectoralreforms with an understanding ofpeople’s aspirations and well-being,thegovernment’sapproachcontinuesto be tardy and patchy. A glaring in-stance of the government’s laid-backapproachtoreformBillswasalsoseen

when the PFRDA Bill was introducedin the Lok Sabha in March 2011. Asizeable number of the CongressParty’s own members were absent.But for the BJP fully backing thegovernment, they would have facedembarrassment.

Theimportanceof thepensionsec-tor cannot be overstated in a countrythat has one-eighth the elderly popu-lation of the world. Only 12% of ourworkforce is in the organised sector.Managing their retirement assets isbig business. The BJP is keen andhopeful that the advisory committeeenvisagedintheBill, consisting of allstakeholders, should ensure that themanagement of the pension funds islabour-friendly.

The author is nationalspokesperson,Bharatiya

Janata Party

Roughly 20m persons havejoined the ranks of the el-derly over the last decade.Add another 50m to this by2021.Sincemostsuchwork-

ers may have barely enough savings tosupport their consumption for even afew months after their incomes dry up,and also as they are largely excludedfromexistingpensionprogrammes,theprimary retirement plan for most Indi-anscanonlybetoworktilltheydie.

Yet, pension reforms don’t appearurgent as we stand on the verge of al-lowing yet another year slip by on thePFRDA legislation. With the benefit ofhindsight,weshouldknowalreadythatexisting pension programmes can’twork for most of India—apart from be-ing fiscally unsustainable, the existingEPFO/EPShaslimitedcoverageandof-fersmeagrepensioncover.

But,sevenyearsafterNPSwasman-dated for new government employees,little progress has been made on thePFRDA legislation. At the heart of thepoliticalinertiaaretheself-styledadvo-cates of people who are still strugglingto accept the urgency of pension re-form,especiallyforthepopulationtheyrepresent—oursurveysshowthereisavery large latent demand for a broad-based pension programme among avery large number of Indians who areinterestedinsavingfortheiroldage.

In 2004, it was desirable to have es-tablishedastatutoryregulatorforNPS.By 2011, this has become an urgent ne-cessityasnearly30lakhindividualsarealready covered by a pension systemthatpresentlyreliesoncivilcourtsandtheContractActtoenforcecompliance,instead of achieving this throughregulationsandpenalties.

Ironically, while successive debatesaround the PFRDA legislation havecentered around customer protection,theyhavemanagedtoonlydeferappro-priate safeguards through legislationfor the people who have already joinedthis scheme. In this context, concernsrelated to FDI limits, administered re-turnsandequityinvestmentsareeitherirrelevant,ill-conceivedorunfounded.

The core NPS architecture is de-signed specifically to protect sub-scriber interests over multiple-decadehorizons. For example, pension fundmanagers,whetherdomesticorglobal,cannot derive anything more than theasset management fee that they pre-commitformanagementof NPSassets.DuetotheNPStruststructure,savingsof NPSsubscriberscanneverreflectonthebooksof afundmanageroranyoth-er intermediary. Importantly, NPS cus-tomers are not forced to invest their re-tirement savings into equities and arefree to put all their money into govern-mentbondsif theywish.Butthemajor-ity of the working poor, who are a keytargetaudienceforNPS,areunlikelytoescape old age poverty unless they in-vest at least a part of their modest sav-ingsintoequities.Inthissituation,andespecially in the context of unpre-dictableinflationlevels,benchmarkingNPS returns to the EPF may only pro-ducesub-optimalinvestmentoutcomesand inadequate retirement incomes.There is an essential role for an inten-siveretirement-literacyeffortandforastrongregulatortopreventmalpracticeand to infuse confidence among exist-ing and future customers. Both Sebiand Irda have done this in their sectorsand we should urgently achieve a simi-lar outcome in the pension sector. Thepeople we’re all debating about simplycan’taffordanyfurtherdelay.

The author is director ofInvest India Micro Pension Services

NIRMALA SITHARAMAN

THE TWO POINTS THE BJPWANTS IN THE PFRDA BILL—AMINIMUM ASSURED RETURNON INVESTMENT, AND AN FDI

CAP OF 26% IN PENSIONFUNDS—ARE CRITICAL IF WE

WANT TO SAFEGUARDWORKER INTERESTS

Post-retirement bluesThe PFRDA Bill—critical if millions of Indians are to get old-age security under the new pension scheme—is held hostage inParliament, with the BJP and Mamata Banerjee ranged against it on issues of assured returns and foreign investment caps

IdeascaFE

India and China are the future driversof the world economy, though the twoeconomies look very different interms of their development patterns

and economic structure. China hasemerged as the manufacturing power-houseinthelast20yearswhileIndiahasbe-come the major player in services.

China’s share in world manufacturinghas witnessed tremendous elevation from2.9%in1991to13.7%in2011.Theincrementin the Chinese economy’s contribution toworld manufacturing has come at the costof the European Union, whose share haddeclinedto20.9%in2010from33%in1991.Itbecomes much more pronounced when welook at the fact that per capita manufactur-ing GDP of China has increased by 8 timescompared to 1991, reaching $806 in 2010while India’s is just $122 (see figure). Theshare of India in world manufacturing is amere 1.8% and has increased by just 1%over the past 20 years.

At the same time, the US contributionhasremainednearlystagnant,whichisduetotheirspecialisationincapitalgoodsman-ufacturing, while Chinese manufacturingis dominated by consumer goods. Chinamay have succeeded in capturing a biggerchunk of world manufacturing, but its percapitamanufacturingGDPisstillfarbelowthat of the US, which was $6,147 as of 2010.

India’s growth is presumed to be drivenby the services sector, which contributes amaximum 65.2% to its GDP. However, therole of manufacturing in India’s develop-ment can’t be discounted considering thefact that it contributed 16% to the country’stotalGDPin2010.Totalworkforceemployedin the manufacturing sector is estimated tobe more than 40 million, which amounts to9%of thetotalworkingpopulationof India.It is interesting to note that the share ofmanufacturing to GDP in India hasn’tchanged much over the past 20 years, due toboththeincreaseintheshareof theservicessector and the decrease in the share of agri-culture, which has declined to just 14.6% in2010from31.4%in1991.Indiahasmorethan142,000 factories operating in the manufac-turing sector and needs to redefine its man-ufacturing strategy to drive its futuregrowthandtocreatemoreemployment.

Manufacturing growth has a multipliereffect on the economy. The development ofmany other dependent sectors, like logis-tics, insurance and raw-material produc-tion, is driven by the growth of manufac-turing as it is one of the biggest consumersforthesesectors. InstateslikeGoa,Gujarat

and Jharkhand, manufacturing con-tributes nearly 27% of the total GDP, whichmakes it extremely important for thesestates to focus on developing policies to fos-ter the development of this sector. It is in-teresting to note that the manufacturingsector in Orissa and Chhattisgarh hasgrown by more than 16% against India’soverallmanufacturinggrowthrateof 9.3%over the past five years, and it is driving thefuture growth of these states (see figure).

The two states of Maharashtra and Gu-jarat together form 34% of the total grossoutput of India’s manufacturing sector,which makes them the manufacturing gi-ants of the country. It is very important to

map the manufacturing sector’s perfor-mance at both the state and firm levels toimprove overall manufacturing competi-tivenessinIndia.Atthestatelevel,theman-ufacturing sectors of Uttar Pradesh, WestBengal and Kerala are found to be the leastproductive, having a ratio of total out-puts/inputs of nearly 1.2 and requiring ur-gent attention from the government. Thefirms in Himachal Pradesh and Uttarak-hand have the highest labour productivity,where the net value added by employees onanaverageismorethanR1lakh(seefigure).In states like Bihar, firms are found to bevery efficient in using their capital and areproducinggrossoutputthatismorethan10

times their fixed investments.Today, manufacturing in India requires

urgent attention from policymakers, to ad-dress the challenges at both the macro andmicro levels. There is a need to reduce thetax burden to improve profitability, and toprovide for the upgradation of workers’skills and technology. Costs of productionhavereachedextremelyhighlevelsbecauseof rising land prices; this needs to bechecked.Highpowercosts,lowerefficiencyanddecliningavailabilityof qualitylabourarealsoaffectingcompetitiveness.Thegov-ernment should adopt a cluster-based de-velopment strategy to push high growth inthe manufacturing sector. It needs to devel-

op a strategic policy framework to identifyand develop innovative clusters that have agreat potential in exports and can generatemore employment. There is a need todevelop investment mechanisms to fosterpublic-privatepartnershipsthatcaninvestin sick clusters and focus on improving thelatter’s productivity.

There is a need for state-specific ap-proaches. After all, each state is at a differ-ent stage of development in the manufac-turing industry and, therefore, needsdifferentstrategiestoimproveitsmanufac-turing competitiveness.! Strong manufacturing states (Gujarat,Maharashtra, Tamil Nadu, Karnataka,Andhra Pradesh, Goa, Haryana and Jhark-hand) need an innovation-driven strategy.These states need to move towards moretechnological advancement to improvetheir production efficiency. These statesshould invest in developing advanced skill-sets for manufacturing and become moreexport competitive.! Weaker manufacturing states (Tripura,Sikkim, Nagaland, Kerala, Jammu andKashmir, Delhi, Bihar, Assam, and West-Bengal)needaninvestments-drivenstrate-gy. They need to give more incentives to in-dustry in terms of taxes, power costs andlogistics, and try to facilitate more privateinvestments in the sector.!Medium manufacturing states (Chhattis-garh,HimachalPradesh,MadhyaPradesh,Orissa, Punjab, Rajasthan, Uttar Pradeshand Uttarakhand) need a factors-drivenstrategy. These states need to focus in low-ering the costs of inputs of production, de-veloping the right set of skills and talent,and removing the barriers to doing busi-ness. These states should initiate public-private partnership mechanisms to attractinvestments and improve productivity.

Before devising policies for cluster devel-opment, it should be understood that manu-facturingclustersneedtobemoreintegratedand deeper than service clusters. How clus-ters that are not export-oriented fit into theglobal value chain of manufacturing needstobeanalysed.Indiahasabigpotentialof be-coming a good manufacturing-outsourcingbase for manufacturing clusters due to thepresenceof rawmaterialsandcheaplabour.But our clusters will need more marketingand brand-building assistance to improvetheir export competitiveness against thelikes of China. Indian manufacturing play-ersneedtopitchupproductqualityforwest-ern markets rather than focusing too muchonpricecompetitionfromChina.

Amit Kapoor is honorary chairman,Institute for Competitiveness, India,

and Anshul Pachouri is seniorresearcher at the institute

Decoding manufacturing competitivenessIndia needs state-specific approaches to consolidate and attract investment

GAUTAM BHARDWAJ

EPS/EPFO-TYPE ASSUREDRETURNS ARE UNVIABLE—THE EPS HOLE IS R50,000 CRALREADY. MANDATINGTHIS MAKES NPS ANON-STARTER AND HURTSMILLIONS WHO NEED NPSCOVER FOR THEIR OLD AGE

AMIT KAPOOR &ANSHUL PACHOURI

The State of Manufacturing in India

Near Term State Prosperity Performance

Highly Produc0ve and Prosperity Rising versus India

Andhra Pradesh

Arunachal Pradesh

Assam

Bihar

Chhagsgarh

Delhi

Goa

Gujarat

Haryana

Himachal Pradesh

Jammu & Kashmir Jharkhand

Karnataka

Kerala

Madhya Pradesh

Maharashtra

Manipur

Meghalaya Mizoram

Nagaland

Orissa

Punjab

Rajasthan

Sikkim

Tamil Nadu

Tripura

Ukar Pradesh

Ukarakhand West Bengal

0

20000

40000

60000

80000

100000

120000

140000

0 2 4 6 8 10 12 14 16

Gross Domes$c Product per Capita CAGR rate, 2008-‐2010

High but declining versus India

Low and declining versus India Low but rising versus India

High and rising versus India

All

India

Avera

ge

57.28

Inde

x Po

ints

All India GSDP /Capita rate (CAGR) of 8.36 %

All India Average of 46,836 Rupees/capita

Gross Dom

es$c Produ

ct per Cap

ita, 201

0

Composi0on of Haryana’s Economy in Greater Depth

Agricuture

Forestry and logging

Fishing

Mining and quarrying

Manufacturing Electricity, gas and water supply

Construc0on

Trade, hotel and restaurant

Railways

Transport by other means

Storage

Communica0on

Banking and insurance

Real states, ownership of dwellings and business services

Public sdministra0on and defence

Other services

-‐1

0

1

2

3

4

5

6

7

8

0 5 10 15 20 25 30

Haryan

a /N

a$on

al GSD

P share (Percent) ,20

10

Average of Change in contribu0on of (Haryana /Na0onal sectoral), CAGR is 15.26%

Strong and Growing Posi0on

Change in contribu$on of GSDP of Haryana to total Indian GSDP, CAGR (2000-‐2010)

Average of (Haryana/ Na0onal sectoral )GSDP share is 3.5%

State Private Sector Wage Performance

Jammu & Kashmir

Himachal Pradesh

Punjub

Ukaranchal

Haryana

Delhi

Rajasthan

Ukar Pradesh

Bihar

Nagaland

Manipur

Tripura

Meghalaya

Assam

West Bengal

Jharkhand

Orissa

Chagsgarh Madhya Pradesh Gujarat

Maharashtra

Andhra Pradesh

Karnataka

Goa

Kerala Tamil Nadu

0

20000

40000

60000

80000

100000

120000

140000

160000

0 2 4 6 8 10 12 14 Wage Growth (CAGR), 2001 to 2008

Low and declining versus India Low but rising versus India

Average Wage : Rupees 64,741

Wage Growth rate 4.53%

Highly and rising wages rela0ve to India


Average Wages in Rup

ees ,2008

Long Term State Labour Produc0vity

Jammu & Kashmir

Himachal Pradesh

Punjab

Haryana

Ukar Pradesh

Rajasthan

Delhi

Ukarakhand

Bihar

Orissa West Bengal

Assam

Meghalaya Tripura

Mizoram

Manipur

Nagaland

Arunachal Pradesh

Sikkim

Jharkhand

Gujarat

Maharashtra

Goa

Madhya Pradesh

Chhagsgarh

Andhra Pradesh

Karnataka

Kerala

Tamil Nadu

0

50000

100000

150000

200000

250000

300000

350000

400000

0 2 4 6 8 10 12 14 16 18 20

GSDP /Labor force par$cipant growth rate(CAGR)


Low and declining versus India

All India Average of of 1,18,112 Rupees/Labour force par0cipant

All India Average of 11.37 %

Highly produc0ve and Produc0vity rising versus India

Low and rising versus India

GSD

P at Current Pric

es per labo

ur fo

rce pa

r$cipa

nt,201

0

Short Term State Labour Produc0vity

Jammu & Kashmir

Himachal Pradesh Punjab

Haryana

Ukar Pradesh

Rajasthan

Delhi

Ukarakhand

Bihar

Orissa West Bengal

Assam Meghalaya

Tripura Mizoram

Manipur

Nagaland

Arunachal Pradesh

Sikkim

Jharkhand

Gujarat

Maharashtra

Goa

Madhya Pradesh

Chhagsgarh

Andhra Pradesh Karnataka

Kerala

Tamil Nadu

0

50000

100000

150000

200000

250000

300000

350000

400000

0 5 10 15 20 25 30

GSDP /Labor force par$cipant growth rate(CAGR)

Low but rising versus India

All India Average 57.28 Index Points

All India Average of 15.11%

All India Average of of 1,18,112 Rupees/Labour force par0cipant

Highly produc0ve and Produc0vity rising versus India


Low and declining versus India

GSD

P at Current Pric

es per labo

ur fo

rce pa

r$cipa

nt,201

0

Long Term State Job Growth

Jammu & Kashmir Himachal Pradesh

Punjab Haryana

Ukar Pradesh

Rajasthan

Delhi

Ukarakhand

Bihar

Orissa

West Bengal

Assam

Meghalaya Tripura Mizoram Manipur Nagaland Arunachal Pradesh

Sikkim

Jharkhand

Gujarat

Maharashtra

Goa

Madhya Pradesh

Chhagsgarh

Andhra Pradesh

Karnataka

Kerala

Tamil Nadu

0

10000000

20000000

30000000

40000000

50000000

60000000

70000000

80000000

90000000

0 0.5 1 1.5 2 2.5 3 3.5

Job growth rate CAGR, 2001-‐2010

All India average of 1,62,99,464 Jobs /State

All India Average 57.28 Index Points


Gaining Jobs Losing Jobs

Num

ber o

f Job

s, 2010

Near Term Unemployment Rate

Andhra Pradesh Arunachal Pradesh

Assam

Bihar

Chagsgarh

Goa

Gujarat

Haryana

Himachal Pradesh Jammu

jharkhand

Karnataka

kerala

Madhya Pradesh

Maharashtra

Manipur

Meghalaya

Mizoram Nagaland

Delhi

Orissa Punjab

Rajasthan

Sikkim Tamil Nadu

Tripura Ukar Pradesh

Ukarakhand

West Bengal

0

5

10

15

20

25

30

-‐30 -‐25 -‐20 -‐15 -‐10 -‐5 0 5 10 Change in Employment rate 2008 to 2010


All

India

Avera

ge

57.28

Inde

x Po

ints

All India Average of -‐6.55%

Below average Unemployment

Unemployment Rising

Above Average Unemployment

Une

mploymen

t rate 2010

Healthcare

Andhra Pradesh

Arunachal Pradesh Assam

Bihar

Chhagsgarh

Delhi

Goa

Gujarat

Haryana

Himachal Pradesh


Karnataka

Kerala

Madhya Pradesh

Maharashtra Manipur

Meghalaya

Mizoram

Nagaland

Orissa

Punjab

Rajasthan

Sikkim

Tamil Nadu Tripura

Ukar Pradesh

Ukarakhand West Bengal

0

1

2

3

4

5

6

7

8

9

0 1000 2000 3000 4000 5000 6000

Total Government Expenditure on Medical, Health and Sanita$on in Crores

All India Average 3.95%

All India

All India Average 1407.59 Crores

Percen

tage of T

otal governm

ent E

xpen

diture on Med

ical, H

ealth

an

d Sanita$o

n

Debt to GDP ra0o

0 20 40 60 80 100 120

Andhra

Assam

Chagsgarh

Goa

Haryana

Jammu & Kashmir

Karnataka

Madhya Pradesh

Manipur

Mizoram

Orissa

Rajasthan

Tamil Nadu

Ukar Pradesh

West Bengal

30.1 115.9

28 39.7

15.2 13.8

35.5 32.1

19 55.7

70.1 33.6

24.3 34.3 34.4

25.1 77.4

37.3 109.1

59.4 30.6

35.2 41.1

80.6 25.5

42.2 43.5

41.1 42.8

Debt to GDP Ra$o of States

Prescribed limit according to WTO for developing

economies

Prescribed limit according to the growth and stability Pact of EU


11!WWW.ECONOMICTIMES.COM

Policy

MYTHILI BHUSNURMATHThe world economy may not be outof the woods yet after the havocwrought by the financial excessesof the last decade, but the reality isthere is no turning the clock backon financial liberalisation.

However, received wisdom evenin the West has veered away froman effusive espousal of financialopenness and capital mobility to amore nuanced view; one that disti-nguishes between good and bad fi-nancial liberalisation. The formeris now seen as beneficial for econo-mic growth while the latter couldbring more grief than benefits.

The good thing about this new in-sight is that a great deal of the rece-nt research now focuses on identi-fying types of financial integra-tion; distinguishing between thosethat enhance economic growthand those that are destabilisingand harmful. In contrast, most ofthe previous empirical work failedto pay sufficient attention to thedifferential effects of differenttypes of capital flows.

Needless to say, economists differwidely in their analysis of the im-pact of financial liberalisation ongrowth. Some point to the dangersof asset price overshooting as a re-sult of excessive foreign investordemand for emerging markets’stocks, bonds, real estate and otherfinancial assets. Others argue thatsurges in capital inflows raise fin-ancial and macroeconomic risk asincreased private capital inflows,especially in the form of debt, leadto lending boom-and-bust cycles.

Reinhart and Reinhart find a rob-ust empirical association betweensurges in financial capital inflowsand banking crises, while Cowanand Raddatz find that industriesthat are more dependent on exter-nal finance decline significantlymore during a sudden stop, espe-cially in less developed countries.

A recent NBER paper adds to thisgrowing literature by examiningthe differential impact of threebroad types of financial capital in-flows — portfolio debt, portfolio eq-uity and foreign direct investment— on the growth of manufacturingindustry in a large sample of coun-tries: 37 industries in 99 countriesfrom 1991 to 2007. It uses both cross-country and within-country dataand evaluates whether and howeach type of financial capital in-flows affects the development ofindustrial sectors that are most inneed of external finance.

Not surprisingly, it finds portfo-lio inflows — both debt and equity— have a mixed association withgrowth, and tend to be associatedwith negative growth effects forlarge surges. FDI is the most stableof the three broad types of privatecapital inflows as well as the onlyone with a statistically significant-ly positive correlation with manu-facturing sector growth. FDI in-flows exhibit a positive associationwith aggregate manufacturing gr-owth during most of the sample pe-riod, with the volumes of inflowsinto individual countries such thata significant positive economic im-pact is observed in all selected

countries both at the aggregate lev-el and specifically for industries inneed of external financing.

But FDI might not be an unmiti-gated blessing. In line with exist-ing empirical literature, the paperfinds a negative association betwe-en FDI and growth following pro-longed periods of steady FDI in-flows into a country. The authorssurmise this may be due to the waythese inflows interact with exter-nal financing needs of industries.For instance, ‘green’ FDI (new FDI)may compete for external financ-ing with domestic firms and, par-ticularly in the case of emergingmarkets, may crowd incumbentfirms out of local bank lending.

Extending theanalysis over timeto externally fina-ncially-dependentindustries, the pa-per finds there arefrequent oscillati-ons between debt,equity and directinvestment finan-cing. This is pos-sibly because ofherding from one

type of financing to another as‘bottlenecks’ are repeatedly form-ed when one source takes too muchprecedence over the other.

In sum, the paper concludes unre-gulated financial flows have a mix-ed effect on the overall performan-ce of the real sectors in emergingmarkets. In essence, therefore, wh-ile the merits of openness are un-disputed, it is for each country tochart its own course, depending onits macroeconomic fundamentalsand political economy considera-tions. The days of rocket scientistsand neat answers are over. Amen!(Capital Flow Types, External Financ-ing Needs and Industrial Growth,June 2011, NBER Working Paper, Josh-ua Aizenman and Vladyslav Sushko)

Grey Matter | Research Explained

No Broad Brushfor Capital InflowsNot all capital flows are necessarily beneficial

AMIT KAPOOR

The current EU economic crisis hasraised concerns over high sovere-ign debt and its harmful effect on

economies that has left Greece and Portu-gal in crises. The theory of debt says thatonce external debt becomes very large,economies are unable to generate pri-mary balance to repay the debt, causingcurrency deflation and adverse shocks.In light of the global impact of debt, wetry to discern the state of affairs in India.

India has to pay external debt of $305.9billion that accounts for 17.3% of GDPand 10.3% of total public debt on India asof March 31, 2011. The gross public debton India is more than 70% of GDP, as perIMF, in the year ending 2011. The coun-try’s external debt has grown at the rateof 12.3% annually during 2006-11 whilethe economy has grown at an annualgrowth rate of just 7.3%, which is alarm-ing and will leave future generations un-der higher debt burden. This month, theInstitute for Competitiveness’ state per-formance barometer looks at the condi-tion of debt across the states and assessestheir position in managing their financeslooking through the lens of fiscal deficit,debt-to-GDP and interest payment sharein revenue receipts of the government." Higher fiscal deficit makes debt bubblelarger and compromises with growth: Ut-tar Pradesh has very high fiscal deficit of24% of revenues that demands for moreborrowing from the markets, and thedebt burden has reached .̀ 2,34,581 crorein 2011, as per RBI. The debt on Uttar Pra-desh alone constitutes 12.9% of the out-standing liabilities of all state govern-ments and the debt-to-GDP ratio hasreached 45.8 in 2011. The high debt leavesthe government no option but cutting ex-penditure, decreasing subsidies and rais-ing taxes in the economy, which also incr-eases inflation and slows real growthrate. These fiscal irregularities are resp-onsible for slower growth of the state thatis just 5.5% annually in the last five yearsagainst overall India growth rate of 7.3%.

Mizoram and Sikkim have very highdebt-to-GDP ratio of 98.1 and 82.2, respec-tively, and are on the verge of touchingthe level of debt-to-GDP of Ireland (101.6)and Belgium (103.1) in the EU, which isnot appreciable for financial stability.The debt-to-GDP ratio of above 60 is con-sidered dangerous both for developingand emerging economies. Such a highdebt increases the risk of financial andeconomic turmoil and EU has put themandatory condition of debt-to-GDP lessthan 60 for any nation to become the part

of the European Central Bank and EU." Robust GDP growth in states makesdebt sustainable: Orissa experienced tre-mendous growth rate of nearly 10.02% inthe past five years, enabling the state tobring the debt-to-GDP ratio from nearly60% in 2005-06 to its half in 2010 with thedeclining rate of above 12% annually(graph 1). The higher growth rate genera-tes more economic activity that eventual-ly increases the revenue receipts of thegovernment from which it is able to repaythe interest and principal amount of thedebt. Thus, the strategy for states shouldbe to achieve higher growth rate. " Higher interest payment share in reve-nues of state governments raises fear of fi-

nancial crises: The total outstanding lia-bilities of West Bengal are nearly .̀ 2 lakhcrorein 2011, as per RBI, for which inter-est payments accounts for nearly 60% ofgovernment revenues, which means thatafter paying interest on debt, West Ben-gal will face a huge cash crunch. The in-terest payment share in revenue receiptsof West Bengal has grown by 7.76% annu-ally while the GDP has grown at the rateof just 6.02% for 2006-11. Fear of financialcrisis, thus, faces West Bengal (graph 2).

High interest payments make the finan-cial system unstable, represent poor fina-ncial health, restrict public expenditureand investments in economic activitiesand puts the state on a slower growth

track. We need more fiscal reforms andproper credit rating for states to assesstheir repaying capacity. The rating sho-uld consider government debt, fiscal defi-cit, gross savings, demand, economicgrowth of all primary, secondary and ter-tiary sectors, and previous debt historyto assess the condition and avoid the sit-uation of excessive debt.

The states need to follow different strat-egies to tackle their financial conditionto achieve higher growth and reduce debtburden. On the basis of debt and growthto be followed, states can be classified in-to four categories (see graph) and suggesteconomic strategy they need to follow.(The author is with Institute for Competitiveness)

Escape From Certain DebtFor states, different levels of debt and growth call for different strategies for long-term sustainability

Investment Strategy (Highgrowth, low-debt states)Need to invest in developingmore advanced factorconditions such as humancapital, physical communicationand administrative support togenerate better economicoutput and become self-sustainable over thecoming years.

Andhra Pradesh (AN), Bihar (BH),Chhattisgarh (CH), Delhi (DL),Gujarat (GJ), Haryana (HR),Jharkhand JH), Kerala (KE), Orissa (OR) and Rajasthan (RJ)

Industrial Development Strategy(Low growth, high-debt states)Need to bring a revolution in theirdevelopment by identifying anddeveloping the industrial clustersthat have the potential ofgenerating more economic valueand employment. Investment bythe government has to be moreresponsible and effective.

Himachal Pradesh (HP), Jammu &Kashmir (JK), Manipur (MN),Mizoram (MZ), Nagaland (NA),Punjab (PB), Sikkim (SK), Tamil Nadu(TN), Tripura (TR), Uttar Pradesh(UP) and West Bengal (WB)

InfrastructureDevelopment Strategy(High growth, high-debt states)Need to developadvance infrastructurefor industries such astourism to increaserevenues that help inrepaying debt astourism is the maindriving factor for theirregional economicgrowth.

Arunachal Pradesh (AP)and Uttaranchal (UK)

Restructuring Strategy (Lowgrowth, low-debt states)Need to invest and givemore loans to the industrialsector for their expansion,which increase theeconomic output and help inlashing the growth. Thesestates need to restructuretheir systems and makethem more effective inpolicy implementation.

Assam (AS), Goa (GO),Karnataka (KA), MadhyaPradesh (MP), Maharashtra(MH) and Meghalaya (ME)

Debt and Growth: The Road Ahead for States

GDP growth rate (CAGR)

Inte

rest

pa

ym

en

t/R

ev

en

ue

s re

ceip

ts g

row

th r

ate

(C

AG

R)

70

60

50

40

30

20

10

0

-10

2 4 6 8 10 12 14

BH

CHOR

DL

GJ

JH

ME

AS

HP

MP

UPGO

TNWB

PB

RJKA

MH

SK

AP

NA

MZ

MNTR

JK

KE

UK

AN

HR

De

bt-

to-G

DP

gro

wth

ra

te (

CA

GR

)

GDP growth rate (CAGR)

15

10

5

0

-5

-10

-15

2 4 6 8 10 12 14

BH

CH

OR

HR

DL

GJ

PB

APSK

NA

JK MZ

MPTR

MN

AS

WB

TN

MEKAKA

ANJH

RJ

MH

UP

HP

GO

UK

KE

C KRISHNA KUMAR

On May 10, 2010, the UN General Assemb-ly proclaimed 2011-20 as the Decade of Ac-tion for Road Safety. The resolution ackn-owledges nine international regional mi-nisterial declarations/expert group rec-ommendations and recognises the Glob-al Status Report on Road Safety: Time forAction publication by the WHO. The datacontained in this report is alarming andcalls for urgent remedial measures.

Death and injuries on the road do not,unfortunately, ignite the shock and reac-tion that one jet crash causes. They aretreated as lifeless statistics. But the num-bers are staggering. Over 1.2 million peo-ple die each year on the world’s roads, and20-50 million suffer non-fatal injuries.And over 90% of the world’s fatalities onthe roads occur in low-income and mid-dle-income countries, which have only48% of the world’s vehicles. Almost halfof those who die in road traffic crashesare pedestrians, cyclists or users of mo-

torised two wheelers — collectivelyknown as vulnerable road users — andthis proportion is higher in poorer econo-mies of the world. The cost of road trafficinjuries is $518 billion each year.

Indian official statistics lack credibilityas there is no organised method of collec-tion and reporting of data. The number ofpersons killed from road accidents is1,25,660 for 2009, as per the ministry ofroad transport and highways’ report. It isbelieved that the yet-to-be-confirmed fig-ure for 2010 is 1,60,000. This jump may notbe due to actual rise but also may be re-flecting improved data management. TheWHO report does a statistical correctionto compensate for weak vital registrationsystems — completeness less than 85% orwith more than 30% of deaths undefined.The modelled data avoids definition-re-lated bias while calculating death rates.The actual number of deaths reported byIndia for 2006 was 1,05,725, but the model-led number came to 1,96,445 with a rangeof 1,55,270 to 2,66,999.

In fact, Delhiites need to worry. Delhiroads consistently kill more people: 22%of all deaths reported for 23 large citiesand towns. As per official figures for 2009,the national capital witnessed 2,325deaths on the roads, followed by Bengalu-ru (742), Mumbai (628) and Chennai (618).Few urban centres have recorded reduc-tion in accidents and deaths. Nobody oth-er than the steep inverse relationship ofvehicular speeds to severeness of the in-jury can claim the credit for this.

Predictions are road injuries will rankthird among the leading causes of globaldiseases by 2020. It is time we had enoughbite in the promotion for road safety. TheUN report on Road Traffic Injury Preven-tion came up with six recommendations." To identify a lead government agencyto guide the nation’s road safety effort.This agency needs to coordinate depart-ments such as roads, transport, health aswell as committed NGOs and traffic po-lice. It should rope in celebrities, intelli-gentsia and political champions.

"Set up an institutional arrangement togather, collate and publish credible dataon road traffic injury."Prepare a national road safety strategyand plan of action, and set goal and driveambitious goals for lower traffic injuries.India is among the three from this regionwho have not progressed in this regard."Allocate financial and human resourc-es to address the problem. Proactive stepscan attract resources from UN/WHO." Implement specific identified actions,such as helmets for two-wheeler riders,that can bring down casualties. Forgiv-ing road designs at black spots and manysuch techno-managerial actions and pub-lic education are vital." Support the development of nationalcapacity and international cooperation.

A safe road traffic system is one that ac-commodates and compensates for hu-man vulnerability and fallibility. Roadtraffic crashes are predictable and, there-fore, preventable.(The author is a transport consultant)

Road Fatalities: 2 Lakh and Counting

DHEERAJ SHARMA

Statements of corporate values andethics have been popular for decades.Organisations also have increasinglyasked employees to sign ethics state-ments to confirm their agreementwith core values. Recent well-publicis-ed corporate malfeasance has drawnattention to whether these tools are ef-fective or/and are true reflections oforganisation’s principles and values.

Particularly, the last decade has wit-nessed media frenzy surrounding un-ethical practices of several compani-es: Starbucks’ handling of coffee pro-ducers in Ethiopia, Nike’s handling ofchild labour-related issues in its facto-ries in Asia, Satyam’s multi-billion-rupee scam and Reliance Communi-cations’ alleged involvement in 2Gscam have been widely publicised andcriticised. Yet, Starbucks, Nike, Saty-am and Reliance continue to have hi-ghly-motivated and committed work-force, putting a question mark on thedirect linkage between a company’sethical values and performance out-comes of its workforce.

Furthermore, in the last few years,unscrupulous activities of many or-ganisations contributed to economicdisaster with employees continuing to‘go along’ with organisational objec-tives without blowing any whistle.

A study using employee data from amultinational corporation finds thatperceptual distortion attributable toorganisational fairness colours em-ployee perception of the ethical prob-lems in their firms. In other words, if acompany is procedurally fair to an em-ployee; ethical problems in the compa-

ny do not impact an employee’s perfor-mance outcomes. Consistency theori-es provide the explanation of how em-ployees may be committed and perfo-rm well, notwithstanding the incon-sistency between the company’s ethi-cal values (CEVs) and their own valu-es. Thus, having employees with dist-orted perceptions of organisation’sactivities and ‘going along’ becausethey are being treated fairly is a realpossibility because of an individual’sdesire to maintain cognitive consist-ency. In other words, commitment andperformance of ethical employeesmay stay at high levels, notwithstand-ing corporate ethical transgressionsinconsistent with individual employ-ee’s ethics. Particularly in the case ofa low CEV firm, nefarious corporatemanipulation of employees’ commit-ment and performance can be done byusing procedural fairness to concealunethical practices. So, organisation-al fairness may blind those inside theorganisation to ethical lapses and em-ployees may not be willing to blowwhistles on corporate malfeasance.

The presence of perceptual distor-tion in an employee means that orga-nisations need to objectively takestock of themselves or, potentially,and even more efficaciously, have ob-

jective outsiders or other parties eval-uate CEVs for them. Sharma and hiscolleagues recommend that managersperiodically conduct a research con-cerning employees’ perception of theorganisation’s ethical values and itsinternal policies. Managerial re-search findings may reveal the natureof employees’ selectivity. Corrective

actions such as com-municating policiesand values to the em-ployees in case theywere not aware ofsuch policies, makingsuch policies availa-ble to interested em-ployees, and respon-ding to the concernsand questions relatedto these policies willresult in reducing theperceptual distortion.

To illustrate the point, consider em-ployees promotion and compensationas two major contributing factors tothe perception of fairness in a majori-ty of organisations. If there are sub-stantial changes in the organisation’spolicies with regard to its promotionand salary, such changes must be com-municated appropriately to the em-ployees. Five distinct steps can be

identified in the pursuit of a success-ful internal communication.

The first step is to identify generalobjective of the change in salary andposition, or promotion. In other wor-ds, salary increments and promotionsneed to be objectively explained to theemployees. Arbitrary promotions andsalary increments may be a way tomask corporate malfeasance. In thesecond step, the management mayconduct a survey among employees inorder to determine their receptivitytoward the proposed change. A cost-and-benefit assessment is the thirdstep that can be completed to determi-ne whether the advantage from mark-eting a proposed changes in the firm’spolicies affecting a particular groupsof employees is worth the benefit re-ceived. If a decision is made to marketthe proposed change to employees, thefourth step is the creation of a docu-ment outlining the promotion and sal-ary policy of the organisation. The do-cument needs to be effectively commu-nicated to employees using a variety ofmethods such as group discussions,persuasive personal contacts, favour-able publicity and reminder promo-tion activities. The fifth and final stepis to ascertain whether the marketingactivity attained its objectives.

The organisation is willing to engagein the aforementioned steps, then, andonly then, will there be an appropriateunderstanding of how corporate ethi-cal practices affect employee perform-ance outcome. Further, an organisa-tion will be cognisant of the negativeinfluence of corporate malfeasanceon employee motivation, when the dis-torting effect of organisational fair-ness is parcelled.Adapted from Dheeraj Sharma, ShaheenBorna and Jim Stearns (2009), An In-vestigation of the Effects of Corporate Eth-ical Values on Employee Commitment andPerformance: Examining the ModeratingRole of Perceived Fairness, Journal ofBusiness Ethics 89(2): 25-260(The author is with IIM-Ahmedabad)

Covering Corporate MisconductSatisfied staff is lesslikely to see an unethicalmove by employer inbad light — and report it

Organisationalfairness mayblind thoseinside theorganisationto ethicallapses andemployeesmay not bewilling toblow whistles

ARINDAM

The Crossword 4352

Dilbert by S Adams

New researchdistinguishesbetweenfinancialintegrationsthat enhanceeconomicgrowth andthose that aredestabilising

Fiscal Deficit versus GDP


Assam

Bihar

Chhattisgarh

Delhi

Goa

Gujarat

Haryana

Himachal

Jammu & Kashmir

Jharkhand

Karnataka

Kerala

Madhya Pradesh

Maharashtra

Manipur

Meghalaya

Mizoram Nagaland

Orissa

Punjab

Rajasthan

Sikkim

Tamil Nadu

Tripura Uttar Pradesh

Uttaranchal

West Bengal

0

2

4

6

8

10

12

14

16

0 10 20 30 40 50 60 70 80 Fiscal deficit/ Revenues in % terms

age 57.28 Index All India Average of

23.93%

GSDP growth rate (CAGR) of 7.15%

Strong posi0on Stable growth

GSD

P Growth ra

tes (CA

GR 2006-‐10)

Urban Popula0on versus Urban Popula0on Growth rates


Assam

Bihar

Chhagsgarh

Delhi

Goa Gujarat

Haryana

Himachal Pradesh

Jammu & Kashmir Jharkhand Karnataka

Kerala

Madhya Pradesh Maharashtra

Manipur

Meghalaya Mizoram

Nagaland

Orissa Punjab Rajasthan

Sikkim

Tamil Nadu

Tripura

Ukar Pradesh

Ukarakhand

West Bengal

0

2

4

6

8

10

12

0 10000 20000 30000 40000 50000 60000

Popula$on in Urban areas as per census (provisional Data) in Thousands

Thousands

Growth ra

te (C

AGR 2001-‐2011)

All India Average 3.35% CAGR

All India

All India Average of 20950320 people/

state

Rural and Urban Popula0on in India

0

2,00,00,000

4,00,00,000

6,00,00,000

8,00,00,000

10,00,00,000

12,00,00,000

14,00,00,000

16,00,00,000

Rural

Urban

Urban

Rural

Rural, Urban and Total Popula0on

Andhra Pradesh

Arunachal Pradesh

Assam Bihar

Chhagsgarh

Delhi

Goa

Gujarat

Haryana

Himachal Pradesh


Karnataka

Kerala

Madhya Pradesh

Maharashtra

Manipur

Meghalaya

Mizoram

Nagaland

Orissa

Punjab

Rajasthan

Sikkim

Tamil Nadu

Tripura

Ukar Pradesh

Ukarakhand

West Bengal

-‐20

0

20

40

60

80

100

120

-‐20 0 20 40 60 80 100 120 Urban

Pop

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percentage of to

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Rural Popula$on as a percentage of total Popula$on


All

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67.02%


SATURDAY, JANUARY 28, 2012 Edgew w w . f i n a n c i a l e x p r e s s . c o m 9

64614442413230292626

Uttar PradeshWest-BengalMaharashtra

Andhra PradeshTamil Nadu

Madhya PradeshGujarat

RajasthanBihar

Karnataka

0 20 40 60 807764443332

Uttar PradeshKerela

MaharashtraMadhya Pradesh

GujaratTamil Nadu

RajasthanJharkhand

Andhra PradeshPunjab

0 2 4 6 8

1. Top 10 states with high density cities

DrAmitKapoor&AnshulPachouri

Citiesareamajorsourceof economicactivi-ty,employmentgenerationandprosperityinaneconomy.Withrisingincomelevels,

peopledemandmoregoodsandservices,whichbecomesanimportantfactorforthemtoliveincities.Thecitiesattractmoreskilledlabour,which,inturn, facilitatesinvestmentstoopennewfirmsandfosterindustrialdevelopmentinthecities.Citiesarethereflectionof globalinte-grationof aneconomyasamajorityof foreignfirmsoperatetheirbusinessesinbigcitiesandattractexpatstoliveandworkthere.

According to UN projections, 70% of the totalworld population will live in urban areas by 2050as compared to 50% in 2010. The percentage of ur-ban population to total population in the US, Eu-rope and China is 83%, 73% and 47%, respective-ly, which is much higher compared to India,which is just 32%.

Thestatesof UttarPradeshandKeralahavethehighestnumberof mega-citiesexistinginonestate,withpopulationsof morethan1million.It’sveryinterestingtonotethatexceptmega-cities,othercitiesexistinginKeralahavepopulationsoflessthan1lakh,whichshowsthatthestatehasclearlydifferentiatedbetweenhighandlow

urbanisedareas.DelhiandGoahavemorethan90%and60%of theirrespectivepopulationsre-sidinginurbanareas,whichmakesthemthemosturbanisedstatesinIndia.Sikkim,ontheotherside,haswitnessedthehighest decadalgrowthrateinurbanpopulation(150%),whichimpliesthatalotof peoplemigratedtourbanareasinthestateinthepast10years.

DrAmitKapooristhehonorarychairmanof Institute forCompetitiveness,India,and

professorof StrategyatMDI,Gurgaon,andAnshulPachouriisseniorresearcherat

InstituteforCompetitiveness,India

ITiswidelybelievedthatgoodeconomicsisnot necessarily good politics. Hard eco-nomic decisions are usually taken only

whenacrisishits.However,itwouldseemthatthe political context in India is changing,quite irrespective of any particular outcomeintheelections.

Political fragmentation in the 1980s and1990s was dominated by identity politics.However, in the past decade, there has beennoticeablepoliticalconsolidation, with morestable alliances emerging, increasing politi-calcompetition,andshiftingtheagendamoretowardsdevelopmentalissues.

Indeed,2012mayturnouttobequitesignif-icant in our political evolution, with sevenstatesgoingtopolls,fiveof themnow,andtwolaterintheyear.Forone,therearenobigemo-tiveissuestocolourtheseelections.So,thefo-cus is firmly on development. More interest-ing is the fact that all the major contestantsseem to be more evenly matched than everbefore. Irrespective of the outcome of theelections, the indications are that after theelections, the focus may increasingly be onpoliciesthatactuallyperform.

Policiesmatter,butananalysisof econom-icgrowthandelectoraloutcomesintwoof themajor poll bound states—Punjab and UttarPradesh—suggest that politicians are forcedto look for policies that improve economicperformance only when they find that theirpoliticalsurvivalisatstake.

So, the hypothesis is that political com-petition creates the condition where eco-nomic reforms become possible, which im-prove economic growth. The point is notthat an increased growth rate necessarilyimproves the prospect for reelection, but

what the impact of political change is oneconomic growth.

In the graphs, annual economic growthrates are compared with the electoral out-come (vertical bars), in terms of whether theruling party or coalition is reelected (+1), ordefeated (-1). In the case of stable coalitions,suchastheAkaliDalandBJPinPunjab,theyare seen as one in this code. Given the natureof coalitions, twomorevariationsareinclud-ed.If anexistingrulingpartyisagainpartof agoverningcoalition(eitherfrominsideorout-side), the outcome is assigned +0.5, and if an-othercoalitioncomestopowerthen-0.5.

What this analysis seem to suggest is thatwhen political competition is high, thegrowth rate tends to move higher. It is need-lesstosaythattheeconomyisaverycomplexanimal,anddoesnotmoveinalinearmanner.Butwhatthegraphsseemtosuggestisthataspolitical competition stabilises, the economytendstomoveintoahighergear.

On the other hand, the political narrativealso suggests a clear trend. First, the domi-nance of the major political force declines.This is followed by political fragmentation,

and then consolidation, and consequently in-creased political competition. This patternwasfirstreflectedinthestates.

For instance, Punjab is the first state innorth India where two major political forces,the Congress and Akali Dal-BJP have beencompeting hard for office for 40 years now.Since1972,ineveryassemblyelection,thetwohave exchanged their places. At first glance,the Punjab graph may suggest that economicgrowth may not matter, and the ruling partywould lose power irrespective of perfor-mance. But a more careful reading wouldshow that the economic growth rate has beenslowlyimproving.

Punjab,of course,hasbeenamongtheeco-nomically better off states in India for a longtime. And it is possible to identify policiessuchasthegreenrevolutiontoattributeforitsinitialsuccess.Thenthefragmentationof thepolity and the rise of insurgency in the 1980sslowedtheeconomy.Growthpickedupsignif-icantly in the 1990s, and so did political com-petition,yetrulingparitiescontinuedtofailtoget reelected. The state economy bottomed inthe early 2000s, with the drought leaving its

mark.Thentheeconomypickedup,whilethegovernmentchangedyetagain.

What is really interesting is that the aver-age growth rate in the past two decadesstayed higher. Punjab’s per capita state do-mestic product increased three-fold in thepast two decades.

So, the proposition here is that politicalcompetition with the real prospect of changein government perhaps provided the neces-sary incentive for the political leadership tolookforpoliciesthatdeliver.Sincechangecancome only through the political process, thisanalysis, if found valid, could help us betterunderstand the political context in order tohaveahandleoneconomicprospects.

Attheotherendof theeconomicspectrumisUttarPradesh,whichisalsogoingtopollsatthesametime.Geographicallythelargestandeconomicallyamongthepoorest,thestatehaslost its political predominance in nationalpolitics since the 1990s. The current electionmaychangethat,though.

UPhasthedubiousdistinctionof throwingup 20 chief ministers in the past threedecades.Tillthe1990s,thechief ministership

had rotated mostly among various con-tenders within the Congress party. But thenthe politics fragmented, and the governmentchanged hands nearly a dozen times, with allthe major political parties in the state gettinga chance to rule, interspersed with Presi-dent’srule,between1990and2003.Sincethen,therehasbeenmodestpoliticalconsolidation,withtwomajorparties(SPandBSP),andtworelatively small but significant political play-ers(BJPandINC).

The Uttar Pradesh graph illustratesthese changes—not very satisfactorily—sinceitcapturesonlytheelectionoutcomes.And even that is complicated by rapidlyshifting alliances. For instance, after the2002 election, Mayawati of BSP had formeda coalition government, but it barely lasteda year, when MLAs defected to support agovernment by Mulayam Singh’s SP. In theelection of 2007, SP lost and BSP got a clearmajority. Yet, UP seems to fit into this broadnarrative quite well. As politics consolidat-ed and became more competitive, economicgrowth increased, and its per capita statedomestic product doubled to over R12,000,between 2000 and 2010.

Two other states that fit this narrativequite well are Maharashtra and Tamil Nadu.And two states that do not neatly fit in to thisnarrative are Gujarat and West Bengal. Butthatisastoryforanotherday.

Despite the prevailing sense of policyparalysisatthenationallevel,clearlyIndiaischanging. Increasing political competitionhasopenednewopportunitiesforthevoterstonot only demand performance, but to drivethe economic changes as their aspirationsrise, and expectations leap far ahead of sup-ply. For a political economist, it would beworthwhile to focus on this process of politi-cal change, which is making it necessary forpolitical parties to explore new policies thatmightmeetthedemandsof theirelectorate.

The2012elections,quiteirrespectiveof theresults, may finally demonstrate whetherIndia is really entering a new phase wherecompetitivepoliticsdeliversgoodeconomics.

The author is director, Liberty Institute,an independent think tank in New Delhi

It is not clear if higher economic growth makes a re-election more likely, but it does appear that whenpolitical competition is high—as in the poll-bound states of UP and Punjab—growth rates tend to move higher

Can bad politics make for good economics?

BARUN S MITRA

Data Drive

Urbanisationin India

Source: Census of India 2011

97.5062.1751.5148.4547.7245.2342.5838.5737.4934.79

DelhiGoa

MizoramTamil Nadu

KeralaMaharashtra

GujaratKarnataka

PunjabHaryana

153.4392.7276.0867.3844.2542.7441.8641.8337.5536.26

SikkimKerala

TripuraNagalandHaryanaManipur

UttarakhandChhattisgarh

Arunachal PradeshAndhra Pradesh

0 30 60 90 120 0 50 100 150 200

States like Delhi and Goa have the largest share of urban population

% share of urban population % decadal growth (urban)

Class A cities (Pop > 1 lakh) Mega-Cities (Pop > 10 lakh)

2. Smaller states have higher proportion of urban population

Data Source: Census of India 2011

44.3042.1041.2036.5034.6032.9032.6032.2030.6028.00

OrissaMadhya Pradesh

ChattisgarhUttaranchal

BiharRajasthanKarnataka

MaharashtraUttar Pradesh

Andhra

17.4716.2613.0712.8710.6010.18

9.729.618.958.92

DelhiMaharashtra

HaryanaTamil Nadu

MizoramPunjabAndhra

West BengalMadhya Pradesh

Goa

0 15 30 45 60 0 5 10 15 20

States like Delhi and Maharashtra have the highest slum-dwellersPoverty Ratio-Urban % of slum population to total population

3. Urban poverty and slums continue to be a problem

Data Source: Ministry of Poverty Alleviation & Urban Development

52.2047.7044.8043.3039.4037.3037.1034.4030.2028.50

ManipurChhattisgarhWest Bengal

OrissaMadhya Pradesh

NagalandTamil NaduJharkhand

Andhra PradeshMizoram

74.3071.0063.4058.4052.7050.9039.5039.4036.4034.40

NagalandBihar

AssamKerala

Uttar PradeshJharkhand

ChhattisgarhTripuraOrissa

Manipur

0 15 30 45 60 0 20 40 60 80

Almost 75% of households in Nagaland do not have tap water% of households with drinking-water outsidepremises (distance more than 200 metres)

% of households without tapwater

4. Water availability is still low, even in top 10 states

Data Source: NSSO

54.5052.8048.2042.9039.2031.1027.4027.1025.6021.90

ManipurTripura

BiharChhattisgarh

OrissaMaharashtra

Uttar PradeshJharkhand

Madhya PradeshWest Bengal

31.5029.1027.7024.5024.3016.0014.2012.6011.8011.30

ChhattisgarhOrissaBihar

JharkhandMadhya Pradesh

Tamil NaduUttar Pradesh

RajasthanJammu & Kashmir

Karnataka

0 15 30 45 60 0 10 20 30 40

Half the households in Manipur and Tripura don’t have bathrooms% of households with no bathroom % of households with no sanitation

5. Sanitation is poor across the board

Data Source: NSSO

100.0099.8099.5099.4099.4099.3099.3099.0098.6098.60

NagalandMizoramManipur

Himachal PradeshSikkim

MeghalayaPunjabGujarat

DelhiUttarakhand

68.1054.0036.7030.3030.3029.3029.0026.3022.8022.60

TripuraKeralaOrissa

GoaMizoramManipur

NagalandChhattisgarh

BiharAssam

0 20 40 60 8097 98 99 100 101

% of households with power connections % of households with no drainageNorth eastern states have almost 100% power coverage6. While power coverage is good, drainage still suffers

Data Source: NSSO

15.0113.6513.6312.8312.6212.1211.9611.2410.9910.43

KeralaAssam

ManipurHimachal Pradesh

GoaSikkim

RajasthanJammu & Kashmir

PunjabMizoram

3.722.822.382.041.951.661.631.291.131.00

MaharashtraTamil Nadu

UttarakhandWest Bengal

Andhra PradeshGujarat

KarnatakaMadhya Pradesh

DelhiRajasthan

0 4 8 12 16 0 1 2 3 4

Per capita floor area (sq m) Urban housing shortage (In millions)Maharashtra has the highest shortage of urban houses, followed by Tamil Nadu

7. Urban housing shortage needs to be addressed

Data Source: Ministry of Housing & Urban Poverty Alleviation All graphics by SURENDER

60.5052.9047.0046.7045.5044.2036.4031.6031.0029.80

SikkimNagaland

Andhra PradeshTamil NaduMeghalayaKarnataka

DelhiHimachal Pradesh

MizoramArunachal Pradesh

1,9971,7201,6391,5021,3881,3711,2251,2091,2041,141

KarnatakaSikkim

MeghalayaDelhi

GoaKerala

MaharashtraAndhra Pradesh

UttarakhandMizoram

0 20 40 60 80 0 600 1,200 1,800 2,400

In Karnataka, Sikkim and Meghalaya, a household pays an average monthly rent of R1,600% of households living in rented dwellings Average rent paid by each household

R

8. Cost of renting a house

Source: NSSO

Punjab

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

1981-82 1986-87 1991-92

Change ineconomic growth

Electionoutcome

1996-97 2001-02 2006-07

Econ

omic

Gro

wth

Per

cent

age

-1

-0.5

0

0.5

1

Elec

tion

Out

com

e

Uttar Pradesh

0.00

5.00

10.00

15.00

20.00

25.00

1981-82 2009-10

Econ

omic

Gro

wth

Per

cent

age

-1

-0.5

0

0.5

1

Elec

tion

Out

com

e

Election Outcome codes: (-)1 Ruling party defeated, (+)1 Ruling party re-elected, (+)0.5 Ruling party with coalition, (-) 0.5 New Ruling party with coalitionData Source: Election Commission of India (ECI) and Central Statistical Organisation (CSO)

Change ineconomic growth

Electionoutcome


Urbaniza$on

Ins0tute for Compe00veness, India 29 19 DECEMBER 2011 45 BUSINESSWORLD19 DECEMBER 2011 44 BUSINESSWORLD

Delhi

Mumbai

Bangalore

Pune

Chennai

Gurgaon

Kolkata

Hyderabad

Ahmedabad

Jaipur

Noida

Surat

Nagpur

Kochi

Chandigarh

Vadodara

Thiruvananthapuram

Nashik

Rajkot

Indore

Kozhikode

Coimbatore

Lucknow

Mysore

Goa

Visakhapatnam

Kanpur

Bhopal

Madurai

Ludhiana

Vijayawada

Agra

Patna

Allahabad

Bhubaneswar

Amritsar

Meerut

Varanasi

Puducherry

Guwahati

Asansol

Jammu

Shimla

Dehradun

Srinagar

Jabalpur

Ranchi

Faridabad

Jamshedpur

Dhanbad

123456789

1011121314151617181920212223242526272829303132333435363738394041424344454647484950

For methodology, see page 43 Source: Institute For Competitiveness

72.8861.7460.6160.4565.9359.9265.4167.2862.1557.9158.2257.8054.7358.1861.1457.4955.8556.0656.2760.0653.7556.3856.2859.8156.6354.8756.4157.4155.3352.9354.3054.4255.9554.4256.9552.3754.4254.8053.2653.6352.0156.4753.6556.4753.3851.9955.1655.6057.0454.34

59.7460.7359.7058.9459.8257.9564.7955.8260.8857.6358.2957.5558.5656.0257.5257.4455.5557.6555.0059.3655.6156.4155.3957.9557.2353.9356.9258.3555.8255.8052.9855.3956.9255.3957.7654.8855.3956.0256.8657.4757.1356.9757.5156.9757.0753.6657.2855.0057.2456.89

92.5963.2461.9862.7275.0962.8866.3584.4564.0758.3458.1258.1848.9861.4166.5657.5756.3053.6858.1861.1350.9656.3457.6162.6255.7256.2855.6456.0154.5948.6156.2852.9754.4952.9755.7248.6152.9752.9747.8647.8644.3355.7247.8655.7247.8649.4851.9856.5056.7350.52

1689311425151316361471730282710422526122134241832474137293820483935464449234322455033311940

RANK2011

13482

13567

101712

916112429383214331528361841202725223926474635434523503449371931404448304221

RANK2010

CITY INSTITUTIONAL INFRASTRUCTURE

RANK

1289546141620319713331715251827101130314039283412213632454224222926233844463541473750434849

RANK SCOREINSTITU-TIONAL

SUPPORT

SUPPLIERSOPHISTI-

CATION

INDIA’S MOST COMPETITIVE CITIES 2011

84.4479.7462.5562.4366.1370.0764.2260.2058.9756.9171.5157.7862.6260.2453.6258.3159.0954.8557.7854.4661.8061.5553.8753.7451.8151.8754.3252.9160.8756.3452.1253.6950.3351.0055.5055.8854.0754.6155.6352.0250.6150.1552.5351.7349.9852.0949.7950.7649.8449.82

76.9787.2163.7757.1169.7478.9170.9357.6755.4954.6979.1953.2358.6658.7552.8954.1855.8256.2953.3156.4462.7961.5351.6652.6053.9853.2252.3454.5360.6553.9153.7251.0951.6952.4652.0253.1252.1152.8951.8855.7151.9752.4853.0452.6252.1453.1551.5651.8151.6051.60

91.9272.2861.3367.7662.5361.2257.5062.7362.4659.1263.8362.3366.5761.7354.3562.4362.3753.4162.2552.4860.8161.5756.0754.8849.6450.5256.2951.2961.0958.7750.5256.2948.9749.5358.9858.6456.0256.3359.3748.3249.2547.8152.0350.8447.8251.0348.0249.7148.0848.03

COMPETITION

SCOREBUSINESSINCENTIVES

INTENSITY& DIVERSITY

OF FIRMS

12341223161965

498102412172171534264313352720314236221418119

47253032445029394833404537384641

RANK

83.0178.4972.0071.4058.6356.7757.2657.0563.7664.8550.5062.8159.1756.6255.6357.2557.0063.4157.8252.8755.8651.4258.3952.6955.8357.0254.9051.6452.6256.9957.9257.1459.1059.3451.1456.0755.1453.6651.3750.1155.5252.0651.0753.0351.7151.3152.5352.3851.1951.69

65.0365.7767.9461.4960.7367.4958.7160.0059.4859.0153.9561.5258.8759.6167.7955.5159.2657.8659.0152.5558.8448.9557.3951.3166.8154.2650.4654.1852.1758.8254.3153.9450.9748.2452.1661.1654.7350.1057.8455.6255.8557.1158.3458.7857.6652.0051.5057.9052.4051.75

101.0091.2076.0681.3256.5346.0455.8154.0968.0370.6847.0564.1059.4853.6343.4658.9854.7468.9656.6353.1852.8953.9059.4054.0744.8559.7859.3449.0953.0855.1561.5260.3467.2370.4450.1350.9955.5557.2244.9144.6055.2047.0143.8047.2845.7650.6153.5646.8649.9951.62

DEMAND CONDITIONS

SCOREINCOMEDISTRI-BUTION

BASICDEMO-

GRAPHICS

59.9963.5362.7654.2556.2069.5157.9366.5154.7758.7478.5251.1555.9953.8561.3849.7556.0550.7751.3362.6254.4154.0959.7057.6056.1852.2958.7365.9550.9951.4954.3954.1657.6648.6053.9251.4752.3050.1962.1172.2749.3364.1954.4355.9759.5660.7457.5957.6854.3849.18

ADMINIS-TRATIVE

71.2568.1964.0468.5164.3561.3263.2960.5663.1352.5357.9860.5059.5661.6160.9457.6661.5653.0660.0259.2961.4863.3857.1956.2558.5153.3556.0552.8158.9755.4553.8658.5143.4959.3950.2253.0753.7955.7756.6547.0053.5548.6347.7754.9748.6250.9849.9152.2349.7549.88

HUMANCAPACITY

62.9770.6459.9964.2167.4562.6359.6164.8657.8152.2357.3457.9258.9164.5165.6458.2861.5651.9058.3354.1664.7660.9347.8158.5363.0559.8649.6056.5760.9351.9461.7748.7547.3547.7454.4949.8950.2649.0858.5057.8552.6456.7963.6953.8361.3256.7649.1152.3550.1549.91

INNOVATION

72.1970.2863.4960.8962.4864.2362.9663.8358.3557.6860.7856.2957.5457.9761.2456.8357.4153.1156.3960.9355.8458.3255.4256.8456.9256.7756.2259.6454.7154.6655.5554.5152.9652.4455.8653.2952.7453.0855.4958.3054.8455.5956.7653.4556.3655.0550.7548.9049.7448.79

SCORE

1251073641317112718168

221942259

301434212023281237383239444629414543331536312440263547494850

RANK

73.4372.1967.5361.8658.6368.6566.2861.3654.6465.3758.1053.8763.9147.8561.6859.2044.0750.1156.8769.1446.4557.9055.5255.9552.8554.3161.1565.2350.9155.1755.3056.2654.3152.9865.7853.8053.3254.8547.6353.4059.2852.2061.0352.5252.2063.6149.0560.0245.9243.52

95.4563.7764.4662.0362.3757.9464.0262.5558.1857.2156.5757.5550.0561.5756.8958.9560.6154.8555.9357.0959.2060.1051.5460.8661.1958.7756.4458.0758.0554.9056.4056.1557.9255.3751.0355.4155.6955.0957.3158.3757.1357.5257.3852.1360.3050.3646.9716.8252.2851.74

70.0383.3862.1554.5065.9065.2966.6467.1661.5660.0256.1756.7356.8358.4560.9057.1260.5957.9855.8863.2748.7553.5260.7851.8349.7462.0655.3759.2248.4359.0451.5753.2157.0250.5659.7256.1351.0953.5250.7360.8957.1154.2156.2351.2556.1447.8551.8754.3045.9748.50

INFRASTRUCTURE

COMMUNI-CATION

PHYSICALFINANCIAL

78.0272.9365.2864.2762.7562.3061.9961.7660.8659.7259.3358.8558.4858.0658.0157.3857.3157.1457.0757.0456.6256.5156.1755.5755.5155.4855.4855.4555.4455.3555.3255.1254.8754.6254.5954.4654.0653.9153.8453.6553.6353.6253.5953.5853.0952.7251.9751.6651.6650.97

OVERALLCOMPETI-TIVENESS

SCORE

Andhra Pradesh

Arunachal Pradesh

Assam

Bihar

Chagsgarh

Delhi

Goa

Gujarat

Haryana

Himachal Pradesh

Jammu & Kashmir

Jharkhand

Karnataka

Kerala

Madhya Pradesh

Maharashtra

Manipur

Meghalaya

Mizoram

Nagaland

Orissa

Punjab Rajasthan Sikkim

Tamil Nadu

Tripura Ukar Pradesh

Ukarakhand

West Bengal

0

2

4

6

8

10

12

14

16

0 10 20 30 40 50 60 70 80 90 100 Literacy rates in percentage terms


All India


Literacy Rates versus GDP GDP

growth ra

te (C

AGR 2006-‐2010)

Literacy Rates versus Popula0on

Andhra Pradesh

Arunachal Pradesh

Assam

Bihar

Chagsgarh

Goa

Gujarat

Haryana

Himachal Pradesh Jammu and Kashmir

Jharkhand

Karnataka

Kerela

Madhya Pradesh

Maharashtra

Manipur Meghalaya Mizoram Nagaland

Delhi

Orissa

Punjab

Rajasthan

Sikkim

Tamil Nadu

Tripura

Ukar Pradesh

Ukarakhand

West Bengal

0

50000000

100000000

150000000

200000000

250000000

0 10 20 30 40 50 60 70 80 90 100

Literacy rates in Percentage terms

Popu

la$o

n

All India Average 67232968 People/state

All India

All India Average Literacy level of

77.12%

POLICYTHE ECONOMIC TIMES ON SATURDAY MUMBAI 27 NOVEMBER 2010 *

SAWANT SINGH, SRIRAM RAMACHANDRAN &GAURAV SINGHI

ON MARCH 31, 2010, FOR THE FIRST TIME,the department of industrial policy andpromotion (DIPP) in the ministry of

commerce and industry put out a Consolidated FDIPolicy: Circular 1 of 2010 overriding the entire heapof press notes, circulars and clarifications issuedearlier in connection with foreign direct investment(FDI). The DIPP’s efforts in preparing Circular 1,which became effective from April 1, 2010, earnedplaudits from the industry at first, but on a closerlook, left India Inc and foreign investors high anddry, especially on issues relating to upfrontdetermination of price for capital instruments andnon-inclusion of partly-paid shares and warrantswithin the definition of ‘capital’.

To its credit, however, the DIPP has issued Consol-idated FDI Policy: Circular 2 of 2010 within sixmonths of Circular 1 and lived up to its promise byclarifying issues that had ruffled feathers in the FDIspace. We highlight a few key clarifications made inCircular 2.Death to warrants and life again: Circular 1 created animpression that there was a complete embargo on is-suance of warrants and partly-paid capitalinstruments to non-residents even if the ForeignInvestment Promotion Board (FIPB) approved it. Onthe contrary, as a matter of practice, the FIPB wasconsidering such proposals and granting approvalsafter factoring in the time limit for conversion of thewarrants and quantum of upfront consideration.

The DIPP clarified the matter in a note to thedefinition of ‘capital’ in Circular 2 by stating thatinstruments other than equity shares and fully, com-pulsorily and mandatorily convertible preferenceshares and debentures may be issued after obtainingprior government approval. This change will ensurethat, on one hand, there is some elbow room for ma-ture foreign financial investors to structure theirinvestments and, on the other, domesticundertakings need not hand over a pie of theirbusiness at a price that could potentially be higher ata future point.Soothing NBFCs: Circular 2 also partly settles the dustover downstream investment by foreign owned andcontrolled (FOCC) non-banking financial

companies (NBFCs). Reading the relevantprovisions of Circular 1 (reiterating what had beenstated in press note 4 issued in February, 2009) ledone to conclude that 100% wholly ownedsubsidiaries of the FOCC NBFCs must also meet theminimum capitalisation requirements of NBFCs.This would have made it commercially difficult forFOCC NBFCs to set up and operate differentsubsidiaries for separate activities like stock broking,housing finance etc. Much to the relief of 100%FOCC NBFCs, however, Circular 2 has explicitlystated that they will not be required to meetminimum capitalisation requirements. Speaking ofdownstream investments, there were concerns afterthe release of Circular 1 that downstreaminvestment by a FOCC could be done only through

funds from abroad and not by leveraging funds fromIndia. Fortunately, Circular 2 has stated with wellclarified that investment by internal accruals ispermitted as long as other conditions laid down inthe policy on downstream investments are fulfilled.Breather to retailers too: Since FDI in multi brand retailis prohibited, players in this market have often beenin the news for the wrong reasons, trying to use thewholesale cash-and-carry route, where100% FDI ispermitted, as a backdoor to enter the multi brand re-tail sector. In Circular 1, the government had comedown heavily on FDI in multi brand retail sectorstructure — where the ownership structure of theretail entity and the wholesale entity were keptdistinct but within the same groupcompanies/promoters and exclusive arrangementswere made between the two companies to realisecommercial value — by stating that only 25% of thetotal turnover could be traded by the wholesale enti-ty amongst the same group companies and for‘internal use’ only. However, after much cajoling,the government has provided a breather to theinfamous indirect structures by getting rid of the‘internal use’ rule.Conclusion: The DIPP deserves a pat on its back for itsexemplary efforts, some of which we have discussedabove. In recent months, the DIPP has published afew discussion papers on opening up prohibited sec-tors such as multi-brand retail and defence to FDI. Apaper has also been put up for discussion on issue ofshares for consideration other than cash, so farpermitted in certain cases such as conversion ofexternal commercial borrowings or royaltypayments). There are, nevertheless, otherambiguities in the FDI policy requiring the DIPP’s at-tention — the important ones being upfrontdetermination of price of capital instruments at thetime of issuance and treatment of FOCC Indian com-panies as non-resident entities, given the guidingprinciple in the FDI policy that downstreaminvestment by FOCC Indian companies are requiredto follow the same norms as a direct foreigninvestment. These issues have been the bones ofcontention in boardrooms and we can only hopethat they can grab the DIPP’s attention at the earliest.

(S Singh is partner, G Singhi is senior associate and SRamachandran is associate at Phoenix Legal)

9

NDIA is at the centre of the population-versus-growth debate. With the world’s second-largestpopulation at 1.2 billion, the country must fo-cus on turning this population into a benefitrather than a disadvantage. This month, welook at how states in India can use their popu-lation size and growth rate to improve theircompetitiveness.

TRADITIONAL economic thinking seespopulation as a drag on a nation’s eco-nomic growth. However, with the worldlooking towards India as a growing andvibrant market, her ‘demographic advan-tage’ is often touted as her biggest asset.

According to the theory of demograph-ic dividend, the rate of economic growthincreases due to a rising share of workingage people in a population. For India,falling fertility rates are resulting in a larg-

er chunk of working-age people, who cancontribute to the GDP and generate high-er output per capita.

In fact, the International Labour Orga-nization (ILO) has stated that India willaccount for the highest working age pop-ulation in the next 10 years, in a report re-leased recently. In the document preparedfor the G-20 Summit held earlier thismonth in Seoul, the ILO says that the G-20 nations will see their working age pop-ulation between 15 and 64 years increaseby 212 million in the period 2010-2020.Over 64% of this increase will occur in In-dia alone!

This month’s IFCIndia State DevelopmentBarometer takes a sharp look at what pop-ulation really means to the economicgrowth of India’s states and analyses howstates can use their demographic situationto improve their competitiveness, andhence, enhance their prosperity.

Rising stars among statesIt is widely accepted that growth among In-dian states is skewed, with some prosper-ous states bearing the burden of growth,while several other lag in terms of GDPgrowth and development parameters.

The average decadal GDP growth figuresshow that unexpected states such as Biharand Orissa, historically notorious for poorgrowth, have exhibited a sustained GDPgrowth rate. Bihar, specifically, is notablefor exhibiting a remarkable decadal growthrate of 10.83% while contributing on amodest population base. Bihar accountsfor 8.1% to the country’s population, asseen in the accompanying graph.

Meanwhile, states such as Maharash-tra, Goa, Punjab and Tamil Nadu, that areknown for their higher levels of industrial-isation, human development or agricul-tural prosperity seem to have slowed interms of GDP growth over the past decade.

Size does matterA large size of population appears to be aburden on the economy of states such asUttar Pradesh, Rajasthan, West Bengaland Madhya Pradesh. These states arealso usually characterised by low percapita income and higher disparities.Large population size is a major factor,

among several others, that is draggingdown the economic growth of relativelyaffluent states like Maharashtra, Kar-nataka and Tamil Nadu. Yet, a few statessuch as Bihar, Andhra Pradesh and Gu-jarat with large populations are exhibit-ing high GDP growth.

No burden on economic growthSixteen states in India have a GDP growthhigher than the national average. Ofthese, ten states show a populationgrowth rate higher than the national av-erage, while six other states have a popu-lation growth rate lower than the nation-al average.

Population growth, considered a bur-den to economic growth, seems to havelittle correlation with GDP growth (corre-lation = 0.24). Large states such as Bihar,for instance, have showed sustained GDPgrowth over the decade along with asteadily rising population, whereas statessuch as Punjab and Manipur with slowerpopulation increase are showing GDPgrowth rates that are lower than the na-tional average.

Population, a double-edged swordClearly, population is a double-edgedsword. On one hand, the data shows thatthere is no clear correlation betweengrowth in population and GDP. Yet, accord-ing to the demographic dividend theory, alarge working age population is an asset.

In order to be able to catapult theirgrowth rates, states need to look closelyat their competitiveness, which in turnis linked to their level of productivity.Improved competitiveness leads to im-proved incomes and better quality of lifeacross the board. When viewed fromthis standpoint, states will be able to de-velop strategies on how best to utilisetheir workforce — small or large, grow-ing slow or growing fast — to maximiseproductivity.Group 1: States with lower populationgrowth rates and high GDP growth rates,such as Kerala, Andhra Pradesh and Oris-sa need to look closely at the training lev-els of their workforce and create strategyto move towards high value sectors andindustries that need a more skilled work-

force, which are also correspondingly farmore productive.Group 2: States with healthy GDP andpopulation growth rates, such as Chandi-garh, Delhi, Haryana and Bihar must fo-cus on sectors where they are inherentlycompetitive because of the presence ofnatural resources or traditional skills andknowledge. These states should find waysto turn the availability of a large work-force in their favour by offering suitableeducation policies and opportunities. Set-ting the right priorities is critical to en-hance competitiveness for this band of In-dian states.Group 3: A number of states such as Kar-nataka, West Bengal, Rajasthan, TamilNadu and Mizoram are performing onlyslightly below India’s average GDPgrowth rate. These states can quickly cat-apult themselves into Group 2 with a fo-cused effort on productivity.Group 4: A roadmap for enhancing com-petitiveness is critical for poorly perform-ing states. Among these, states such as Ut-tar Pradesh and Madhya Pradesh withlarge and growing populations must con-trol the rate of population growththrough effective healthcare and out-reach efforts, as arresting populationgrowth takes time. They also need to har-ness their large growing workforce effec-tively and focus on promoting economicactivities that can employ and utilise alarge labour workforce, like certain typesof manufacturing.

Vision for the futureA look at the relationship between thepopulation and GDP growth serves tohighlight how states in various stages ofgrowth — both economic and demo-graphic — can harness their position inthe best possible manner. This is best doneby first ascertaining a state’s inherentcompetitive edge — these could be re-sources, sectors, human potential, etc —and then designing and implementingpolicy around this to achieve highly pro-ductive and efficient clusters that provideemployment, contribute to growing theGDP and bring prosperity as well.

Institute For Competitiveness

POST the crisis, the one common thread thatlinks advanced economies across the world,with perhaps the exception of the ever-prudentGermans, is the phenomenal increase in publicdebt, i.e., debt raised by governments strappedfor funds and desperate to kickstart the econo-my with stimulus packages.

Based on IMF forecasts, Eswar Prasad at Cor-nell University calculates that the level of aggre-

gate net government debt in the world will more than double from $23trillion — 44% of world GDP — in 2007 to $48 trillion — 65% of GDP— in 2015. Advanced economies account for much of this increase.

Prasad estimates the ratio of aggregate debt-to-aggregate GDP for ad-vanced economies will rise from 48% in 2007 to 71% in 2010, and fur-ther to 85% in 2015. In contrast, emerging markets (EMs) fare muchbetter. The corresponding ratios for the EM group are 30%, 30% and26% respectively. In 2007, EMs accounted for 24% of world nominalgross domestic product (GDP), in US dollars terms, and 17% of worlddebt. By 2015, they are expected to produce 35% of world output butaccount for just 14% of world debt. Thus, even as EMs increase theirshare in world GDP, their share in world debt is expected to come down.To put that more graphically, EMs will power their growth from inter-nal rather than borrowed resources.

This has two major consequences for EMs — both positive. One,they will be able to use more and more of their revenue for productivepurposes rather than for servicing debt, whether by way of interest costor repayment. Two, the distressing issue of inter-generational equitywhere succeeding generations end up paying for the profligacy of ear-lier generations will be resolved far more satisfactorily in EMs than inadvanced economies. Add to this the fact that EMs have a lower de-pendency ratio — read: larger share of population in the younger agegroup — and clearly, they are on a stronger wicket.

This is graphically brought home when the rise in debt is comparedwith the rise in GDP. EMs accounted for 10% of the rise in global debtlevels from 2007 to 2010, and could account for 13% of the rise from2010 to 2015. In contrast, their contributions to global GDP growthover these two periods are expected to be 70% and 54%, respectively.Average debt per capita in advanced economies was $19,400 in 2007,rose to $29,100 in 2010, according to the paper, and will go up to$41,000 in 2015. By 2015, the burden of debt for US citizens will rise to$48,000 per person. The debt burden for Japanese citizens will hit$75,900, the highest in the world. In contrast, China’s debt burden willbe just $1,200 in 2015. India’s, however, will be far higher at $2,013.

Among advanced economies, average debt per working-age personwill more than double from $31,700 in 2007 to $68,500 in 2015. Japantops the league tables by this measure while the US moves into secondposition by 2015 with debt per working-age person of $134,500 and$79,200, respectively.

Diehard optimists point to periods when public debt ballooned butfears of Doomsday proved ill-founded as a reason not to get perturbedabout the sharp rise in debt. But they could be living in cloud cuckooland! Borrowing like there is no tomorrow has serious — and unhappy— consequences for both their own as well as global financial stability.

The analysis paints a sobering picture of worsening public debt dyna-mics and a sharply-rising debt burden in advanced economies. It warnsthe worst is, perhaps, yet to come. First, these countries are experienc-ing little population growth. Second, they are facing rapidly aging pop-ulations. Third, their economies are likely to register slow growth, es-pecially relative to the EMs. Fourth, entitlement spending on health-care and pension could rise sharply due to unfavourable demographics.

The prescription: advanced economies had better get their fiscal acttogether once the recovery is better entrenched. It will take strong po-litical will to tackle near-term deficits and then to control the growth inentitlement spending. In the absence of decisive action, ballooningpublic debt in these economies could become a major threat to domes-tic and global financial stability.

http://www.brookings.edu/articles/2010/1101_government_debt_prasadMythili Bhusnurmath

[email protected]

Sins ofindulgence

The DIPP has clarified manycontentious issues regarding FDI,but ambiguity remains on subjectssuch as determination of pricing ofcapital instruments at issuance

THE EXPLOSION OF PUBLIC DEBT HASSERIOUS LONG-TERM REPERCUSSIONS

ANIMISHA

POLICIES THAT MAKE PRODUCTIVE USE OF AVAILABLE RESOURCES ARE CRITICAL

ARINDAM

I

INDIA

Source: IMF Fiscal Monitor, May 2010; IMF WEO, April 2010;ILO Economically-Active Population Estimates and Projections, 2009

DEBT BURDEN

Gross debt to GDP (%)Gross debt(US dollars in billions)Gross debt percapita (US dollars)Gross debt perworking-ageperson (US dollars)

79.01,080

888

1,638

77.81,164

945

1,728

70.31,400

1,092

1,954

2009 2010 2011 2014 201580.8999

833

1,548

67.31,471

1,132

2,013

ChandigarhDelhiUttarakhandHaryanaGujaratBiharChhattisgarhSikkimNagalandHimachal Pradesh

5.05

3.11

1.59

1.98

1.64

1.86

1.76

1.58

4.89

1.59

Populationgrowth ratesare HIGHERthan nationalaverage

Populationgrowth ratesare LOWERthan nationalaverage

GDP(India avg 7.99)State

Populationgrowth rate

(India avg 1.55)

13.1211.8611.8

11.6910.8

10.839.789.6

9.548.88

Andhra PradeshOrissaMeghalayaTripuraArunachal PradeshKerala

0.99

1.07

1.39

0.99

1.27

0.77

9.529.378.058.4

8.799.55

PEOPLE POWER

States contributing to India’s GDP growth(GDP growth higher than national average)

Population size vs GDP growth rate

Comparison of state population growth and GDP growth

0 500 1000Population size in lakhs

1500 2000 2500

14121086420

CH

GOTRMG

MZ

HP

JHPJ

MPAS

ANMNJK

PD

DLHRUK

SK CG KRORAR

NL

TN

APBR

KA RJWB

MH

UP

DL: DelhiCH: ChandigarhKR: KeralaTR: TripuraMG: MeghalayaPD: PuducherryKA: KarnatakaWB: West Bengal

AS: AssamNL: NagalandUK: UttarakhandHR: HaryanaGJ: GujaratCG: ChattisgarhSK: SikkimJH: Jharkhand

TN: Tamil NaduBR: BiharRJ: RajasthanGO: GoaMZ: MizoramPJ: PunjabMN: ManipurOR: Orissa

UP: Uttar PradeshAP: Andhra PradeshAR: Arunachal PradeshHP: Himachal PradeshJK: Jammu & KashmirMP: Madhya PradeshAN: Andaman & Nicobar IslandsMH: Maharashtra

0 1 2Population growth (%)

3 4 5

14121086420

AP

TR KR

WB

AS

TN

KR ORAR

MGMH

RJGO

AN

PD

JHPJJK

UPMN

MP

SK CGHP

GJ BR

UK HR DL CH

NL

GJ

MZ

JAYEETA

States can harness theirpopulation to grow

FDI policy needs some more weeding DILBERT by S Adams










9






























[email protected]

Sins ofindulgence



ANIMISHA


ARINDAM

I

INDIA


DEBT BURDEN


79.01,080

888

1,638

77.81,164

945

1,728

70.31,400

1,092

1,954

2009 2010 2011 2014 201580.8999

833

1,548

67.31,471

1,132

2,013


5.05

3.11

1.59

1.98

1.64

1.86

1.76

1.58

4.89

1.59





(India avg 1.55)

13.1211.8611.8

11.6910.8

10.839.789.6

9.548.88


0.99

1.07

1.39

0.99

1.27

0.77

9.529.378.058.4

8.799.55

PEOPLE POWER





1500 2000 2500

14121086420

CH

GOTRMG

MZ

HP

JHPJ

MPAS

ANMNJK

PD

DLHRUK

SK CG KRORAR

NL

TN

APBR

KA RJWB

MH

UP






3 4 5

14121086420

AP

TR KR

WB

AS

TN

KR ORAR

MGMH

RJGO

AN

PD

JHPJJK

UPMN

MP

SK CGHP

GJ BR

UK HR DL CH

NL

GJ

MZ

JAYEETA












9






























[email protected]

Sins ofindulgence



ANIMISHA


ARINDAM

I

INDIA


DEBT BURDEN


79.01,080

888

1,638

77.81,164

945

1,728

70.31,400

1,092

1,954

2009 2010 2011 2014 201580.8999

833

1,548

67.31,471

1,132

2,013


5.05

3.11

1.59

1.98

1.64

1.86

1.76

1.58

4.89

1.59





(India avg 1.55)

13.1211.8611.8

11.6910.8

10.839.789.6

9.548.88


0.99

1.07

1.39

0.99

1.27

0.77

9.529.378.058.4

8.799.55

PEOPLE POWER





1500 2000 2500

14121086420

CH

GOTRMG

MZ

HP

JHPJ

MPAS

ANMNJK

PD

DLHRUK

SK CG KRORAR

NL

TN

APBR

KA RJWB

MH

UP






3 4 5

14121086420

AP

TR KR

WB

AS

TN

KR ORAR

MGMH

RJGO

AN

PD

JHPJJK

UPMN

MP

SK CGHP

GJ BR

UK HR DL CH

NL

GJ

MZ

JAYEETA




HOW INDIAN STATES PRIORITISE EDUCATION

Small states: Surging ahead; need focus Large states: Daunted, need to leverage infrastructure Higher secondary enrolment vs GDP

^ Per lakh population (in ‘000) inhigher secondary

Source: Institute for Competitiveness * %

# State govt revenue expenditure in ` ‘000 crper lakh population in education, sports, arts & culture

UttarakhandHimachal P MeghalayaTripuraHaryanaGoa Delhi Kerala

GDPgrowthState

Femaleliteracy*

11.808.888.058.40

11.697.81

11.869.55

59.6367.4259.6164.9155.7375.3774.7187.72

331141

128

No ofuniversities

Expenditure oneducation#

18.72

27.61

7.31

17.56

13.63

28.29

20.81

16.27

GDPgrowth

Femaleliteracy*

7.037.85

7.497.76

10.839.524.705.80

64.4367.03

59.6156.8733.1250.4350.2942.22


13.85

24.50

14.00

14.65

7.63

12.70

16.91

6.53

Two performersTamil NM’rashtraMost daunted by educationWBKarnatakaBiharAndhra PMadhya PUttar Pradesh

Enrolment^7.62

5.71

3.17

3.51

3.57

3.82

4.01

3.35

No ofuniversities

2227

141617201929

Enrolment^

4.53

4.38

2.90

3.62

1.05

1.84

3.16

0.32Higher secondary enrolment per lakh population (‘000)

14

12

10

8

6

4

2

00 1 2 3 4 5 6 7 8

Uttarakhand

Himachal PradeshM’rashtraGoaTripura

Tamil NaduManipur

MadhyaPradesh

J&K

PunjabAssam

Jharkhand

UttarPradesh

WBMizoram

K’takaRajMeg

AP KeralaSikkim

Ch’garhOrissaAndhra

Nagaland

Bihar GujaratHaryana Delhi

THE real estate sector is extremely capital-inten-sive and its growth, to a large extent, dependson the availability of low-cost funds. Tradition-

ally, Indian developers funded projects from domes-tic sources such as friends and family, customeradvances, bank loans and so on. However, globalisa-tion has opened the floodgates for the inflow offunds from foreign sources. Sources of foreigncapital include foreign institutional investors (FIIs),foreign direct investment (FDI), private equity andreal estate funds.

The trends seen since 2005, when the real estatesector was opened up to foreign investment, indicatethat FDI could be a significant source of funds for thereal estate sector. Current FDI regulations for the sec-tor stipulate certain conditions, such as minimumarea to be developed, minimum capitalisationrequirements, lock-in and so on, that have been putin place from the perspective of preventingspeculation in the sector. Such conditions, however,pose challenges for FDI inflows into various projects,where given the nature of projects, it may not bepossible to comply with such conditions. According-ly, regulators may consider providing adequate flexi-bility in the policy framework to increase the flow ofFDI into such projects. We have highlighted some as-pects regulators should consider.

The FDI regulations currently in force allow anentity to receive FDI in construction developmentonly if the minimum built-up area of the project is50,000 square metres. Such a condition can proveunrealistic for some developers, especially those inmetro (tier-I) cities where large parcels of land aredifficult to acquire and prices are exorbitant. Butgiven the high cost of construction, projects in suchcities need foreign funds. Further, it is also unlikelythat an affordable housing project would requiremore than 50,000 square metres of development.Thus, to effectively promote affordable housingprojects, especially in tier-I cities, the minimumarea requirement for such projects in the FDI policyneed to be lowered.

Work on many projects by Indian developerscame to a grinding halt for want of funds andcustomer demand amid the global financial crisis of2008-09. The global economy is now recovering andthe work on many of these incomplete projects havepicked up. Foreign funds and investors, too, have be-

gun to show increased interest in these brownfieldprojects. Unfortunately, we have not been able tocapitalise on this opportunity as investors are notclear whether FDI is be permitted in brownfield proj-ects. Having said that, I reiterate the famous words offormer American President Thomas Jefferson: “Theprice of freedom is eternal vigilance.” Thegovernment can consider imposing certainrestrictions and allow FDI inflows into brownfieldprojects subject to specified conditions.

Further, there is no denying that real estate is acomplex sector and for any project to take-off, clear-ances are needed from multiple governmentagencies. And so, coordination between jointventure partners becomes extremely essential forsuccessful completion of projects. Many real estateprojects have failed to take-off due to the delay in ob-taining statutory clearances and conversion of landusage. In some instances, projects have failed due toconflict between joint venture partners. Therefore, itis necessary that the FDI policy for investing in realestate should provide investors exit options. The cur-rent FDI regulations provide for a three-year lock-infor each tranche of foreign investment, and earlyexit needs government approval. The process can besimplified by defining specific cases where a foreignpartner can be allowed to exit a project early withoutnecessarily seeking approval.

Recently, the government allowed development ofprojects with mixed use — development of hotel alongwith a housing/commercial complex, etc. Herein lies asource of potential conflict in interpreting regulations.The FDI policy for investment in hotels and hospitals isfar less stringent than the one for housing projects. Incase of such mixed use projects, where the majority ofbuilt-up area goes towards development of hotel orhospital, there is lack of clarity which provisions of theFDI policy would apply to the project — those for hotelsand hospital or those for housing projects. Adequateclarity under the policy, specifying applicability of regu-lations in case of mixed-use project, would be welcome.Regulators may consider providing adequate checkssuch as the nature of project licence, percentage of areaallocable for development of hotels, hospitals, etc toprevent any misuse of such relaxation.

Real estate is a key growth driver for the Indianeconomy and the industry has significantbackward and forward linkages with theeconomy. Adequate relaxation in current FDI pol-icy could foster significant opportunities forgrowth and investment in the sector. The govern-ment’s concerns about keeping a strict vigil oninflow of funds into the real estate sector is wellappreciated, but it should consider certainrelaxations to provide a fillip to FDI in the realestate sector. Adequate checks and balances canprevent misuse of these relaxations.

(Views are personal)

POLICY

DILBERT by S ADAMS

9

THE global marketplace and indeedthe world economy is changing rap-idly and these changes are impactingthe way we do business, earn a livingand grow within India as well. About

51% of India’s population is less than 25 yearsold. While this gives India a large demographicadvantage, states in India need to focus on edu-cation to ensure that an educated and appropri-ately trained/skilled workforce is ready to tapthe opportunities of the time. However, in-creased government spending on educationsince 2007 notwithstanding, 142 million chil-dren in India are denied primary and secondaryeducation and a third of the nation’s populationcannot read. Clearly, with the Indian economygrowing rapidly, fuelled by the rise of knowl-edge-intensive and hi-tech sectors like ICT, au-tomotives, pharmaceuticals and others, statesmust ensure quality education to enable Indiansreap the benefits of economic growth.

In order to understand which states in Indiaare prioritising education, we considered fourindicators — higher secondary school enrol-ment, government revenue expenditure on ed-ucation, number of universities and women’sliteracy rates. These indicators serve as goodpointers to the condition of education in a stateand impact on economic growth.

Small states target education as the recipefor growth; need more focus The hill states of Uttarakhand and HimachalPradesh will benefit from high per capita schoolenrolment figures, which are much higher thanthe national average of approximately 3,230 stu-dents per lakh people, even as their GDP growthrates are above the national average. Meghalaya,Tripura, Haryana, Goa and Delhi are other stateswith healthy GDP growth as well as school enrol-ment figures. These, except for Haryana, are alsoamong the top 10 states in terms of per capita rev-enue on education, arts and culture. This indicatesthat education is a clear priority in these states.

Women’s literacy is another dimension andthe one widely seen to have a big impact oneconomic growth. Many small states fare wellin this regard. Kerala clearly stands out withexemplary female literacy rate (87.72%). Thestate also shows healthy school enrolmentfigures, good government expenditure andadequate infrastructure.

The fact that these states are small — both ingeographical area and population — requires

them to pay attention to the quality of their hu-man resources if they have to attract investmentand successfully harness their natural endow-ments. For instance, both Uttarakhand and Hi-machal Pradesh have focused on creating indus-trial zones. The success of these industrial zonesdepends on the availability of employable talentlocally, besides power, cost of land, logistics andgovernment incentives.

From a competitiveness perspective, thesestates would need to align skills imparted bythe institutions in the state with the skills to berequired by the industry in the future. States,therefore, need to make a realistic projectionof labour that would be required by the in-dustries the state is promoting as well as bythose industries that already exist, and thenfocus on developing institutions that can trainpeople who can be placed in these industries.This is the key to enable people to avail of theopportunities within their home state, insteadof being forced to migrate to other states ormetros for employment.

Large states daunted by task of educatingmasses despite adequate infrastructureTamil Nadu and Maharashtra are the only twolarge states with good higher enrolment figures forhigher secondary school. Other large states such asWest Bengal and Karnataka, that have healthyGDP growth, and even Bihar and AndhraPradesh, that have substantially higher GDPgrowth than the national average, show poor percapita higher secondary school enrolment. Mad-hya Pradesh scores low on both counts. Largestates, with the exception of Tamil Nadu, Maha-rashtra and West Bengal, are also at the bottom ofthe list when it comes to female literacy.

Educating a large population is a challenge forbig states. If we look at the figures for govern-ment expenditure, this is evident. Large statesdo not figure among the top 10 spenders perlakh population. Yet, West Bengal spends moreon education, arts and culture than Tamil Naduand Maharashtra that show good enrolment fig-ures. Madhya Pradesh and Uttar Pradesh spendthe least per capita on education.

Ironically, these large states have the best infra-structure in the country. Uttar Pradesh has thelargest number of universities (29), followed byMaharashtra (27), Tamil Nadu (22), AndhraPradesh (20), Madhya Pradesh (19), Bihar (17),Karnataka (16) and West Bengal (14). However,the quality of education imparted by these institu-tions is a matter of concern. States such as MadhyaPradesh and Uttar Pradesh are neither able to ad-equately fund their educational institutions, norretain quality faculty. Inadequate employmentopportunities for graduates further strengthen thecycle of out-migration, leaving such states bereft oftheir knowledge workers and lowering the moti-vation for profit-making corporations to invest inthese locations. This has, however, been changingin specific cities where centres of learning, corpo-rate will and attractive location factors are fuellingclusters of industry in specific verticals. Bangalorein Karnataka has emerged as a hub for the IT in-dustry and so has Hyderabad in Andhra Pradesh.Uttar Pradesh has world-class institutions like theIndian Institute of Technology at Kanpur, IndianInstitute of Management at Lucknow and the Ba-naras Hindu University at Varanasi, but has beenunable to develop industries around these to har-ness the resident knowledge from these placesand employ the graduates. The standards of state-level universities that attract local students mustalso be simultaneously raised while local employ-ment opportunities are created.

Low-performing states need urgent inter-vention to progressSome of the small and mid-sized states that donot fare so well need specific intervention.Chhattisgarh, Orissa, Gujarat and Nagalandhave poor higher secondary school enrolmentsdespite moderate and high GDP growth. Jhark-hand, Punjab and Assam have low GDP growthrates and low school enrolment. Other than Na-galand, Punjab and Gujarat, these are also thestates with low female literacy.

Rajasthan is on the cusp of both GDP growthand school enrolment. However, Rajasthan hassurprisingly high government expenditure oneducation, showing that the state has prioritisededucation and is determined to cross over into abetter performer in the next decade. States suchas Chhattisgarh and Jharkand, which do nothave a single university yet, need to urgentlycreate the right infrastructure to raise their hu-man capacity and attract investment.

Long-term benefits on the horizonStates need to focus on the benefits that educa-tion provides in the long term. A literate popula-tion results in controlled population growthrates over time. High-quality workforce will al-low states to boost economic growth by focusingon more sophisticated and value-added indus-tries and services instead of merely continuingto invite investment in basic manufacturing andservice activities.

The increased productivity that a trainedworkforce can deliver results in enhanced pros-perity and better distribution of wealth, whichare the ultimate goals of governments and pri-vate sector corporations alike.

Institute for Competitiveness

WHENwritten in Chinese, the word “crisis” iscomposed of two characters — one representsdanger, and the other represents opportunity,noted the young president who inspired awhole generation. That was then, in the hal-cyon days of the 1960s. Fast-forward to thehere and now, and a panoply of working pa-pers and books on the financial crisis of 2007-09 has since been authored by westerners,

and which generally call for revamped regulation and broadermacroeconomic oversight. The regional bias is understandable: thecrisis was home-grown in the US thanks to dodgy, mortgage-backed financial products.

But the crisis did precipitate a global recession, and there have beenfew Asian perspectives on the developments. Until now. A new book,which contains a bouquet of policy-relevant essays by a leading ana-lyst affiliated with a prominent think-tank in Penang, Malaysia, seeksto address the challenges for Asia. The study is categorical that inboosting domestic consumption as an alternative to exports-ledgrowth, Asian economies should not follow the ‘Anglo-Saxon mod-el of pumping up domestic consumption through debt creation’. Itadds that Malaysia’s Gini coefficient, a measure of income inequality,at 49, is higher than that in the US. Also, 60% of the former’s house-holds earn only about $900 per month. And without increased in-comes and improved income and wealth distribution, merely ‘pump-ing up consumption through debt creation could take it down thesame path as the US,’ it is opined.

The study, which has a forward by Dr Y V Reddy, former RBI gov-ernor, who mentions that it is lucidly written, easy to read and simpleto understand. Next, that it captures current history, context and theway forward. Further, that it elaborates upon financial theory and ‘fo-cuses on policies and institutions rather than abstract thinking or an-ecdotes’. Also, that it offers an emerging market insight, while pre-senting in detail the debates on the subject in the western, particular-ly Anglo-Saxon, world. Dr Reddy has called for supplementing theanalysis in the text with more discussion on economic integration be-tween Japan, China, Southeast Asia and South Asia, in particular In-dia. In sum, the expert view is that the study has several original ele-ments explaining recent developments in financial markets and theattendant policy measures.

For example, there’s much reference in the study to the efficientmarket hypothesis (the idea that asset prices always and everywhere re-flect true value), which it is noted, governed public policies in generaland the stance of key central bankers and regulators in particular. Thehypothesis is seen as the primary cause of the crisis. In the run-up to thecrisis, prominent market participants asserted that ‘interfering withmarket-determined pricing of risks would be a serious policy mistake’.Yet, ‘these same people’, the study mentions, ironically pleaded andprobably lobbied for massive government intervention in the form offiscal stimulus packages, within months of asserting very much to thecontrary, once the crisis struck and there was a virtual credit freeze.

By 2009, the world had pumped in $12 trillion of stimulus pro-grammes to boost growth, and several mature economies in Europehave since opted for budgetary austerity measures and fiscal belt-tight-ening. So, things remain in a state of flux. For a big picture snap-shot,the study dwells at length on the ‘three contested terrains’. It avers thatthe financial crisis should be seen as a contest for hegemony in three ar-eas. At one level, what’s underlined is the continued political and eco-nomic dominance of the international monetary system by the US. Inparallel, there’s the attempt for continued dominance of the financialsector over the real economy. And in tandem, a contest for continua-tion of intellectual dominance by neoliberals and market enthusiasts.

The paper mentions that as the dollar remains the dominant inter-national currency, seigniorage, the ability to print money to pay yourliabilities, confers on the US the ability, in effect, to borrow and repaywithout limits, which is hugely distortionary. The emergence of co-anchor currencies would take time, it is opined. Going forward, poli-cymakers need to draw the right lessons from the great crisis and im-plement meaningful financial sector reforms, both nationally and forcross-border transactions, and not simply tinker with the system, con-cludes the study on a hopeful note.

(Nowhere to Hide, Chapter 6 The Three Contested Terrains, by MichaelLim Mah-Hui, Institute of Southeast Asian Studies, 2010)

Jaideep Mishra

[email protected]

Adequate relaxation in the currentforeign investment policy couldfoster significant opportunities forgrowth and investment in the real estate sector

Real estate sector needs FDI fillip

DEMOGRAPHIC ADVANTAGE

Focus on higher education to leverage

Financialcrisis & Asiandilemmas

States need to improvethe efficiency of

spending on educationand the quality of

teaching at schoolsand universities

AJIT KRISHNANTax Partner, Ernst & Young

ARINDAM

THE ECONOMIC TIMES ON SATURDAY NEW DELHI 25 DECEMBER 2010







GDPgrowthState

Femaleliteracy*

11.808.888.058.40

11.697.81

11.869.55

59.6367.4259.6164.9155.7375.3774.7187.72

331141

128

No ofuniversities


18.72

27.61

7.31

17.56

13.63

28.29

20.81

16.27

GDPgrowth

Femaleliteracy*

7.037.85

7.497.76

10.839.524.705.80

64.4367.03

59.6156.8733.1250.4350.2942.22


13.85

24.50

14.00

14.65

7.63

12.70

16.91

6.53


Enrolment^7.62

5.71

3.17

3.51

3.57

3.82

4.01

3.35

No ofuniversities

2227

141617201929

Enrolment^

4.53

4.38

2.90

3.62

1.05

1.84

3.16


14

12

10

8

6

4

2

00 1 2 3 4 5 6 7 8

Uttarakhand


Tamil NaduManipur

MadhyaPradesh

J&K

PunjabAssam

Jharkhand

UttarPradesh

WBMizoram

K’takaRajMeg

AP KeralaSikkim


Nagaland












POLICY

DILBERT by S ADAMS

9

























Jaideep Mishra

[email protected]










ARINDAM



Saturday, January 14, 2012 Edgew w w . f i n a n c i a l e x p r e s s . c o m 9

2011 2025

Data Source: UN Projections

17.821.7

19.320.2

10.610.5

8.610.0

4.55.0

0.0 7.0 14.0 21.0 28.0

India

China

EuropeLatin America

& Caribbean

USA

India will become the most populous country inthe world, surpassing China by 2025 (%)

1. Contribution to world population

% of Old population in total (2011)% Increment in potal old population

12.359.9

11.262.0

10.359.9

9.769.4

9.277.2

Kerala

Tamil Nadu

Himachal Pradesh

Punjab

Karnataka

0 25 50 75 100

The top 5 states where the old age population hasincreased the most

5. Increment in total old population

% of working population to total (1959)-2011% Increment in working population (2011-2026)

5.2

14.5

19.2

Delhi

Tamil Nadu

Kerela

West-Bengal

NE States(ex Assam)

0 20 40 60 8063.3

51.761.3

4.660.4

60.3

60.3

Most states will see an increase in their alreadyconsiderable working populations, especially Delhi

6. Increment in working population

32.8

% of Population (0-14) years to total% decline in population ofage group 0-14 (2011-2016)

-4.4

-10.0

-6.0

Uttar Pradesh

Bihar

Madhya Pradesh

Rajasthan

Chhatisgarh

35.02.1

34.0-14.6

32.7

31.3

-18 0 18 36 54

The number of children will decline in most states,although at differing rates

7. Decline in children population

Source: Census Projections

Sex Ratio (2011) Sex Ratio (2026)

942893

840

877839866

789

Himachal Pradesh

Punjab

Uttarakhand

Haryana

Delhi

963953

9740 300 600 900 1,200

The sex ratio in almost all the states will becomeworse by 2026

8. Sex ratio needs to be addressed

Working population (19-59 Years)Old population (Above 60 years)Children population (0-14 Years)

2011

2016

2021

2026

0 250 500 750 1,000

98.5346.9

673.9

740.3118.1

340.3792.5

143.2336.9

832.2173.2

327.0

The demographic profile raises serious concerns ofan ageing population and declining sex ratio (mn)

2. Population group-wise projection

Male (%)2011 Female (%)-6 -3 0 3 6

0-4 years5-9 years

10-14 years15-19 years20-24 years25-29 years30-34 years35-39 years40-44 years45-49 years50-54 years55-59 years60-64 years65-69 years70-74 years75-79 years

80+ years

-5.1-5.0-5.1-5.3-5.2-4.5-3.9-3.4-3.1-2.8-2.4-1.9-1.4-1.0-0.7-0.5-0.4

4.54.54.84.94.74.03.63.43.12.72.21.71.31.00.80.60.4

The male-female ratio gets less skewed towardsmales in the higher age groups

3. Male-female ratio across ages

Results of the quarter endedDecember started on a positivenote with IT major Infosys re-

porting a 33.3% year-on-year (y-o-y)rise in net profit and 30.8% (y-o-y)growth in revenue as a weak rupeeboosted margins. Even the Index ofIndustrial Production for Novembergrew by 5.9% after witnessing a con-tractioninthepreviousmonth.Theim-provement has mainly come in frommanufacturing, consumer durablesand consumer non-durables.

Though Infosys’ result has sur-prised analysts, the cut in its full-yeardollar revenue outlook for the fiscalyear to March 31, 2012—from 17.1% to19.1% projected in October last year to16.4% in December—because of theslower growth in developed marketscoupled with the European crisis hasaffected market sentiments. Analystssay the cut in the guidance will have anegative rub off on the sentiment forother IT stocks as well, and investorswill look at cues on the budget outlookfor the calendar year, spending withinkeyfinancialservicesandmanufactur-ingverticalsandcurrencymovements.

The Indian markets in 2011 were theworst performing globally with 25%negative returns, with the second high-estnegativereturnssince1980s,asbothdomestic and global headwinds took atoll on sentiments. After last year’s dis-malperformance,theprice-to-earningsratio of Indian markets for FY13 hasnow slipped to 12x, which is below the10-year average of 14.6x. However, ana-lysts say the bulk of the earnings down-

gradesandRBIpolicyratetighteningisover and markets will now look at theimplementation of key reforms and aturnaround in the capex spending.

Various quarterly result previewsby brokerage houses indicate that In-dia Inc will face another tough quarteras bottom lines will be tepid andtop lines will continue to moderate.Edelweiss Securities Limited esti-mates profit after tax of Sensex compa-nies at 3.3% year-on-year for the quar-ter ended December 2011, which is farbelowthe12.1%reportedinthequarterended September last year. Net sales ofSensex companies would be around20.5% y-o-y. It estimates that almost athird of the companies under its cover-age are expected to post an earnings de-cline of more than 20%. Similarly, Ko-tak Institutional Equities estimatesprofit after tax of Sensex companies at12.4% y-o-y and sales growth of 27.3%y-o-y. However, the net profits of the

companies it tracks are expected todrop by 8.4% y-o-y despite net sales ex-pected to grow 31.8% y-o-y.

With only 40% of foreign currencyloans by corporate India hedged, the19% depreciation of the rupee againstthe dollar in 2011 will hit earnings. Butthe new AS-11 amendment by the min-istry of corporate affairs, under whichlong-term foreign currency assets andliabilities can be amortised in the prof-it and loss account over the life of theasset or liability, will act as a tempo-rary relief. Though the amendmentwill cushion the reported earningsagainst mark-to-market losses, theEdelweiss report cautions that it willlead to the creation of notional assetsin balance sheets, which will be detri-mental to the future return on capitalemployed, return on equity and coreearnings of companies.

Sector-wise, revenue growth of capi-tal goods has slowed down significantly

andisexpectedtoreportmutednumbersin the quarter ended December. Accord-ing to Edelweiss, the sector’s top linegrowth, which was a healthy 23% in thequarter ended December 2010, is expect-edtodeclineat13%inthequarterendedDecember2011andthismoderationisonthe back of slower pace of order intake,particularlyinthepowersector.

The consensus amongst analysts isthat, barring cement, IT, pharma andconsumergoods,noneof themajorsec-torsareexpectedtopostanysignificantincrease in their y-o-y growth rate.

In automobiles, volume growth hasbegun to taper off across all categoriesandconcernsonmarginsareemergingin two-wheeler and tractor companiesbecause of the slowdown in sales. Highinterest rates are likely to keep the de-mand for cars and trucks under pres-sure. Kotak Institutional Equitiesexpects a stable quarter for auto com-paniesonthebackof decliningrawma-

terial costs. Revenues of its autocoverage is likely to increase by 26%y-o-y and PAT to increase by 8% y-o-y.

Apart from capital goods, banks andfinancial institutions are expected toreport muted earnings.

Kotak Institutional Equities expectsa 50-80 bps fall in net interest marginsand restructured loans to likely in-creasequarter-on-quarter.Feeincomesare likely to remain weak while trea-sury and recovery related incomes arelikelytoimproveq-o-q.Kotakislookingat higher operating profits for HDFCBankandICICIBankbutloweronesforSBI,Bankof BarodaandBankof India.

Upstream oil companies like ONGCandOilIndiaLtdareexpectedtoreporta strong increase in revenue and net

profitonthebackof highercrudepricerealisation. The consumer sector is ex-pected to see strong sales growth andhigh price increase. However, discre-tionary consumption is expected toslow down because of weaker con-sumer sentiments. Metals companiesare expected to report weal perfor-mances as companies like Tata Steel,JSW Steel have seen a marginal in-crease in raw material costs due to therupeedepreciation.Realestatecompa-nies are expected to report anotherpoorquarterbecauseof sluggishsales,higher interest rates and delays incompleting projects.

[email protected]

Going by most accounts, 2012 isn’t likely to be very much better than 2011 was—Infosys’s cut in dollar revenue outlook, slowingcar sales and muted banking and financial institutional earnings show that the recovery still has a long way to go

Fortune telling for India Inc

SAIKAT NEOGI

Data Drive

Source: Census Projections

70.68

% ofpopulation

above 606.9

7.5

8.3

9.3

10.7

12.4

83.58

98.47

118.09143.24

173.18

2001

2006

2011

2016

2021

2026

0 50 100 150 200

The proportion of the population above 60 years ofage is increasing

4. Ageing population of India

Amit Kapoor

India will become the most populouscountry in the world surpassing Chi-na by 2025, contributing 21.7% to total

world population. The contribution ofEurope to the global population willdecrease slightly to 10.5% by 2025.

The huge population of Indian statesgives them a big demographic advantagedue to a larger workforce and consumerbase, which are vital for their growth. Buttheir demographic profile also raises seri-ous concerns of an ageing population anddeclining sex ratio, which is affecting thedemographic dividend. The old age popu-lation is expected to grow highest, by

3.83% annually, while the workingpopulation will increase by 1.42% andchildren population will decrease by0.33% annually till 2026.

The old population (>60 years) ofIndia had seen a continuous upwardtrend since 2001. It is expected that thepercentage of old people in the totalpopulation will be 12.4%, at anestimated173.1 million, in 2026. Indianeeds to invest in providing adequatehealthcare facilities for increasing ageingpopulation which will boost the growth ofinsurance sector in the country.

Apart from that, India has a big demo-graphic advantage, as nearly all the stateshad a working population (between 19-59

years) of 50% in 2011. Delhi, Rajasthan,Uttar Pradesh and Bihar will see the max-imum increment, of more than 30%, intheir working population by 2016. Keralaand Tamil Nadu will experience adecline in the share of the workforce inthe total population in the coming 15years. India needs to focus on improvingthe quality of higher education and investin developing vocational training centresto supply a skilled workforce to theindustry to maximise the advantage ofupcoming opportunities.

All the states, except Delhi and UttarPradesh, are expected to see a reductionin their population of children in thecoming 15 years. This implies that

more people are moving towards nothaving children in the early years oftheir marriage.

As far as the sex ratio goes, Tamil Nadu& Karnataka will have more women inthe region by 2026, which should balancethe declining sex ratio in the northernstates. The states of Punjab, Haryanaand Gujarat are expected to suffer fromgender imbalances due to a decreasingsex ratio.

The author is professor of Strategyand Industrial Economics at

Management Development Instituteand honorary chairman at the


Demographic mathematics

Sales growth (%) Ebitda (%) PAT growth (%)

Y-o-Y Q-o-Y Dec –10 Sept – 11 Dec – 11 (E) Y-o-Y Q-o-Q

Automobiles 25.7 14 13.7 12.3 12.2 7 22.6

Banking 15.3 2.8 - - - 12.2 8

Consumers 16 5.8 24.7 24.8 25.9 22.6 11.8

Diversified 22.9 15.9 27.4 22.3 21.4 -42.7 3.7

Energy 48.4 15.1 26.9 24 19.9 16.4 -10.6

Industrials 20.7 11 15.4 13.4 14.3 15.9 12.6

Metals 11.5 -1.1 18.8 15.1 16.2 1.3 15.8

Pharmaceuticals 25.1 7 22.8 32.4 30.3 59.4 2.5

Property 2.8 0.7 47.5 46.3 45.9 -21.7 -2.1

Technology 31.3 12.1 28.1 26.6 28.1 21.3 17

Telecom 17.2 6.9 31.6 33.7 34.6 6.7 35.4

Utilities 23.7 11.5 26.1 17.1 17.9 6.1 24.5

Sensex 27.3 9.7 21.1 19 18.4 12.4 7.1

Sensex (ex-energy) 20 7.5 19.1 17 17.7 11.1 15.3

Source: Kotak Institutional Equities

SECTOR-WISE EARNINGS OF SENSEX COMPANIES








GDPgrowthState

Femaleliteracy*

11.808.888.058.40

11.697.81

11.869.55

59.6367.4259.6164.9155.7375.3774.7187.72

331141

128

No ofuniversities


18.72

27.61

7.31

17.56

13.63

28.29

20.81

16.27

GDPgrowth

Femaleliteracy*

7.037.85

7.497.76

10.839.524.705.80

64.4367.03

59.6156.8733.1250.4350.2942.22


13.85

24.50

14.00

14.65

7.63

12.70

16.91

6.53


Enrolment^7.62

5.71

3.17

3.51

3.57

3.82

4.01

3.35

No ofuniversities

2227

141617201929

Enrolment^

4.53

4.38

2.90

3.62

1.05

1.84

3.16


14

12

10

8

6

4

2

00 1 2 3 4 5 6 7 8

Uttarakhand


Tamil NaduManipur

MadhyaPradesh

J&K

PunjabAssam

Jharkhand

UttarPradesh

WBMizoram

K’takaRajMeg

AP KeralaSikkim


Nagaland












POLICY

DILBERT by S ADAMS

9

























Jaideep Mishra

[email protected]










ARINDAM


Percentage of factories in opera0on versus total number of factories

Jammu & Kashmir

Himachal Pradesh

Punjab Haryana

Ukar Pradesh Rajasthan

Delhi

Ukarakhand

Bihar

Orissa

West Bengal

Assam

Meghalaya

Tripura Manipur

Nagaland

Jharkhand

Gujarat

Maharashtra

Goa

Madhya Pradesh

Chhagsgarh

Andhra Pradesh

Karnataka

Kerala

Tamil Nadu

0

2

4

6

8

10

12

14

16

0 5000 10000 15000 20000 25000

Percen

tage of factorie

s not in ope

ra$o

n

Total number of factories

All India Average of 4.1% factories not in opera0on/state average

All India

All India Average of 6198 Factories/state

Energy Usage Sta0s0cs

Andhra

Arunachal Assam

Bihar

Chagsgarh

Delhi

Goa

Gujarat

Haryana Himachal

Jammu & Kashmir

Jharkhand

Karnataka

Kerala Madhya Pradesh

Maharashtra

Manipur

Meghalya

Mizoram

Nagaland

Orissa

Punjab

Rajasthan Sikkim

Tamil Nadu

Tripura

Ukar Pradesh

Ukaranchal

West Bengal

0

200

400

600

800

1000

1200

1400

1600

1800

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00%

Per C

apita

Ene

rgy Usage ( Units)

Energy Deficit

Average Per capita energy usage is 564 units.

Average Energy Deficit is 9.8%

Poverty and Rural Development

Andhra

Arunachal

Assam Bihar

Chagsgarh

Delhi

Goa

Gujarat

Haryana

Himachal

Jammu & Kashmir

Jharkhand

Karnataka

Kerala

Madhya Pradesh

Maharashtra

Manipur

Meghalya

Mizoram

Nagaland

Orissa

Punjab

Rajasthan

Sikkim

Tamil Nadu

Tripura

Ukar Pradesh

Ukaranchal

West Bengal

0.00

200.00

400.00

600.00

800.00

1000.00

1200.00

1400.00

0 5 10 15 20 25 30 35 40 45 50

Per C

apita

Reven

ue Expen

ditute on Ru

ral

Developm

ent

Poverty Ra$o – Number of people in the state of Poverty/100 People in 2004-‐05 in Rural areas

Average per capita rural expenditure is Rs 564

India’s poverty ra0o in rural is 28.3%

The Compe00veness Ranking Assessment


State Compe00veness Report 2011

© Institute for Competitiveness, India