Effects of India’s Growth on the Global

8/14/2019 Effects of Indias Growth on the Global

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Effects of Indias growth on the

global economy and environment

Veena Jha


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Outline of presentation

Stylised Facts on Indias growth and

poverty. Broad drivers of growth in India.

Implications of India's success for other

countries. Policy lessons learnt that may have

relevance for other countries


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Stylised Facts about the IndianEconomy

1980 to 2005, economic growth averaged 5% per year,with over 7% growth since 2001.

Capital efficiency increased in 1980s, and investmentgrew by about five times since 2001.

Agriculture grew rapidly till mid-1990s, but slower sincethen.

Non-farm employment growth picked up after 1999.

Share of profits in Net Value Added in organised

manufacturing almost doubled during 1999-05. Real wages (rural and urban) declined after mid-1990s.

Managerial emoluments increased much faster,especially after 1999.


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Stylised Facts about the IndianEconomy

Period after 1999 saw significant povertyreduction, particularly in rural areas, thoughincome distribution worse.

Important reasons were:

a sharp decline in inflation (particularly food prices),

Higher worker participation rate due to demographicchanges and opportunities created by growth.


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Indias real GDP growth

Period 1950-1980

1980-1990

1990-2000

2000-2007

AnnualReal GDPGrowth

3.7% 5.9% 6.2% 6.8%

AnnualReal GDPper CapitaGrowth

1.5% 3.8% 4.4% 5.8%


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Poverty

1999-2000 2004-05

1Rural 27.1 21.8

2Urban 23.6 21.7

3Total 26.1 21.8


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Informal Sector Asset formation

-50.00

0.00

50.00

100.00

150.00

200.00

1 4 7 10 13 16 19 22 25 28

pd 1pvrty

pd2pvrty

pd 1wages

pd 2wages

pd1asset

pd2 asset


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Effects of Interstate migration

Some case studies show that beforemigration, 24% of the migrants earned at

least minimum wages. Others earned less.

After migration, 72% earned at leastminimum wages in the state of destination.

Nearly 63% of the migrants built assets inrural areas and 22% in urban areas.

Minimum wages in rural areas below that inurban areas.


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The ave

Findings


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Drivers of Growth

Quarter century of strong economic growth built a momentumof sustained growth; average 5% per annum.

Services driven growth, where services account for nearly60% of GDP today.

More open economy (to external trade and investment); fall inapplied tariffs from over 100% in 1991 to 12% in 2006.

Budget deficit declined from 7 to 3.7 percent of GDP from1991 to 2001.

Supportive international economic environment fuelled bygrowth of China and the US. India itself now contributing toglobal economic growth significantly.


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Drivers of Growth

Demographic dividend of a young population: Working population nearly 60% of total.

Household savings rose from around 15-16 % of GDP in late 1980s to22-24 percent in recent years

A growing middle class fuelling domestic consumption: 100 million with $10 th. to $ 40 th. 340 million with incomes above poverty levels but less than $10 th. Six fold increase in sales of motor vehicles and a 10 fold increase in

telephones since 1991.

Strong companies in a modernized capital market.

Market capitalization on the Bombay Stock Exchange rose fourteen-foldfrom $50 billion in 1990/91 to $680 billion in 2005/06. Share of interest outgo in gross profits dropped sharply from above 50

percent in the late 1990s to 15 percent in 2005/06


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What India needs for sustaininggrowth and poverty reduction

Make growth more inclusive by stimulating agricultural growth.

Improve the output and labour share of manufacturing. The growthof key services like transport, storage, communication, insurance,banking, trade and real estate has to be considerably manufacturing

driven. Improve labour participation rates further from 61% to 82% as inChina.

Maintain price stability which is threatening to rise on all fronts.

Fiscal consolidation. Difficult in an election year with pressure for

populist expenditures. However revenues have risen dramaticallyover the past 2 years at over 40% per annum.

Infrastructure bottlenecks particularly in power and roads needs tobe addressed.


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What India needs for sustaininggrowth and poverty reduction

Change labour laws which are so rigid as to discourage additionalemployment in the formal sector altogether. Without significantreform of existing labour laws, Indias cheap labour advantagesremain hugely underutilized.

Improve Indias weak human resource policies. Serious shortages ineducation, skill-development, and health service provision. Thisapplies to both primary and tertiary schooling.

While there is some evidence of decoupling of Indias growth fromthe US, the slowdown in the global economy is nevertheless amatter of concern. Oil price rise is another area of concern.

Rise in the price of metals and food may also dampen some ofIndias growth expectations.


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Effects Of Indias growth on theglobal economy

According to a World Bank study, Dancing with Giants,there is scope for India to expand its trade significantlywithout hurting development prospects of most othereconomies. India is expected to contribute 12% to global

economic growth by 2020.

If India were to grow at a real rate of 5.5% per annum upto2020, then the EU would experience a concomitant growthof 2.3% per annum with a physical capital formation of

2.6%. Of course most of the gains are expected to cometo the UK as Indias trade and investment links are mostintensive with the UK amongst all the EU countries.


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Effects Of Indias growth on theglobal economy

Large efficiency gains because of: severe competition in the high-tech sectors outsourcing and technological developments. Global BPO sectorsaves 80% costs through India more countries catching up with capacity augmentation and business links, as wages in fast growing emerging

economies (India) rise.

While India may displace other countries in markets for high-techproducts, it would create space for other countries to increase productionof light manufactures, agriculture and a large number of services.

Improvement in the range and quality of exports from India may createsubstantial opportunities and welfare benefits to the world. The welfarebenefit for EU is one of the highest in the world valued at over 3 trillion

dollars.

Indian companies would invest abroad in both developed and developingcountries.


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Effects of Indias growth on Africa

Upward pressure on raw material price levels which would benefitAfrica.

Exchange rate developments and resource allocation could goeither way

Low-wage competition and income distribution, which may causestructural shifts while at the same time bring increasing consumerwelfare.

Industrialisation strategies, input linkages to Indias growth processwhich would be overall beneficial.

Capital-flow effects (such as through FDI, project finance, public-private joint ventures from India), which is likely to augmentinvestment in Africa.

Donor assistance from India which is already about US$2b.


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Some Questions remain

Will India become an important source of FDI to Africa?

What would be the beneficiary sectors Would it graduate fromnatural resource intensive sectors to intermediate processing

sectors?

Would the poor be able to benefit from these developments, orwould they remain outside any benefits, especially if most FDI goesto resource-intensive industries?

Where will interests be competitive, e.g would India divert indirectlyinvestment resources away from African economies?


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Effects of Indias growth on theglobal environment

India accounts for 5% of the global energy useat current levels.

Indias energy intensity of growth has declined

by 0.2% per annum over the last 25 years. In 2003, Indias total primary energy productionwas estimated at 441 Mtoe, with coal accountingfor 36 percent of the supply mix, oil for 9

percent, gas for 5 percent, hydroelectric powerfor 1 percent, nuclear for 1 percent, and biomassenergy and other renewables for 48 percent.


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India is an energy scarce country with per capitaconsumption of energy about one seventh that ofthe UK, and one fourth that of China.

If India were to grow at an average rate of 5% perannum till 2050, studies project that total energydemand is likely to rise by about 3 times by 2050.

The switch to electricity in India increases the

share of coal in primary energy demand from one-third in 2001 to almost 58 percent in 2050.


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World Bank study says: combined effects of India and Chinas demand for oil

is likely to raise prices at roughly the same rate by2050 as over the last about thirty years

dampening effect of oil price rise will be mitigated bythe growth-stimulating effects of the larger marketsin China and India.

If Indias GDP growth were to be higher, global GDP

growth would also be pushed upward, price rise of oilwould be small

Indias share of global emissions would risesubstantially.


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All these scenarios have not introducedany assumptions on energy efficiency ordecarbonisation. If these are taken into

account than there is a dramatic reductionin carbon emissions from India, with 33%less than predicted by 2050.

These alternative scenarios would requirean increase in investment of nearly 30% inclean energy.


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Indias effort at sustainability

India is focusing on environment.

Several examples of India using "leapfrogstrategy" to sustainability.

India aims to increase renewable energy's shareof its power from five percent to 20-25 percent it already has the fourth largest wind powerindustry, and the third largest photovoltaic

industry in the world. Rainwater harvesting strategies are spreading inIndia.


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Policy Lessons for other developingcountries

Initial growth phases may demand strong economicreforms, wage stability and increase in profitability tostimulate investment.

Both agricultural and non-farm sector growth areimportant for poverty reduction.

Links between manufacturing and the growth of keyservices like transport, storage, communication,insurance, banking, trade and real estate.

Investment in both primary and tertiary education payshigh growth dividends.


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Policy Lessons

Investment in research and technology, removal of themis-match in availability and need of skills, and removalof infrastructural bottlenecks both of physical andsocial infrastructure is crucial for sustaining growth.

Essential to maintain price stability. Importance of fiscal consolidation. This improves the

Government credibility and reduces crowding out. Italso provides the fiscal space for allocating largerresources for capital investment, especially in social andeconomic infrastructure.

A supportive international environment with low levels ofprotection is essential to sustain growth and povertyreduction in developing countries.


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Thank you very much. Pl. email comments

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Effects of India’s Growth on the Global